Bel Fuse Inc. (BELFB) CEO Dan Bernstein on Q1 2021 Results - Earnings Call Transcript

Bel Fuse Inc. (NASDAQ:BELFB) Q1 2021 Earnings Conference Call May 3, 2021 11:00 AM ET

Company Participants

Dan Bernstein - President and Chief Executive Officer

Farouq Tuweiq - Chief Financial Officer

Craig Brosious - Vice President of Finance

Lynn Hutkin - Director of Financial Reporting

Conference Call Participants

Theodore O'Neill - Litchfield Hills Research

Jim Ricchiuti - Needham & Company

Hendi Susanto - Gabelli Funds

Operator

Good day, and welcome to the Bel Fuse Inc. First Quarter 2021 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.

Dan Bernstein

Thank you, Jennifer. Joining me on the call today is Farouq Tuweiq, our CFO; Craig Brosious, our Vice President of Finance; and Lynn Hutkin, our Director of Financial Reporting. Before begin the call, I'd like to ask Lynn to go over the safe harbor statement. Lynn?

Lynn Hutkin

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 the anticipated impact of the acquired EOS Power business on our results, anticipated higher sales for our Magnetic Solutions group during the second and third quarters as a result of strong bookings in the first quarter, expectations regarding our scheduled backlog as an indicator of stronger sales in the second and third quarters, expected contributions to net earnings from our rms and EOS acquisition and cost savings from restructuring efforts, and our efforts to continue to optimize our cost structure are all 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 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 impact of public health crises, such as the governmental, social and economic effects of COVID-19; 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 also may 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.

Dan Bernstein

Thank you, Lynn, and thanks everybody, for joining us on the call today. I hope that you and your families continue to stay safe during these difficult times. First, I'd like to provide an update on COVID-19 and how it impact our facilities. Overall, I'm pleased to report that all manufacturing sites globally continue to be operational throughout the first quarter. Our most recent acquisition, EOS, is based in Mumbai, India where they're going through a very difficult time. The factory continues to be operational as they manufacture essential products and protective measures have been put in place to prioritize the safety of our new associates. We would like to thank these new associates who’re working each day under these difficult conditions. Before getting to our results, while Bel does not normally comment on market activity, we realized there was a substantial amount of trading in Bel's stock on Friday, and the company does not know the reason for this increased trading activity.

Turning to our results. We saw 6% improvement in sales as compared to last year's first quarter. Demand in each of our market was strong with the exception of commercial aerospace. Both eMobility and Circuit Protection had exceptional quarters and demand from our distribution partners was strong, which is a good indicator of general market demand to their broad customer base. Sales within the Power Solutions and Protection group were up $7.5 million or 21% from the first quarter of 2020. CUI turned in another strong performance this quarter with $2.1 million increase in sales over last year's first quarter. Our products sold into eMobility applications were up $1.5 million, a 100% increase from 2020 first quarter and fuse sales were up $1.6 million, an increase of 60% from last year's first quarter. The areas of growth were partially offset by elimination of low margin products within the group.

Within our Connectivity segment, sales was down $1 million or 3% in the first quarter of 2021 versus the same quarter 2020. While we continue to be impacted by year-over-year comparison related to the commercial aerospace market, we saw a partial rebound in the end market versus the fourth quarter of 2020. And looking at that trend from the fourth quarter of 2020 to the first quarter of 2021, commercial aerospace increased by $1.2 million or 57% and payoffs through distribution by $3 million or 30%. Sales within Magnetic Solutions business were fairly consistent as compared to the first quarter of 2020. We have strong bookings in this segment over the past two quarters and our production team is working through some challenges on material and labor availability in order to accommodate these increases in demand. Overall, our margins were down in the first quarter of 2021, [primarily] driven by the industry wide material shortages resulting in higher material costs. Labor costs also continue to rise as labor availability in China has been impacted by the lack of traditional workers migrating during Chinese New Year holidays as a result of the pandemic this year.

Our cost saving initiatives from prior years have mitigated a higher cost to a certain extent and the remaining impact has significantly been addressed through price increases to all our customers. We anticipate price increases, the majority of these increases, to go in effect during the second quarter and third quarter of 2021. On the acquisition front, our first acquisitions of rms -- our first quarter acquisitions of rms and EOS have both been run smoothly and integrated has been proceeding planned. It is encouraging to see that rms was accretive to Bel's results in the first quarter of 2021 and we anticipate EOS to be immediately accretive to our results in the second quarter. Our backlog of orders was $234 million as March 31st and we reached $264 million by the end of April, a strong indicator of top line growth for the balance of year here. Our ability to fulfill orders in the books will be dependent on both the availability of materials and labor. We will keep a close eye on costs and availability of raw materials and [labor] in order to service our customers as timely as possible.

