Bel Fuse Inc. (NASDAQ:BELFB) Q4 2023 Earnings Call Transcript

Bel Fuse Inc. (NASDAQ:BELFB) Q4 2023 Earnings Call Transcript February 22, 2024

Bel Fuse Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Bel Fuse Fourth Quarter and Full Year 2023 Earnings Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please go ahead, Jean.

Jean Marie Young: [Technical Difficulty] …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 2024. 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.

These material risks are summarized in the press release we 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: Thank you, Jean, and good morning, and thank you for joining our call of Q4 and '22-'23 year-end. Last month, Bel celebrated its 75th year of being in business. This is no easy feat in electronic components business and a testament to the generation of great assertions, customers and partners that we have a privilege to working with. Over the years, we have instilled the four principles of father Bernstein [ph] when he first started the company in 1949. We worked closely with our customer and product development teams, the benefits of collaboration will enable the company to stay relevant and on the cutting edge of technology. Two, establish and maintain relationship with quality suppliers; three, provide value to our shareholders.

This is always central in our priorities and made possible for building and operating successful businesses; and finally, attract and retain talented associates. Bel has successfully navigated the challenges faced over the years and has stood the test of time by relying on these four principles. 2023 on many accounts was a challenging year for our initiative. Bel was able to perform better than most due to diversity in our end markets and our unrelenting dedication to continuous improvement by our global teams. It was also a transformer year for us as we consolidated four manufacturing sites, sold on our non-core Czech operations and divested our former headquarter building and focused on optimizing production and business processes. We finished 2023 with a non-GAAP adjustable net sales, which excluded expedited fees slightly up from 2022 levels with significantly improved profitability.

It's also a year of record cash flow generation. This enabled us to explore broadly ways to invest in the business and return capital to our shareholders. As announced in our earnings release, the Board of Directors has authorized a new program for the repurchase of up to $25 million of the company's outstanding shares in the open market, privately negotiated or block transactions or otherwise in accordance with applicable laws and regulations of the SEC, including Rule 10b-18 of the Exchange Act. Additional details regarding the stock repurchase program are contained in the 8-K that was filed yesterday. Despite the many wins of 2023, we're not able to be as acquisitive as we had hoped, given the limited availability of viable targets. As we look to 2024, I'm excited about the road ahead.

While it's expected that the year will be off to a slower start, as consistent with the Board assessment throughout our industry, we do believe the second half of the year looks promising, assuming inventory levels in the channel normalize. With our previously announced facility consolidations behind us, we entered 2024 with a much more efficient cost structure, which will serve us well, especially with the current sales level of our Magnetics business. Turning to the management team. We announced last month that Steve Dawson will be taking the helm of Bel Power Group upon Dennis Ackerman's retirement in July. Steve came to Bel through its acquisition of Power-One business from ABB in 2014 as an integral part of our turnaround story over the Power segment in recent years.

I've worked side by side with Dennis and the team for the past decade, coupled with his technical background and industry experience. Steve brings the right mix of continuity and fresh perspective to the role. I'm very excited to have him stepping up this summer as part of our going-forward executive team. And with that, I'll turn over the call to Lynn to give us a financial update. Lynn?

Lynn Hutkin: Thank you, Dan. From a financial perspective, sales came in at 140 million for the fourth quarter and 640 million for the full year of 2023. On a non-GAAP basis, our adjusted net sales, which exclude expedited fee revenue, were down 12% in the fourth quarter of 2023 versus Q4 '22, but were up 1% for the full year 2023 over 2022. Consistent with prior quarters, there were large offsetting movements within our product segment with pockets of strength within Connectivity and Power helping to mitigate the significant declines in Magnetics sales throughout 2023. Gross margin continued to increase on a year-over-year basis for the ninth consecutive quarter and reached 36.6% in the fourth quarter of 2023 as compared to 31% in Q4 '22.

Looking at the full year, gross margin was up by 570 basis points in 2023 as compared to 2022. Margin improvement continued to be led by a favorable product mix and the successful execution of a variety of cost reduction and efficiency programs. Before getting into the product segment discussion, there is one item to note which impacts our fourth quarter segment margins. Historically, and including the 2023 year, we have accrued our global incentive compensation expense in the corporate segment throughout the year and pushed down the appropriate annual allocation to the product segments in the fourth quarter. Due to a shift in our incentive compensation program to a calendar year basis, there were five quarters of this expense pushed down to our segments in the fourth quarter of 2023.

Aside from this, the year-over-year period disclosed in our earnings release are generally comparable. However, there is a larger disconnect if looking at segment margins on a sequential basis from Q3 '23 to Q4 '23. Now turning to our product groups. Sales of our Power Solutions and Protection products in Q4 '23 amounted to 69 million, a 16% decline from the previous year's fourth quarter. On a full year basis, 2023 showed an increase of 9% compared to 2022, reaching 314 million in sales. The growth for the full year was mainly driven by higher demand for front and power products, which serve our networking end market. Sales of our eMobility and rail products also remained strong and helped us offset declines in circuit protection and distribution sales.

