Good day, and welcome to the Bel Fuse Inc. First Quarter 2019 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dan Bernstein, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Mary. Joining me on the call today is Craig Brosious, our Vice President of Finance; Lynn Hutkin, our Director of Financial Reporting. Before we begin the call, I'd like to ask Lynn to go over the Safe Harbor statement. Lynn?

Thank you, Dan. Good morning, everybody. Before we start, I'd like to read the following Safe Harbor statement. Except for historical information contained on this call, the matters discussed on this call such as statements regarding sales projections, customer demand, the impact of product releases and anticipated cost savings are forward-looking statements as described under the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Actual results could differ materially from those 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; 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; the impact of changes to US trade and tariff policies; 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 may also discuss non-GAAP results during this call and reconciliations of our GAAP results to non-GAAP results have been included in our release. I would now like to turn the call back to Dan for a general business update.

Thank you, Lynn. Before going through the financials, I would like to provide a brief update on how the business did from an operation standpoint this quarter and what we see going forward. Overall, we were pleased with the continued year-over-year sales growth during the first quarter, with sales coming in at $125.4 million, up 6 % from the first quarter of 2018. Our Power Solutions and Protection group continued their trend of year over year sales growth, with an increase of $5.7 million compared to the first quarter of 2018, driven by continued demand for our power supplies in array of data center applications. Sales of our DC to DC products also showed growth in 2019. This was offset by a decline in demand for our custom module products. Our Connectivity Solutions group had year-over-year sales growth of $1.4 million. Our Cinch business increased revenue by $1.3 million compared to the first quarter 2018, led by strong demand for our connector products in commercial aerospace applications, both direct to customers and through aftermarket sales. Our Magnetic Solutions sales were generally the same as last year for the first quarter. The sales of our Signal Transformer products were strong during the first quarter of 2019 related to medical and industrial applications. This increase was offset by lower demand during the quarter from MacJack products and discrete magnetic components. Following the record bookings in 2018, we did see some slowing in bookings during the first quarter attributed to customers working down on high inventory levels which has been built up in response to new product launches and potential rises in tariffs. These factors led to a backlog of a $166.8 million at March 31st, 2019, a reduction of $4.4 million or a 3% from 2018 year-end. By product groups, the backlog…

Thank you, Dan. To provide a quick recap on sales, sales during the first quarter were $125.4 million. North America sales were $64.6 million, up 8.6% from last year's first quarter. European sales were $23.5 million, up 16.6% and Asian sales were $37.3 million, down 3.5%. By product group, Power Solutions and Protection sales were $42.8 million, up 15.3% from last year's first quarter. Connectivity Solutions sales were $44.4 million, up 3.4% and Magnetic Solutions sales were $38.3 million, essentially the same as last year. Gross profit margin increased to 18.8% in the first quarter of 2019 as compared with 17.9% in the first quarter of 2018, as incremental sales in 2019 led to improved fixed cost absorption, partially offset by higher labor and material costs during 2019. Our selling, general and administrative expenses were $19.8 million or 15.8% of sales as compared with $20.7 million or 17.5% of sales in the first quarter of 2018. The decrease in SG&A expenses during the 2019 period, primarily related to a $659,000 increase in cash surrender value of our Company-owned life insurance policies, as a result of the stock market rebounding during the first quarter of 2019. In addition, foreign exchange losses were $428,000 lower in 2019 versus 2018 first quarter. These factors were offset by an increase in ERP implementation costs of $661,000 during the first quarter of 2019, as the first phase of our implementation went live in January. On a go forward basis, we would expect SG&A to run between $20 million and $21 million per quarter in the near-term, barring any significant fluctuations in foreign currencies. As a result of these factors, we generated income from operations of $2.8 million in the first quarter of 2019 as compared to $437,000 in the first quarter of 2018. Interest expense…

Yeah. Hi, Mary. Can we open up the call for questions?

Thank you. [Operator Instructions] Our first question is from Mike Morales with Walthausen & Company. Please go ahead.

Hi. Good morning, guys and thanks for taking my questions. I want to dig into a little bit on the slower bookings that you commented on. I know last call that you said that January was running pretty strong, but there was some concerns about inventory levels out there. Can you just give more color on when and in what verticals you started to see slower bookings in the first quarter?

I think across the board, I think there's two major things that we're facing. One was the shortages that were out in a market, driven by ICs and capacitors that people were being cautious and double booking and making sure, they had orders come in. So that was one concern that we felt that was out there. The other concern was if the government moves from a 10% tariff to a 25% tariff, people want to get those products in before then. And also, I think some two of our major distributors that are both private companies. One is DigiKey, one is Mouser. I think really took a very aggressive stance, and bringing in substantial inventory. So we see both of those distributors just holding back on their order process at this time. And so, we're projecting that by this quarter, hopefully, a lot of that inventory would be flushed out.