I would like to now turn over to Craig to go over the financial update. Craig?

Craig Brosious

Thanks, Dan. Sales by product segment for the first quarter of 2021 were as follows; Power Solutions and Protection sales were $43.6 million, up 20.6% from last year's first quarter; Connectivity Solutions sales were $38.1 million, a decline of 2.7%; and Magnetic Solutions sales were $28.9 million, largely the same as last year's first quarter. Preliminary gross margin by product segment for the first quarter of 2021 was as follows: Power Solutions and Protection had a gross margin of 24.7% in the first quarter of 2021, up slightly from 24.3% in last year's first quarter; Connectivity Solutions gross margin was 25.7%, down from 28.6% in the 2020 quarter; and Magnetic Solutions gross margin was 13.7%, down from 21.2% in last year's first quarter.

On a consolidated basis, gross profit margin decreased to 21.9% in the first quarter of 2021 as compared with 24.8% in the first quarter of 2020. Gross margin during the first quarter of 2021 was impacted by industry wide increases on raw material pricing and higher labor costs driven by wage increases and an unfavorable foreign exchange fluctuation. Bel implemented price increases to its customers and distribution partners to offset these higher input costs, with many of those price increases taking effect in the second quarter. The margin comparisons were also affected by $2.2 million in COVID related subsidies received in last year's first quarter that did not repeat. Research and development costs were $5 million during the first quarter of 2021, a decline of $1.1 million from the first quarter of 2020, primarily due to the closure of our Switzerland R&D facility in mid 2020.

Our selling, general and administrative expenses were $21 million or 19% of sales, up slightly from a dollar perspective from the first quarter last year. SG&A salaries and fringe benefits were $1.4 million higher as compared to the first quarter of 2020. These costs were partially offset by a reduction in commissions and other selling costs of $632,000 and lower travel expenses of $416,000. During the first quarter of 2021, we closed on the sale of a property in Hong Kong. This transaction resulted in a gain of $6.2 million, which is included in our first quarter results. These factors resulted in income from operations of $4.5 million in the first quarter of 2021 as compared to a loss from operations of $1.1 million in the first quarter of 2020. Other income and expense net was an income of $546,000 for the first quarter of 2021 as compared to an expense of $2.1 million during the first quarter of 2020. The expense in the first quarter of 2020 largely related to a $2 million loss on the company's SERP investments, which are included in this line item.

Interest expense was $800,000 in the first quarter of 2021, down from $1.4 million in the same quarter last year, as a result, decreases in both LIBOR, the company's spread on its credit facility driven by EBITDA improvements and the overall reduction in our outstanding debt balance. We had provision for income taxes of $1 million in the first quarter of 2021 compared to a benefit of $772,000 during last year's first quarter. The benefit in the first quarter of 2020 reflected a reduction in GILTI tax and tax benefits associated with the CARES Act. Earnings per share for Class A common shares was earnings of $0.24 per share in the first quarter of 2021 as compared with a loss of $0.30 per share in the first quarter of 2020. Earnings per share for the Class B common shares was earnings of $0.26 per share in the first quarter of 2021 as compared with a loss of $0.31 per share in the first quarter of 2020. On a non-GAAP basis, which excludes certain unusual and other nonrecurring items, EPS for Class A shares was a loss of $0.23 per share in the first quarter of 2021 as compared with a loss of $0.28 per share in the first quarter of 2020. On a non-GAAP basis, EPS for Class B shares was a loss of $0.23 per share in the first quarter of 2021 as compared with a loss of $0.29 per share in the first quarter of 2020.

And now I'd like to go through some balance sheet and cash flow items. Our cash and cash equivalents balance at March 31, 2021 was $74 million, a decrease of $10.9 million from December 31, 2020. During the first quarter of 2021, we made net payments of $16 million in connection with the acquisitions of rms and EOS, $1.5 million towards our outstanding debt balance and used cash for capital additions of $1.2 million, dividend payments of $815,000 and interest payments of $627,000. These items were partially offset by cash flows generated from operating activities of $3 million and $6.7 million in proceeds received from the sale of property. Accounts receivable were $74.1 million at March 31, 2020 as compared with $71.4 million at December 31, 2020. The primary driver of the increase related to the 2021 acquisitions of rms and EOS, which added $3.1 million to our receivable balance. Days sales outstanding increased to 60 days at March 31, 2021 as compared to 57 days at December 31, 2020.