For full year 2023, sales of eMobility products amounted to 27.8 million, an increase of approximately 40% from the 2022 level. Products sold into rail applications totaled 30.1 million for full year 2023, up 33% from 2022. The gross margin for the Power segment was 40.2% for the fourth quarter of 2023, representing a 720 basis point improvement from Q4 '22. On a full year basis, the gross margin increased by 760 basis points to 38.1% in 2023 as compared to 30.5% for 2022. These increases were primarily driven by a favorable shift in product mix, cost reduction efforts and favorable effects from the Chinese remedy. Our Connectivity Solutions group achieved sales of 50.6 million in the fourth quarter of 2023, an increase of 7.5% compared to Q4 '22.

On a full year basis, 2023 Connectivity sales amounted to 211 million, an increase of almost 13% versus 2022. This improvement was due to the continued growth in the defense and aerospace industry, partially offset by softer demand from our premise wiring customers. For full year 2023, sales of products into the commercial aerospace end market amounted to 53.3 million, an increase of 72% from the 2022 level of 31 million. Products sold into defense applications totaled 44.7 million for full year 2023, up 25% from the 35.9 million in 2022. The gross margin for this group was 29.3% in the fourth quarter of 2023, up from 23.6% in the same quarter of 2022. On a full year basis, the gross margin improved by 830 basis points to 34.2% compared to 25.9% in 2022.

A close-up of a technician's hands assembling electronic components on a circuit board.

Gross margins for the 2023 periods were favorably impacted by the higher overall sales volume, multiyear contract renewals and operational efficiencies implemented during 2023, partially offset by higher wage rates in Mexico and an unfavorable fluctuation in exchange rates between the U.S. dollar and Mexican peso in 2023 as compared to 2022. Lastly, our Magnetic Solutions group sales declined by 49% from Q4 '22 levels to $20.5 million in the fourth quarter of 2023. This resulted in full year 2023 sales for the Magnetic segment of 115.1 million as compared to 178.8 million in 2022. This segment has a large concentration of sales in the networking end market and is largely tied to the ordering patterns and end demand of certain large customers within that space.

The trends on top line in this segment is a continuation and further deterioration of what we saw in the second and third quarters of 2023. With lead times being down and new orders being shipped in the same quarter, this segment does not have the same visibility as for other segments. The intra-quarter sales that were expected in November and December simply did not trend prior and has become evident that the rebound in this space will take longer than originally anticipated. The gross margin for the Magnetic segment was 17.1% for Q4 '23 as compared to 29.5% in Q4 '22. On a full year basis, Magnetic gross margin was 22% in 2023 as compared to 27.6% in 2022. The lower sales volume and dual cost structure in place throughout much of 2023 were the primary drivers of gross margin reduction for the Magnetic segment compared with 2022.

These factors were partially offset by favorable exchange rates with the Chinese renminbi versus the U.S. dollar. On positive developments in the Magnetics group, we can confirm at this time that our large facility consolidation projects in China that will benefit this segment is complete. The leaner, more efficient operations and elimination of the dual cost structure should aid the margins of this group going forward. At the consolidated level across all product segments, our backlog of orders totaled 373 million at December 31, 2023, a level we still consider to be high based on our history. The selling, general and administrative expenses for the fourth quarter of 2023 were 24.9 million, down slightly from the 25.1 million in Q4 '22. This reduction was primarily due to lower sales commissions and the reduction in progression fee.

On a year-to-date basis, SG&A increased by 6.7 million during 2023, mainly due to higher sovereign and fringe benefits in 2023, in addition to the MPS litigation block incurred earlier in 2023. Turning to our balance sheet and cash flow. We closed the quarter with 127 million in cash and securities, a significant increase from the 70 million we had at the end of 2022. During the fourth quarter of 2023, we generated cash flows from operating activities of 27.4 million, a 69% improvement from Q4 '22. Looking at the full year of 2023, we generated cash flows from operating activities of 108.8 million, an improvement of 170% from 2022. Capital expenditures amounted to 2.5 million in the fourth quarter of 2023 and 12.1 million for the full year of 2023.

We continue to make progress on reducing our inventory levels and have achieved a $33.6 million reduction in inventory since the end of 2022. 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, and good morning, everyone. As Dan mentioned, 2023 was a solid year for us in terms of holding our revenue base and seeing significant improvement in profitability and cash flow generation. I wanted to take this opportunity to thank our global team for their tremendous efforts, creativity and ingenuity this past year as we push for continuous improvements in all areas of the business, and our team answered the call and delivered above expectations. The priority of 2023 was to strengthen Bel's foundation, and this was achieved with much of the housekeeping efforts now behind us, the focus of 2024 will be threefold. First is top line growth. This includes investing in customer relationships, identifying new sales strategies, determining which end markets and geographies to double down in and, most importantly, the development of new products to support Bel's growth in the future.

