Bel Fuse Inc. (BELFB) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Fourth Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder this conference call is being recorded. I will now like to introduce your host for today’s conference Mr. Dan Bernstein, President and CEO of Bel Fuse Inc. Sir, you may begin.

Thank you. I’d like to apologize to everybody on the call, we had a little mix up with the operator and that’s why we’re five minutes late, so please accept my apologies. Before we begin I’d like to ask Colin Dunn, our Vice President of Finance to go over the Harbor statement. Colin?

Hi .Good morning, everybody. Thanks Dan. Except for the historical information contained in this call, the matters discussed on this call including the statements regarding potential growth and opportunities to reduce cost and enhance efficiency in the future our forward-looking statements are described under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Actual results could differ materially from Bel's projections. Among the factors that could cause actual results to differ materially from such statements are; the market concerns facing our customers; the continuing viability of sectors that rely on our products; the effects of business and economic conditions; difficulties associated with integrating recently acquired companies and achieving cost synergies; capacity and supply constraints or difficulties; product development, commercialization or technological difficulties; the regulatory and trade environment; risks associated with foreign currencies; uncertainties associated with legal proceedings; the market's acceptance of the Company's new products and competitive responses to those new products; and the risk factors detailed from time to time in the Company's SEC reports. In light of the risks and uncertainties, there can be no assurance that any forward-looking statement will in fact prove to be correct. We undertake no obligation to update or revise any forward looking statements. We also may discuss non-GAAP results during this call and reconciliations of our GAAP results to non-GAAP results that have been included in our release today. Now moving on to a discussion about our performance, our fourth net sales were 135.2 million down 9% compared to 148.7 million in the fourth quarter of last year. This decline was primarily due to the unfavorable impact of the global business conditions and industry trends which resulted in lower sales. On a regional basis, sales in North America decreased 5.8 million or 26% in the fourth quarter of 2015 as compared with the fourth quarter of 2014. Sales in Europe decreased 926,000 or 1% and sales in Asia decreased 6.7 million or 13%. On a product basis, Magnetic Solution product sales were 41.6 million in the fourth quarter of 2015 a decrease of 5.5% compared with fourth quarter of last year. Our interconnect products which include Cinch Connectivity Solutions product sales were 43.1 million in the fourth quarter of 2015, a decrease of 5.6% compared with the fourth quarter of 2014. Power solutions protection product sales were 50.7 million in the fourth quarter of 2015 a decrease of 14.3% from the fourth of 2014. Despite the headwinds from the global industry trends and resulting decline in sales in the fourth quarter of 2015 we were able to improve our gross profit margin by 40 basis points as compared with the fourth quarter in the prior year. This margin improvement reflects the favorable impact of our operational enhancements and cost reduction activities we achieved during the year. Turning to selling, general and administrative expenses, in the fourth quarter of 2015, there were 20.6 million or 15.3% of sales as compared with 24.6 million or 16.5% of net sales last year reflecting low professional fees and lower acquisition related cost in the fourth quarter of 2015 as compared with the fourth quarter of 2014. These declines were also due to lower depreciation and amortization expense primarily due to the timing of assets being fully depreciated last year. Turning to income from operations, income from operations was 4.2 million in the fourth quarter of 2015 as compared with 2.5 million in the fourth quarter of the prior year, reflecting the favorable impact from improved gross profit margin and lower SG&A expenses. Interest expense was 1.6 million in the fourth quarter of 2015 as compared with 1.9 million in the fourth quarter of the prior year reflecting the interest on outstanding borrowings during each period. The income tax provision was 174,000 in the fourth quarter of 2015 this compares to an income tax benefit of 957,000 in the fourth quarter of the prior year. The income tax provision in the fourth quarter of 2015 reflected a shift in the mix of pretax earnings and losses in certain jurisdictions. The Company’s effective tax rate, which is income tax benefit or provision as a percentage of earnings before income taxes, partially expressed on a geographic segment in which the pretax profits are winning. Of the geographic segments in which Bel operates the U.S. is the highest tax rate, Europe’s tax rate is generally lower than U.S. tax rates and Asia typically has the lowest tax rates. Earnings per share or EPS for the Class A common shares was $0.19 in the fourth quarter of 2015 as compared with $0.14 in the fourth quarter of the last year. EPS for the Class B common shares was $0.21 in the fourth quarter of 2015 as compared with $0.15 in the fourth quarter of the prior year. And now I would like to turn on some cash flow and balance sheet items. Cash and cash equivalents at December 31, 2015 was $85 million which was an increase of 7.9 from December 31, 2014. During the year we used cash to reduce our outstanding debt by 45.4 million also during the year we used cash and capital expenditures of 9.9 million and made dividend payments of 3.2 million. Cash taxes paid was 580,000 and cash interest paid was 6.2 million. From a working capital perspective accounts receivable was 86.3 million at the end of December 2015 as compared with 99.6 million at December 31, 2014. Day sales outstanding were 59 days at December 31, 2015 as compared with 62 days at December 31, 2014. Inventory was 98.2 million down 15.4 million from December 31, 2014. Inventory turns was 4.5 times during the year ended December 31, 2015 as compared with 4.3 times in the prior year. Accounts payable was 49.8 million which decreased 12.1 million from December 31, 2014 reflecting the timing of payments and lower inventory purchase in line with the decline in sales. Bel’s outstanding debt as of December 31, 2015 was 187.2 million down 45.4 million this reduction was due to the combination of our mandatory payments of debt as well as additional voluntary prepayments made during the year. Book value per share at December 31, 2015 which is calculated as shareholders’ equity divided by our combined A&B classes of common stock outstanding was $19.59 per share. And now I’d like to turn the call back to Dan and passing up the call for questions. Also on this call today we have Frank Scognamiglio who is joining us and may add some additional data. Frank is our, handles our consolidations and all our internal reporting within Company.

