Bel Fuse Inc. (NASDAQ:BELFB) Q3 2023 Earnings Call Transcript

Bel Fuse Inc. (NASDAQ:BELFB) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Good morning and welcome to the Bel Fuse’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please proceed.

Jean Young: Thank you Latonia and good morning everyone. Before we begin, I’d like to remind everyone that during today’s conference call we will make statements relating to our business that will be considered forward-looking statements under Federal Securities Laws, such as statements regarding the company’s expected operating and financial performance for future periods, including guidance for future periods in 2023. These statements are based on the company’s current expectations and reflect the company’s views only as of today, and should not be considered representative of the company’s views as of any subsequent date. The company disclaims any obligation to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties and other factors.

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These material risks are summarized in the press release that we’ve issued after market closed yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations, is discussed in our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K, for the fiscal year ended December, 31, 2022, and our quarterly reports and other documents that we have filed or may file with the SEC from time to time. 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 press release. Our press release and our SEC filings are all available at the IR section of our website.

Joining me on the call today is Dan Bernstein, President and CEO; Farouq Tuweiq, CFO; and Lynn Hutkin, Vice President of Financial Reporting and Investor Relations. With that I’d like to turn the call over to Dan. Dan?

Dan Bernstein: Yes, thank you Jean, and thank you for joining us on our call today. We are pleased with our results for the quarter. We continue to execute on our plan for growth and strategic improvement of profitability. As discussed over the past several quarters, the team has taken a multipronged and balanced approach to the way we do business in terms of customers we serve, products we sell and markets we support and doing it all in the most cost efficient manner. Our third quarter sales continued to be healthy, driven by order patterns of our customers whereby we saw different growth profiles across our diverse product offerings. We saw growth in certain markets such as defense, aerospace, eMobility, and rail that was offset in general industrial premise by our consumer.

On the distribution side of business, we see some pockets of growth. So however, the distribution channel continues to have elevated levels of inventory that affected our new orders. As we looked at our top line trend, it’s important to remember that we are an engineering driven company first. We’ve been successful in supporting tomorrow’s technology for over 70 years and this is a testament to our ability to work closely with our customers and engineers. In developing the future products there is a value associated with that. A few years ago we were eager to support all customers at all costs, allowing us to engage in projects we felt a worthwhile pursuit, but which at times were less than great outcome for us. To be clear, our priority and focus to be aligned with customers will value the quality and technology of our price and are not solely focused on price.

We no longer have a problem walking away from these sales that fell below our gross margin requirements. It allows our engineers to work on more beautiful designs and open space in the factory floor to support our growing end markets such as eMobility, medical, industrial and rail. Our internal model in 2023 is building a better value and this touches all areas of our business, HR, finance, product development, business development, procurement and manufacturing. There isn’t a single function or department within the organization that doesn’t have improved initiative to take place. Our collective actions have evolved and improved profitability and increased cash generation. This gives us financial flexibility to continue to explore various growth and capital adaptation strategies, which could include a potential stock buyback subject to market conditions, evaluation of acquisitions and other strategic initiatives to support future growth of the company.

As we approach our 75th anniversary on January 11, 2024, it is exciting to see the recent mindset, cultural shifts that have taken place internally and the level of energy and dedication put forth by our global team as we deliver better value to our customers, shareholders and associates. But that said, I’d now like to turn the call over to Lynn to provide a financial update.

Lynn Hutkin: Thank you, Dan. From a financial perspective, sales were fairly stable for our Connectivity and Power segments as compared to the third quarter of 2022, with the largest impact felt within our Magnetic segment. While the Magnetic segment was down from Q3, 2022, we did see an almost 20% rebound from its low point in Q2 2023. Overall, third quarter 2023 sales were $159 million as compared to $178 million in the third quarter of 2022. Of the $19 million decline, $8.4 million was attributable to reduced expedite fee revenue in 2023 quarter versus Q3, 2022. Gross margin continued to increase on a year-over-year basis for eight consecutive quarters and reached 35% in the third quarter of 2023 as compared to 29% in last year’s third quarter.

Margin improvement continued and was led by favorable product mix and the successful execution of a variety of cost reduction and efficiency program. By product group, Power Solutions and Protection sales for Q3 2023 were $74.9 million, down 2.1% from last year’s third quarter. Within the Power group an $8 million decline and expedite fee revenue was largely offset by higher demand for our front end power products serving our networking end market. Sales of our eMobility products also remained strong and helped offset declines in Circuit Protection and distribution sales. Gross margin for our for our Power Group was 41.7% for the third quarter, a 930 basis point improvement from Q3 2022, primarily driven by a favorable shift in product mix, cost reduction effort and favorable FX.