A quick comment here on the sales team. We've done a lot of work on that in 2023. We've added some new team members across the globe. We also rolled out a brand-new compensation and incentive structure that went live as of January. And the intention there is to really reward success and delivery with direct alignment and motivation to our associates. Second is further leaning out the way we do business. While we have accomplished a number of items, we still have a few projects we are working on. For example, we just kicked off a new project in the Connectivity side where we're streamlining our operational -- operations there for our passive connector business, transitioning the manufacturing out of Pennsylvania into other existing Bel facilities.

This new initiative is expected to be completed by the end of 2024 and is anticipated to yield incremental annual cost savings in 2024 to the tune of $1 million. Third is capital deployment. It is evident, as Dan noted, that we are building up cash and now securities at a respectable pace, and we want to be good stewards of this capital. As such, and as Dan noted, we launched our first stock repurchase program since 2012. And this authorization is a proud moment for the Board and management team as we look to return cash to our shareholders. This was done at a time where our stock was discovering new milestones. To be clear, M&A is a top priority for us and must be aligned strategically and financially with our long-term goals. We'll also look to reinvest in the business to support organic growth.

Increased investments in R&D to bolster new product introductions will be key. Additionally, another year of most likely elevated CapEx spend is expected in 2024 as we continue to upgrade aging equipment while introducing more automation to our manufacturing processes, again, the backdrop of rising wages globally. Now pivoting to 2024 and looking at that, as Dan mentioned and noted in our release, we expect a slow start to the year with a potential rebound in the second half. For the first quarter of 2024, based on currently available information and taking into account various financial and economic indicators, including what we see in our backlog and what we are hearing from our customers, we expect sales to be in the range of $125 million to $135 million.

Aside from the anomaly we saw in Q1 last year, 2023, there is a typical step down in sales from Q4 to Q1 due to the Chinese New Year shutdowns that do occur in this quarter, and this historical trend is expected to continue this year. When looking at Q1 2023, there are a few items to keep in mind as we bridge from the $172 million that was last year to the expected range of Q1 '24. So I'm going to run you through these items to keep in mind. First, our first quarter '23 sales included 7 million of expedited fee revenues that is not expected to recur in Q1 '24. These sales previously benefited our Power segment. Second, if you recall, we divested our Connectivity business in the Czech Republic during mid-2023, which contributed around annual sales of around $5 million.

Third, we announced during Q3 '23 that we walked away from roughly 9 million of annual sales within the Magnetic segment due to their low margin profile. Fourth, Q1 '23 was one of our Power segment's strongest quarters as they were finally able to ship orders that have been past due with the raw material shortages of 2022 easing by early 2023. These "catch-up orders" from Q1 '23 and Q2 '23 largely tapered off during the second half of 2023, as expected, and these heightened volumes are not expected to repeat in Q1 '24. We estimate that there were approximately 10 million of these catch-up sales in Power in Q1 '23 that will not occur. Fifth, on the differential between Q1 '23 actuals and Q1 '24 projections, we're estimating that Magnetic sales will trend down further in Q1 and typical seasonality weakness and while accounting for the over inventory in the channel, we expect to account for approximately $20 million decline compared to Q1 '23.

And lastly, due to the overall weaker demand within our industry right now, Bel's factories in China will be taking an extended Chinese New Year holiday for a few additional days. While this is being done as a cost containment measure, it does result in a few manufacturing and shipping days. And one comment to point on that is we're seeing our suppliers and also our customers and their contract manufacturers taking a longer Chinese New Year as opposed to last year. One -- those were kind of the bridges from Q1 last year to this and just a quick comment. Bel is operating in an industry currently, as we all know, that has been going through an over-inventory situation throughout 2023, that we performed pretty well against that backdrop. So this industry-wide phenomena is hitting Bel a little bit more than we anticipated on the Magnetic side and do see -- anticipate based on the conversations we are talking about to see a light at the end of the tunnel here in the second quarter.

Obviously, this is a very fluid situation that we are monitoring. The other thing to note in Magnetics is, as was talked about a little bit earlier, is the concentration of certain customers and end markets. One other thing is, as Dan also noted here, is we've gone through this down cycle in the past and will not be the last time. We're confident in our ability to manage through this period, and we'll be well positioned when the industry does rebound. Taking a big step back and looking at more macro 2024, we remain very excited and optimistic about some of our other resilient end markets such as commercial air, dispense, rail, EV, niche industrial and, more recently, space. We do expect a recovery in our distribution business, which, as a reminder, accounts for almost 30% of our revenue with very healthy gross margins.

One other comment is during these softer times of inventory in the last 2 years, the engineering resources at our customers and industry was really focused more on fulfilment and finding alternative sources to production. Now with the inventory situation, we are seeing our customer engineering resources re-pivot towards more NPI and more growth-oriented working on next-generation technology. We are excited to embrace the challenges and the opportunities of 2024 and are not deterred by this year -- by this near-term bump in the road. We are on a journey, and our focus continues to be on a growth and progress for the long-term betterment of Bel. With that, I'll turn the call back over to Dan.

Dan Bernstein: Thank you very much, Farouq. At this time, we'd like to open up the call for questions.

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