Thanks Colin, I appreciate that. We’d like to open up the call now for any questions anybody might have.

[Operator Instructions] And our first question comes from the line of Harish Kumar from Stephens. Your line is now open.

Thanks guys. This is Richard in for Harish wanted to start with a line in the press release said some of the business lift as overall customer demand slowed. Are you expecting this business to come back as we go throughout the year or how should we think about that slipped business?

We think from everything we see out there, we don’t see any bright spots in our industry as we look at people out there that most people are predicting anywhere from a 5% to 8% decrease for the year. We don’t think we’re going to be any different at this point in time we did -- Cisco is a driving force for us and they said basically in the last two weeks of January orders just came to a stop for them and they pushed everything back in December that affected us. But before it was a wait and see I think in the last quarter now I think people are a lot more pessimistic of how things looks going forward.

And then in terms of your power business where are we in terms of engagement with customers and how should we think about that business going forward?

Again I think the day I die my tombstone is going to say Bel’s power group is going to be our driving force. Our sales really took a bad hit we’ve done everything right we had customers that we were getting gaining on report cards we were the lowest rated on that report cards. Now all our customers either one or two when it comes to quality, every customer we have is not a problem dealing with them and before all our major customers were on the verge of walking away from us. We do again we are doing a few months and those proctor out there now in addition to meeting a product life cycle large OEM customers that our commodity products like Electrolux for our white good product which represents about $8 million of sales we walked away from the business because the margins were too low for us. But I think we are doing everything right but we just don’t have the sales to show for it and that’s somewhat disappointing. We are making a major effort with this data storage people as you probably know Facebook is a key customer of ours and they are driving the force in open computing and that has led us into a lot of other opportunities out there with the stated data storage people. So, we do think there is as Cisco said one of Cisco’s big concerns were they were a lot more into software because a lot of people were building their own data centers and for that for us that is a good opportunity because we are addressing all those customers like Google, Amazon and anybody that is building their own data centers.