Inventories were $106.7 million at March 31, 2021, up $6.6 million from December 31, 2020. The increase we've seen in raw materials and work in progress, and was largely due to the inclusion of $5.3 million from the 2021 acquired companies. Accounts payable were $42.5 million at March 31, 2021, up $2.7 million from its level at December 31, 2020. The 2021 acquired companies accounted for $2.2 million of this increase from the year-end level. Sales outstanding debt balance was $114.3 million as of March 31, 2021, net of deferred financing costs, a decrease of $1.3 million since the 2020 year end balance. Book value per share, which is calculated as stockholders' equity divided by our combined A and B classes of common stock outstanding, was $15.09 per share at March 31, 2021 as compared to $15.04 per share at December 31, 2020.

And with that, I'll turn the call back over to Dan. Dan?

Dan Bernstein

Thank you, Craig. Jennifer, we'd like to open up the call for questions now, if possible.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Theodore O'Neill with Litchfield Hills Research.

Theodore O'Neill

My first question is about the eMobility market, which is getting an awful lot of discussion this quarter. Could you give us an idea about, is it scooters, is it bikes, is it both? Do you see any regional differences in the market? And how big do you think the opportunity could be?

Dan Bernstein

I think at this time, it's too early to measure the opportunity. What our niche is we're not really focused on the automotive market overall. We do do some good business from a circuit protection business. But the growth that we got from eMobility mobility, we're focusing on now, is the business that we do from our Power group and what we're looking at are niche markets. So basically, post office, school buses, sanitation, mining equipment. So very specific niche markets where they're moving to electric vehicles. Again, we think the opportunity should have substantial growth, at least in the next five to six years. And again, that's what the areas we're focusing on, specifically niche markets, also voting charging markets also.

Theodore O'Neill

It's not scooters and e-bikes?

Dan Bernstein

No, absolutely not. But Theo, if I can give you a -- we did do a business where a company called StreetScooter that was building mailbox deliveries in Europe. So more of a government specific requirement type of situation, but nothing that's mass market.

Theodore O'Neill

You've mentioned in the prepared remarks that you've seen an uptick in commercial aviation business. I mean, I guess that was probably pretty low. But how much more headroom do you have on the commercial aviation business, if we get back to something looking approaching normal?

Dan Bernstein

I mean what's normal? Again, I think if you look, again, from what we understand that you do see with Airbus receiving a big order last week from Delta, I believe. I can't mention anybody else. So we do see opportunities. But again, if you look at -- my hands are kind of tied because of agreements. So basically, it can't get much lower. So we do see consistent improvement in aerospace for the next three to four years till we get back to normal from all the research that we've read.

Theodore O'Neill

I like that answer.

Lynn Hutkin

If you want, Dan, I can certainly comment on the broader commercial aerospace end market that was…

Dan Bernstein

Go ahead, Lynn.

Lynn Hutkin

So as we see in the fourth quarter, our total commercial aerospace sales, and this is direct, this is not through distribution, was around $2.1 million. And in the first quarter, we saw that go up to $3.3 million. So definitely some recovery here. But to put it in perspective, last year's first quarter, we were at $5.1 million. So it's definitely a partial recovery at this point and we anticipate it being -- along runway, no pun intended, in getting back to that normal that we had.

Dan Bernstein

And also, you should know that we are picking up the benefit of our new acquisition, rms, which is dedicated to the aerospace industry also.

Operator

We'll go next to Jim Ricchiuti with Needham & Company.

Jim Ricchiuti

I just wanted to pursue the increase in backlog. So I think you guys reported in your K, you had a backlog at the end of February of around $180 million. So this is a big increase. And I'm just wondering if you could maybe talk a little bit about which areas, which segments? I mean, you alluded to the demand, I think, in eMobility. But I wonder if you could talk a little bit more broadly about where you're seeing the business recover so strongly and how does this compare with some other cycles?

Dan Bernstein

Every cycle is kind of unique, but this is truly broad based if we took out commercial aerospace. Each one of our product groups are seeing some good substantial increases, that is dependent on where the lead times are. Currently, our Power group has the longest lead times of any products because they do use semiconductors. So those lead times that went from 12 to 14 weeks up to 32 weeks. So we've seen that be stretched out. And so that really helped increase the backlog. Our concern at this point is, historically, is there double ordering taking place because of the long lead times and material shortages, and that's what we have to monitor. But again, if you look at our customers and the different types of products, our fuse product line is not our biggest product line by far in a way but it does have the broadest customer base because it goes into so many different markets and that's a great sign and same with our distribution business, that our distributors sales and industrial, commercial, networking, computing, you name it, security, medical. And every one of these markets, we see strength out there. Again, our only concern is that double booking occurring because of the long lead time and people can't get parts and possibly our other suppliers.