Got you. So just to make sure that I'm interpreting this correctly. You said you expect downward pressure in the second quarter. Is that a slight top line contraction? Are you subjecting a little bit of growth in the second quarter, how are you think about that and what do you suspect?

I think for the second quarter as we indicated, we are expecting top line sales to go down compared to last year's second quarter. And at this point, we're estimating high single-digit decline.

Okay.

Now, as we look to the second half of the year, it's still a little too early to tell at this point. We do see some positive growth drivers further out in the year particularly related to some military programs that we're on and also HEV projects that are picking up. But we, we typically only have about 12 weeks of visibility in our business. So, it's hard to predict at this point, how the second half will look, but we do see positive indicators as we look to the second half.

Great. That's very helpful. Thanks for the color. And then Dan, one of the things that you mentioned was some concern about the component shortages that are out there. I've heard over the past couple of months, people kind of point to June 2019 is when this starts to fully work itself out. We've seen some relief recently moved from where you guys are sitting. What are you seeing on the component side? Is there any areas of tightness. Has it worked itself out? How is that right now?

I think at this point, we see a substantial easing of the lead times. We were facing some situation with lead times to stretch out past a year, 18 months. I think that's come down substantially more real reasonable levels. The big curve ball that we have out there, I think is electric cars, and the uses that they have with capacitors and ICs. So, for example, if you look at we do a lot with fuses and circuit protection, the standard non-electric car were maybe used 40 or 50 fuses, on a new car, electric car, you could have 500 fuses. So we don't know how that's going to progress and how that's going to change the market. If you look back at the shortages that we were facing last year, I think it was large, largely dependent on the auto industry.

Ok. And then, I've also read that China's kind of pulling back some subsidies HEV's

Electric cars. Yeah.

HEV exposure be, electric cars. Where would your HEV exposure be. Is it more China-oriented? Is it US and Europe?

No, it's definitely more North America and European. I don't think we, we [indiscernible] cost competitor for the electric market in China. So our focus has been more, from the Power side, it's more a niche markets in Europe and in North America. And by then for example buses, trailers, not...

Off-road equipment...

Off-road. Yeah. Even we do, we're working a lot with motor companies for, I'm sorry boating companies now on battery charges for them. Also, we do a lot of work with Tesla on circuit protection.

Got it. Dan, Lynn and Craig, thank you very much for the color. I appreciate it.

We appreciate the questions.

[Operator Instructions] Our next question is from Hendi Susanto with G. Research. Please go ahead.

Good morning, Dan, Craig and Lynn.

Hi.

Good morning.

Dan, do you have estimate of 5G addressable market for Bel Fuse? And can you remind us your major products that will benefit from 5G?

Okay. What we're doing is a lot, a lot of the wireless work, again, looking at telecommunication where that's going, looking at the auto industry, different areas are moving. I mean, if you look at 5G, it's, basically you have a whole world interconnects with itself from what's going to happen with the lighting systems outside, how cars interact with each other. So basically, we're coming up with array of products that can meet this new technology. Really focused on the RF side, and the wireless side of the business from that. I should say from the Cinch side, the high, or the high reliability side of the business than the commercial side.

And then I think you cited like lower demand of MacJack and discrete magnetic component in Q1. How should we expect those two product groups to trend as we see the remainder of 2019. Should we expect like lower demand to continue?

Well, I think both of those, those product groups go heavily into the networking companies like HP or Cisco or Oracle. So I think, again, I think they're more of an no way inventory situation, because of the concerns they had with the shortages that they brought in. Cinch is a greater product than they need. So we're hoping that a lot of that product could be flushed out this quarter and hopefully the beginning of next quarter. So it should start improving by the second half of this year.

Okay. And then Lynn mentioned Q2 expectation of high single digit year-over-year. And can you elaborate let's say, like across different segments like whether like one would see, like a higher decline versus like a slower decline among your product groups, I mean.

Lynn, do you want to take that one?

Sure. So I think on the Magnetic Solutions piece, we're probably going to see the highest decline in that group. Just related to what Dan was just referring to, one of our major customers had a new product launch. They have a lot of inventory on hand right now, that they're working through. And under the new revenue recognition standard, we now report revenue as we ship it to their hubs. So to the extent that they are using inventory and we're not shipping as much, that does have a downward impact on our sales. So I think that's the group where we see the most decline, the Connectivity Solutions group, some pressure there, but could either be flat slightly down, but no major concerns there. And then on the Power Solutions group, we are expecting that to be down a bit from last year's second quarter. We did have some shipments especially in two blockchain customers that we don't anticipate repeating in this year's second quarter.

And it appears there are no further questions at this time. Mr. Bernstein, I'd like to turn the conference back over to you for any additional comments or closing remarks.

Thank you, Marry. We appreciate everybody being on the call and look forward to speaking to you next quarter.

And this concludes today's call. Thank you for your participation. You may now disconnect.