And then in terms of your costs cut I think you talked about an additional $1 million worth of cost cuts from I believe consolidation. Can you give a little bit more color there how should we think about the linearity of that as we go throughout the year. And then what area is COGS or OpEx do you just see that coming from?

Well let me ask Frank to, CapEx for you now.

So, I guess the question is on the estimated incremental $1 million savings. Okay, during the quarter we had additional facility consolidations one of them being on our Miami facility which we have consolidated into other facilities in the U.S. part of that involved terminations as well as equipment movement which caused most of the charge in the quarter. The million dollars of savings should happen over the year of 2016, can't point to a particular quarter where we will see that come through it's more of a over the course of the year where that should show itself through the P&L. Part of it in costs sales I would say that’s a 75% cost of sales 25% of it is in the SG&A section.

And our next question comes from the line of Sean Hannan from Needham. Your line is now open.

I actually have many questions. So, first so your overall aggregate business was down 9% year-over-year we have got a clean compare when we consider the Emerson and the Power One acquisition which added to your portfolio of products and I think you guys had expected to prove that out just bringing quality particularly in the Power One business to eventually allow for cloud sale gain some growth. Secondly, there is one program that we’re being waiting on the Power One side that we’re incrementally going to add the growth now you don’t think that there is a pricing issue within the market. And you put a comment earlier that you feel you missed something behind in cycle so I mean is that really the key culprit here I am trying to understand how to rest itself you guys being down 9% year-over-year it is not all…

No we are substantially graded down in the Power One side. Power One, again was down substantially greater than the 9%. The problem was when we acquired Power One mistakes after mistakes, after mistake was accomplished by then. One of the key mistakes that they have done is before we bought they banked their future on electric vehicles and they took a lot their engineering resources, the capabilities of people instead of focusing on networking telecom or industrial markets where they were very strong they took those engineering resources to go after this electric motor market. Where their key customers that were looking at them they predicted that Via Motors out of Colorado would be a $12 million to $15 million business and that they would use that as a spring board to go a lot of other electrical vehicles that never materialized. Once we acquired the company we said listen we can't turn our backs to our IT customers or our industrial markets we are very strong in Europe we have to get that engineering talent re-focused and back down from the electric vehicle market that time. However again for the lifecycle of product is generally 12 to 18 months in the power area. From first designing of -- once you get the design and you get that product into shipments and volumes could take anywhere from a year to 18 months and that’s where we get beaten pretty heavily. Now in this soft market where things are very flat the products are not getting introduced as quickly as they have been in the past. So two things one, they turned their backs and they’re key customers and in addition to that they walked away from some high value dollar business that was marginal and that really compound the situation. So again we had to reengage the customer first once we had the customer reengaged then we had to verify that we were a quality house which they didn’t believe then after six months of them looking out or a year they finally voted us and understand the changes we made were proper now they looked at us and said okay we can give Bel these opportunities so those really opportunities that we’ve got over the last three or four months.

Would it be fair to characterize in saying that there are two parts to the challenges of the acquisitions on one I think you just went through in a fair amount of detail in that they turned their back on their key customers and you’re still incrementally getting hit by that as per the timing negatively impacting and being able to be design wins so this is your perspective it's not that your fault but there is effective share loss that’s occurring right now. But have you to be being back at some point you’re getting hit by that right now so you weren’t able to get the desired effect there?

Yes, that’s the one hit and the second hit we got with the low margin products like in Electrolux or some of these other customers that were low margin products that they didn’t want to go on future products with them and we didn’t want to go on future products with them also because there was no -- the margins were just too low for us.