Jim Ricchiuti

Yes, I mean you're anticipating my next question. And how do you monitor, you've improved so many of these periods like this? And is there any better way to monitor it than, say, in the past, when sometimes you guys are caught off guard?

Dan Bernstein

But historically, you try to say there's noncancelable orders, say that you need payment upfront situations like that, that you look at and you try to work through depending on your contract agreements that you have with customers. So again, you just try to hit it, someone has to pay up. If you really want the parts, are you going to pay a premium for delivery and how much do you want to pay upfront to guarantee delivery? So those are the things that you can look at and also noncancelable orders and that could help also.

Jim Ricchiuti

Are you guys seeing any signs that the component constraints are potentially a risk factor just for some of your customers because of their own supply chain challenges, which might [lead] to some disruption?

Dan Bernstein

No, we see some slightness of that where we’re taking our parts if we're not getting all the parts in to build a finished product. So trying to push us off. But the problem you have with that situation is then is because there's such a demand from our other customers, if a customer tries to push back our product that we achieve, we can send it to another customer and they use it. We're not going to accept push outs if we have other customers for those products. So basically, if you're a aggressive customer, you're going to take the parts in and wait the extra four to six weeks till the other parts come in or you might lose all your parts. Does that make sense?

Jim Ricchiuti

And I'll jump back in the -- yes, it does. It does. And one more, if I can, I'll jump back in the queue. The SG&A was a bit higher than I think you guys were indicating back in the last call, I think you said around $19 million to $20 million. So is this a level that we think you're going to see going forward and probably trends up with the growth in sales that you're expecting?

Dan Bernstein

Craig, can you answer that?

Craig Brosious

Yes, I think you're right, Jim. I think it will trend up a little bit just because of maybe the increased activity related to travel and stuff like that in the future quarters. We'll also have some incremental expense coming from EOS that basically joined Bel right at the end of the quarter. So we'll have a little bit of an uptick there.

Operator

We'll go next to Hendi Susanto with Gabelli Funds.

Hendi Gabelli

First question, Dan, I saw you talk about price increase that will take place in Q2 and Q3. Would you be able to pass like 100% of the price increase, or is there some like sharing component into your discussion with your customers?

Dan Bernstein

There's always sharing with our customers. But I think our goal -- and I think it's industry wide, it's not us. So I think we do look at each customer. We do look at what our competitors are doing. But across the board, I think we're trying to implement 5% to 12% price increase depending on where the product sits on the fence. Again, it's a new product that's just been introduced. We probably only look for 5% increase, but a mature product that's been beaten up over many years. We have to increase it probably closer to 8% to 10% to improve the margins. And as you know, we have walked away in the past year on products that do have low margins where the customers do not accept a price increases.

Hendi Gabelli

And then in terms of gross margin expectation for this year. Last year, you did improve gross margin quite significantly. And with raw material cost increase and price increase, what are the puts and takes on your gross margin for 2021?

Dan Bernstein

Craig, I think that's a good question for Farouq. What do you say, Craig?

Craig Brosious

Yes, I approve, to address that one.

Farouq Tuweiq

So from a gross margin perspective, obviously, we saw the dip, but as it was alluded to in the open commentary, last year's gross margin was aided by a little bit of kind of one off government subsidies adjustments. So I think when we look it at an organic or adjusted basis, the delta is not as wide. With that being said, I think the overarching theme, that's a number we're laser focused on. And to Dan's -- also, the comments that he made, we are seeing some of this -- we're doing price increases, raw material increases. So we are monitoring that situation closely. Obviously, we're trying to prevent that from dropping to the gross margin line in addition to our other, call it, organic focus on it. Does that answer your question, Hendi?

Hendi Gabelli

And then, Dan, last question. Do you have any insight into IT hardware? Many companies talk about substantial recovery in the second half of 2021. And then I'm wondering what your takes and insight into data center or IT hardware markets?

Dan Bernstein

Again, the hardware, we still haven't seen much -- I mean, that's the only area that we -- our backlog is very strong on those products. But we haven't seen the Ciscos, the Siemens, some of these companies out there, we really haven't seen much bullish behavior from them. Data has been strong for us and I don't think the data farms have cut back at all. So we do have opportunities that we are addressing in certain countries. Again, looking at niche markets, not the Facebooks, the Amazons and Microsofts of the world, but the second tier type of customers, where we feel that we can offer a benefit with our technology and our service.

Operator

And at this time, we have no further questions, and that will terminate this conference call. Thank you for participating.

Dan Bernstein

Thank you for joining us today.