Our Connectivity Solutions group had sales of $51.8 million in the third quarter of 2023, an increase of 3% from last year’s third quarter with continued strength seen in defense and aerospace. Gross margin for this group came in at 35.8% for the third quarter of 2023, up from 26.1% in the third quarter of 2022. Lastly, our Magnetic Solutions group had Q3 sales of $32 million, down 37.2% from last year’s third quarter. Gross margin for this group was 22% in the third quarter of 2023 as compared to 30.4% during last year’s third quarter. We are happy to report that $6.9 million shipped from the new BTX site in China during the third quarter of 2023. At the consolidated level, our backlog of orders totaled $408 million at September 30. Historically, our backlog typically represented approximately one quarter’s worth of sales when we times for 8 to 12 weeks.

Our current backlog levels continued to represent about 2.5 quarters worth of sales and we view this as still being high. We expect our level of backlog to come down further in future quarters as lead times continue to normalize. Our consolidated book to bill ratio improved sequentially from 0.6 in Q2, 2023 to 0.8 for Q3, 2023. Of note, our Q3 bookings within our commercial air end market were $15.7 million, a new quarterly record high for us in this end market. Our selling, general and administrative expenses for the third quarter of 2023 were $23.7 million or 14.9% of sales, up from $22.2 million or 12.5% of sales in the third quarter of last year? This increase was largely related to higher salaries and fringe benefits in the 2023 quarter, partially offset by lower sales commissions.

Turning to the balance sheet and cash flow item, we ended the quarter with a cash balance of $100.2 million as compared to $70.3 million at year end. We generated $81.4 million in cash flow from operating activities during the first nine months of 2023. The capital expenditures of $9.7 million, this resulted in free cash flow generation of $71.7 million for the first nine months of 2023, an improvement of $53.3 million versus the same period of 2022. Our inventory levels decreased by $29.3 million from year end, resulting in improved inventory turns of 2.9 times during Q3, 2023, at 2.6 times from year end. While progress has been made on bringing inventory levels down, which remains a company-wide initiative to restore our inventory turns to better align with industry norms.

Looking at the third quarter of 2023, we generated $40.8 million in cash flow from operating activities. This translated into free cash flow of $38.2 million during the third quarter. From a debt perspective, our outstanding balance remains at $60 million and is effectively subject to a fixed interest rate of 2.5% through our swap agreements that are in place through 2026. I’ll now turn the call over to Farouq for additional commentary. Farouq?

Farouq Tuweiq: Thank you, Lynn. Over the past months, I’ve spent quite a bit of time visiting Bel facilities in Europe and in the Dominican Republic and what a big change I’ve seen from just one year ago. As I look at the mindset shift that has resulted in improved productivity and cost containment at the factory level it has been nothing short of stellar. We continue though to challenge our facilities to improve globally and expect big things from there. We also have been devoting a good amount of time on our material spend to ensure we are aligned with vendors appropriately matched for our size that we believe will ultimately result in a higher level of savings. Dan and I also attended our European sales meeting a few weeks back and believe it’s in great hands as Charles it’s passed forward to further penetrate Europe.

On a side note, Europe has been a strong performer for us this year despite some of the challenges there and we think there is more to be done in this region. Looking out to the fourth quarter, based on currently available information, we provided sales guidance in the range of $146 million to $154 million with gross margins roughly in line with Q3, 2023 levels. In addition to some voluntary trimming on the top line, as Dan mentioned, the channel continues to be over inventoried, especially with our distributor customers. We expect this situation will continue for another two quarters or so before it returns to normalcy, though there are certain pockets of growth in the channel which is good to see. From a supply chain perspective, there has been easing and availability of passive components, but we are still seeing longer lead times for others, mainly on the IC side.

In summary, it’s been a busy year on all fronts, the progress made in many areas of the organization. I’ll reiterate my sentiment from prior quarters and that is that we are on this journey of continuous growth and improvements. Change is rarely linear or immediate. We do know we are building a healthier organization that’s more focused on pursuit of growth and demanding operational excellence. These are all things that excite all of us. With that, I’ll turn the call back over to Dan.

Dan Bernstein: And I thank you Farouq and at this time, I’d like to open up the call to any questions you might ask.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Theodore O’Neill with Litchfield Hills Research. Please proceed.

Theodore O’Neill: Thank you and congratulations on the good quarter. Lynn, I know you said at the Jeffries conference that your debt is as low as it’s going to get. But I was wondering if you could talk about either M&A or how you’re going to deploy the capital because at the time of the conference you didn’t have $100 million in cash and you do now and you’re talking about bringing inventory turns down as well, so that would add to your cash balance as well.

Farouq Tuweiq: Yes. So, I’ll just jump in here Theo. We did have a nice cash build this quarter. I’d also point out that we’re roughly on track to double last year’s CapEx spend internally here as we look at kind of various growth avenues and investments. As Dan had had pointed out too we are obviously always on the hunt for M&A. We think that there is a little bit of a slowdown right now in the M&A market given some of these global circumstances and kind of situations that we keep reading about. We do believe that will change and as we build our cash here obviously we’re always looking for ways to invest in the future of the business for the long-term. So we think that there will be a use for it. History has shown that, if you look you know back to a bunch of years quite frankly. So we do know that there will be a use there for it. But as also Dan called out, we’re always looking for ways to improve our capital allocation strategy, so I’ll kind of leave it at that.