Well, actually to expand on that second part it sounds like the mid of that was being brought into your operations through this we had the low margin stuff as becoming incrementally challenging and that has been an issue. But then also a part of that is another access of mix for programs that really never materialized and that was part of the hope and the benefit of looking at this acquisition and I think going to that…

Sean I think you know me well enough when it came to wired motors and electric vehicle market when I do look back and forth the cash when we do acquire the company we really very really focused on the forecast. But the problem we had with that the only problem we had with that is just the energy of resources they put into electrical vehicles that never materialized and that’s where we got kind of screwed up. I can give a best example when we bought them they took the focus from industrial and add a brand name called Emerson product line which is a very great brand in Europe. When we acquired the company we owning we got five costs from competitors and the only thing they were looking at is buying a Emerson product because they thought it was a such a great-great brand line. However, when we met to people in Europe to discuss the Emerson product line our focus is around electrical vehicles now we don’t think industrial products are way to go and once we heard that we put immediate stop on that type of thinking and really said hey we have to focus on the rail, we have to focus on the industrial markets. Again we feel the best value in Power One which we really haven’t been able to capitalize on is that what we have in Europe we have a world class design center in Switzerland second to none in the world. We have manufacturing low cost areas of out here where we do have engineering are descent events. We do have an R&D center in Italy we do have engineering capabilities for modular products in England and we have low cost in China. We feel that the European market should be our best opportunity but we haven’t been able to capitalize on it and focused our salesforce in that area. And again with that is with Power One management making sure the decisions that we kind of had to stop and do a 180 line.

So then as we think about all of that on the pipeline and then how we looked at our aggregate SG&A what adjustments do we make here because I don’t expect that you guys feel the work your total OpEx down to the high-teens the quarterly dollar spend you now just reported an OpEx number of defining parameters that was the highest OpEx percentage since the first quarter of ’14 and that’s the lowest operating margin since the first quarter of ’14. And so just have some different trends going up here to try and understand how we can better manage this negative leverage that use against us?

Well, I think we have cranked down our cost we have raised our margins which we’ve got a much better mix in place now and all the numbers going out fourth quarter gross profit margin was 18.9% I still like to get it a little higher. But if we start to look at income from operations but changes safely going up and certainly our year-over-year G&A numbers is 13.8% for the year of 2015 G&A I think is quite remarkable. So we haven't given up and we are going to getting some benefits because some of the things that effect G&A for example the consolidation of facilities in Europe which only happened in the last part, I am sorry in Asia, in Hong Kong specifically that only happened in the last quarter of 2015 and we only get that benefit starting in 2016, we also had a merging the two connected facilities one from the Emerson acquisition and the traditional Cinch one in the Chicago area which was put together also in the fourth quarter of 2015. So we are going to get those reps in 2016 and as Frank said before the closure of the facility in Miami the right facility which is now being merged with no additional headcount or minimal additional headcount only on the production side into Texas and into Mexico.

But sure looking forward I think we got about a 96% to 90% of the cost cutting down with from an operational standpoint we are getting close to hitting the goal now. So, we don’t foresee any major course, there is some minor stuff we can do in China but overall I think we are 95% done with all the cost cutting that we were projected to do and hopefully that should be reflected in our numbers. And just again our focus in the last 18 months was to get these companies aligned, get their overhead down substantially, which I think we have accomplished, to streamline the organization and the salesforce and now our total focus is on increasing sales what can we do to improve sale? Again last 18 months is operational going forward to the next 18 months it is definitely only the focus of our sales and marketing and how we do things better how we improve things and how do we support the customer more efficiently than any of our competitors.

And our next question comes from the line of Handi Susanto from Gogol & Company. Your line is now open.

First question, how much reinvestment will come from your cost reduction target of 4.5 million in 2016?

Listen I would say you are basically looking for our CapEx of what we are going to spend or?

No, no you will cut your operating costs, operating expense and cost by 4.5 million, will a part of that go towards reinvestment or will that cost saving go towards your bottom-line?

So, last quarter we announced that we have actually during the year that would yield 3.5 million of annual savings beginning in 2016 so this quarter we have taken additional actions which would yield an additional 1 million. So from a -- I guess is your question from a run rate perspective what can you expect in 2016?

Yes what we can expect and then let’s say if we take off that 4.5 million will a part of that go toward reinvestment or will the whole amount will go towards your bottom-line?

So, from a cost savings perspective a part of that has come through in the fourth quarter and the remainder is suppose to come through in 2016 throughout the year. From a reinvestment perspective the cash savings are there to have us at a base line SG&A and cost of sales perspective not to use that cash or those savings to increase any additional CapEx it's not maintenance or essential at this point.

Okay, so…

In summary I think in summary we are trying to say that that money is projected to go into the bottom line into our EPS.

Okay.

And we never projected or neither do we have an extra 4 million we are going to buy new building or buy a capital expenditure or hire 25 or 30 more people.

And then you go to China a lot would you would be able to share what you see in China in terms of business environment, market trends [Multiple Speakers]?

But I think in -- besides being during the call saying and the last sixty years in Hong Kong. I think again it's just the government and what are they doing with the people's situation. How they are controlling the RMB trying to keep it down and they are so concerned about the pressure they are facing. Just again historically when everybody is rolling in at the Chinese New Year will the people come back to work, will they find better jobs and historically over the last two or three years we did a retention rate of 92% to 90% which for us is incredible if you go back five or six years ago it was 50%. So, again we just think again it's uncertainty of how they are going to control the RMB and how they are looking at things but again I think there just as dumfounded as most people are in North America and what the economy is going to look like going forward and just again a lot of uncertainty and again looking at the stock market where a lot of people are investing in the stock market in China and a lot of people get beat up pretty bad. So again they’re walking on a little bit of a tide now that’s for sure.

And then you seem quite cautious about 2016 you said that you are expecting some declines. I believe that that’s not a firm expectation as like second half is still [Multiple Speakers] from today?

I am a half splash kind of guys so not half full half empty so I tend to be again I think the worse thing I could do hype up things so we tend to start and we always tend to be a little cautious. However, once if we can see some upswing in our backlog or some upswing with any of our customers it doesn’t take us in the power business now, it doesn’t take too much to move the parameter to the right side so I can assure you if I see anything positive out there I will let our shareholders in the marketplace know about it. But at this time I already -- when I look at my world, my world is only two quarters. I can’t look any further ahead with the visibility that we are getting from our customers.

And our next question comes from the line of Lenny Dunn with Freedom Investors Corporation. Your line is now open.

I think you’re doing okay in a tough environment, I just want to bring to your attention which state the obvious your book value is 19.15 and that’s relatively conservatively presented and the stock is trading a little under $15 which is a substantial discount to book. We are certainly I think not good candidates for repurchasing shares at these prices because I don’t think that’s the best use of capital.

I think you just gave me a heart-attack are you positive on that one? I am sorry.

Listen I am I don’t think you should repurchase shares at these prices, because quite frankly as shareholders we’re being very patient and it sounds like we’re going to have to be patient for a couple of more quarters. So, I am going to go back to something that I’ve suggested in the past which is doing a small dividend increase which is not going to really upset your balance sheet and you're repaying your debt in an orderly way and a simpler interest rates and letting your shareholders get paid a little better while they’re waiting and I am not looking for a substantial dividend increase but a small one makes it more palatable to wait.

Personally being one of the large shareholders of Bel Fuse I think that’s one of the best ideas I’ve ever heard. However, what we propose we had a Broad meeting yesterday we did discuss with these low prices, shall we be buying back stock, should we be increasing the dividend and I think our major concern is really that and the debt ratio we’re facing and because of this down market we’re very concerned about our debt ratio and getting may be hit with a higher interest rate so we’re doing everything we can to make sure that we maintain our very low interest rate with the banks and I think again anything we can do to pay down this debt I think is substantially more beneficial to our shareholders in increasing the dividend. So hopefully and I think that’s the position the Board has and I think they’ve taken a pretty strong position on that.