Theodore O’Neill: Okay. In the eMobility segment, are you seeing any particular pockets of strength or growth in there? And could you comment just broadly about if you’re seeing any inflation effects in the supply chain?

Farouq Tuweiq: Yes, I mean inflation is all around, you know, whatever the wage level and obviously that doesn’t just impact us, it impacts all of our suppliers as well and our customers. So I think inflation is something that everybody’s wrestling with and how to contain it. So as we think about automation, as we think about streamlining, there’s a big emphasis on ensuring efficient operations. So it is definitely something that we are thinking about and managing as quite frankly that with our numbers, our facility consolidations will help us manage and some of this inflation, but it is a point of consideration quite frankly through everything we do, whether the customers would pursue the products, we pursue our pricing, our operations. So it’s definitely front and center. So we do think it is something that everybody is wrestling with quite frankly.

Theodore O’Neill: And on the eMobility side, any particular pockets of strength there?

Farouq Tuweiq: Yes. So on the mobility side, generally maybe just a general comment on industrial eMobility. These are big ticket items. They cost more than traditional let’s say ICE buses as an example. So as a result of that we’re still seeing overall industry excitement around the future of eMobility. I think some of — the nature of our customers we are seeing that are called a little more startup in nature, so as they go through funding rounds, those are points of consideration. But the good thing about our eMobility business, it’s diverse and it covers customers from startup mode all the way to kind of mature household names. But overall I’d characterize it as a very good end market. But like any other market a little bit of challenges there at the customer level, but I think for the most part we’re bullish on that for sure.

Theodore O’Neill: Okay, thanks very much.

Operator: Our next question comes from James Ricchiuti with Needham and Company. Please proceed.

James Ricchiuti: Hi, good morning. Maybe just to close the loop on the eMobility side, I think you said at one point that you expected this revenue to double this year. Is that still the case or are you seeing some macro influencing some of the demand in that market?

Lynn Hutkin: Yes, so Jim, last year eMobility sales were in the neighborhood of $20 million for the first nine months of this year we’re at $22 million. So probably it will not be doubling this year at this rate. But we’ve already been seeing, we’re already exceeding last year’s full year eMobility sales. So we’ll not double this year.

Farouq Tuweiq: Also I think on the eMobility side given some of the components, there was a little bit of challenges in getting products out the door earlier this year. So we do expect a nice finish during Q4, but I don’t think it will be at double level.

James Ricchiuti: Got it. Sure. Yes, there’s a lot of moving parts on the shelves line. Just you are exiting some, you’ve exited some low margin business. You have these raw material surcharges that impact. Is there any way to think about what the revenue growth was organically nine months or Q3? I’m just trying to get a better fix on the top line.

Farouq Tuweiq: So revenue excluding PBB?

James Ricchiuti: Yes, I mean, Farouq we could discuss this offline, it’s just we — I know that you are deemphasizing some low margin business that’s coming out. There’s an impact from the raw material surcharges, but yes, is there on an organic basis are you seeing growth? Clearly there’s some overhang in the channel, the distribution channel, I think we all get that.

Dan Bernstein: Hey Jim, I think because of the long lead times that we’re faced over the past 24 months, our pricing that we put in place really in effect that we didn’t lose out because of price increases. I think going forward that might change as lead times come down. So as I said over the past 24 months our new strategy, I’m looking at margins and not just taking business and take business hasn’t really, we haven’t seen the effects of it because of the lead times, so most of it is coming from PBB.

James Ricchiuti: Okay and maybe just moving to the facility consolidation, you gave a little bit of color on some of the early benefits. How do we think about the balance of that rolling out over the course of 2024 is that expected early in the year or is it going to be spread more evenly over the course of the year?

Dan Bernstein: I think, the way I think about it Jim is, it’s kind of a phased rolling approach. So we started seeing a little bit of benefits in Q2 more in Q3. We expect to see more in Q4. My guess is they’re, if I were just going to hedge a little bit, my guess is that there will still be a little bit maybe cost that dribbles into Q1 next year. But I think largely we expect that that this will be behind us in 2023 maybe with a little bit of overhang and into next year. But I think for the most part we made some pretty good progress here. So yes, I think we’ll largely see the benefits of that throughout all over next year.

Lynn Hutkin: And just to circle back quickly on your question about the expedite fee revenue, we do now have in the earnings release itself in the non-GAAP tables, GAAP net sales and what the expedite fee revenue is along with the non-GAAP adjusted net sales. So for the nine-month period, the numbers are noted there. So on that basis year-over-year for the nine-month period it was a $22 million increase in non-GAAP adjusted net sales which was just under 5%.