Well if the -- I am not opposed to you paying down the debt, and I would encourage you to pay that down as rapidly as possible because this has always been a company that had a clean balance sheet, so I am not bullish to that at all. But if you paid another penny a share quarterly to shareholders it will be a nice symbolic move, it would -- also wouldn’t hurt our fact of books and I don’t think that would really affect your ability to pay down the debt.

Again I am off Board trust me nothing would make me and my wife happier than increasing the dividend but the Board…

But you could have a substantial increase you got with…

I’ll take a $0.005 you can give me anything I am -- I don’t care but again I am all for it and as I said I tried to push it with the Board and again I’d be glad to pushing with the Board again you have my promise on that. But again…

Well, that’s a 12 million shares so what’s going to $0.04 a year more would really not be a substantial difference in your cash flows…

I understand your position and I will present it to the Board again.

Well, I would appreciate it and maybe be a little more aggressive that is what -- we’re going to have to sit here and wait and the discount to book value is terrible but at the same time it flows so small right now that I guess the only reason that I was just buying back shares, so we really don’t -- we don’t have a much of a flow to start with and I don’t know that we want to decrease it at this point unless you are intending to go private which I don’t think you are. So, okay, that’s my $0.04 worth, penny a quarter.

[Operator Instructions] And our next question comes from the line of Anthony J. Gallo, a private investor. Your line is now open.

I think the performance is rather good considering the environment that we are in and I do appreciate all your due diligence and efforts in the company. I have just a couple of questions. First off, do you look at oil and the price of oil as any kind of correlation vis-à-vis with your business do you see that as something to gauge your backlog or whatever?

From a pricing standpoint we use very little oil in our products in the products we buy in some plastics but not a material effect whatsoever at all. We have a major effort like everybody else three years ago to look at the oil and gas market for opportunities to sell our products. Like I am sure -- the people out of Houston Texas all the major manufacturers we have opportunity to add some of our connector product. However, because of that however we haven't really obtained any substantial sales there even though they are testing our product but at that point it would only represent maybe less than 5% of our corporate sales. So, again oil and gas is not a really good parameter to us, if you are looking to the best parameters for us it's probably you look at Boeing is a major customer of ours or Cisco and the open computing are like good parameters. So, open computing or Cisco is doing well or Boeing that really has a much bigger effect on our bottom-line.

I have another quick question. With reference to your effective tax rate you seem to have wide variations as an example in this particular quarter your 6.7%, for the year we were 25.5% and then for 2014 we were 11.9% and it seems to be wide gaps in the effective tax rate and I was wondering if you could explain that?

Sure, how about Frank explains that for you Anthony.

Hi Anthony, sure I think the main think to focus on when we're looking at the effective tax rate is the region in which our profits or losses are generated. As Colin indicated in his script and as you may know Asia has a low tax rate, Europe is a little bit higher and U.S. is one of the highest in the world, so, a lot of our profits or the ETRs determine by where those profits are generated. So, if you look on a comparative basis in 2015 put simply we had more profits in the U.S. than anywhere else in the world which generated a higher effective tax rate.

I see. One final question when you list your liabilities you have other liabilities and it's a big part of the total liabilities and I was wondering what other means, why it is separated like you have it?

Sure, so if you are talking of the long-term liabilities on the balance sheet it is of $70 million.

Yes.

Yes, okay a little bit more detail on that is basically we have our pension plan liability which is in that, that’s around $12 million in both of addition differences are deferred taxes and our 1048 was other taxes liabilities or other reserve for taxes. That’s pretty much the bulk of the other liabilities.

And I am showing no further questions at this time. I would now like to turn it back over to management for any closing remarks.

Again thank you for joining this call today, we do apologize for the five minute delay and hopefully next time we are right on-time. Thank you and looking forward to a hopefully better quarter, this coming quarter. Bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may now disconnect. Everyone have a great day.