Q2 2020 Bel Fuse Inc Earnings Call

Good day and welcome to the build fuse incorporated second quarter 2020 results Conference call Today's conference is being recorded.

This time I would like to turns conference over to Dan Bernstein, President and Chief Executive Officer. Please go ahead Sir.

Joining me on the call today, it's Greg brochures, Vice president for that and they cannot director of financial reporting.

Before I begin the call like asked them to go over the Safe Harbor statement when.

Thank you Dan good morning, everybody before we start.

<unk> Safe Harbor statement.

Except for historical explanation teaching down let's call. It matters discussed on this call such statements regarding our efforts to improve profitability.

Back to the closure of our power R&D facility.

That's really interested me to cost savings, resulting from restructuring and the continuing impact of those efforts to reevaluate its customer base and product portfolio are forward looking statements.

The Securities Litigation Reform Act of 1995 that involves risks and uncertainties actual results could differ materially for adults protection.

Among the factors that could cause actual results could differ materially from such statements are in market.

Our customers that continuing viability effect or is that rely on our product.

The impact of public health Crazy, such as the governmental social and economic effects of called at 19.

The effects of big net economic condition.

Yes, the cold EEZE associated with integrating recently acquired companies.

Capacity <unk> supply constraints or difficulty.

Development commercialization or technological difficulties.

I get to join trade.

Risks associated with foreign currency.

Oh jerky before people people people.

The market acceptance of the company.

And can probably the response, which doesnt plotting.

The impact of changes do you watch trade and tariff policy.

Factors detailed from time to time and the company Jackie reports.

Sure.

[noise] embodies the risks and uncertainties. After you know what's your.

Any forward looking well, it's actually to be correct. We undertake no obligation to update or revise any forward looking statement.

They also discuss non-GAAP results during this call and reconciliations of GAAP results.

GAAP results have been included in our.

I would now like to join the call back to Dan.

Nothing.

Thank you and I didn't get the joining our call today I hope that you and your family just staying safe during these difficult Todd.

Well first priority throughout this past quarter.

I used to be the safety of our associates around the world. We continue to provide these a central products to our customers I did today. We are pleased to report that all manufacturing sites.

Right.

The majority again.

Or near normal production rate. However, the situation remains fluid production manager is around the world done an excellent job in ensuring ongoing compliance with local regulations related Kobe 19.

I would once again like to take the Todd I'll take a moment to acknowledge our manufacturing associates and each of those factories for their dedication to our company customers. During this period.

Turning to our result, real well you got our efforts related to cost reduction it became it matches over the past yet that's translated into meaningful gross margin improvement.

That was reflected in our second quarter 2020 for natural result.

Any other factors that drove this improvement are expected to provide upstate benefit to our margins for the foreseeable future. Those factors include lower overhead cost from restructuring efforts a reduction material prices related to component well were direct labor cost due to its hard favorable foreign exchange rate.

Factoring 2020, and inclusion of harder bargain see view ourselves.

Further we made a concerted effort to exit costs convert.

And product lines that have lower margins in order to better utilize our manufacturing resources.

As a result of these and other factors.

Sales adjusted EBITDA that long and probably more than doubled compared to last year's second quarter. Despite the lower sales volume.

Sales were down 6.2 million or 4.9% from last years second quarter.

Acquisition next few you are in late 2019 contributed to 10.6 million if the sales during the second quarter gross margin of all that 39%.

Everybody sales are adopted use you know workplace.

Excluding see yourself in the second quarter.

We were down 16.9 billion from last year's second quarter gift cards would decline due to quote or product group sales were flat and power products were down 7.3 million from last year second quarter logic due to reductions doubtful low margin customers.

The weakness in commercial aerospace end markets accounted for 5.6 million of this decline excels toward the distribution partners remain low or that type.

Yeah caught up by 2.9 million.

We got to the second half the year with very limited visibility as our second quarter build it bookings worked so well.

However, there are areas. This change has reacted a third quarter recent awards for our connectivity products, she defense programs and finishing.

Military avionics platform mobile communication programs, we joke, resulting a food <unk> military sales well over 40% in second quarter versus last year's second quarter booked is there. The also remain healthy providing an opportunity for keeping your strength and shipments throughout the second half a year.

I'm back network solution group continues to see stronger shoring demand for product going into communication hallway and next.

Generation network infrastructure.

So she is need to accommodate increase band. That's why did you do a large number of people working from home.

Within the power solution detects and good though ward waters, a design win for power supplies. So cool cost effective data later this non Cancelable Nonrecurrent awards totaled one point Sixmillion and expected to start shipping in the third quarter. We also continue to see year over year growth were later this year or so you are.

Acquisition through the remainder of the yet and I guess, you're not sure protection group had a 14% increase for the quarter due to a competitor not being able to ship.

The closure of office Jody.

Switzerland will bring our annual fixed costs down by 3 million, but those savings taking place by the fourth quarter. This year.

The Bell management team remains focused on bottom line growth and continued focus on which calls for products and Bell facility, that's along with the goal improving profitability.

Before I turn back the colder Craig I'd like to get their Gallagher pick our global team the epic Finagle gotta be flexible in responding to this rapidly changing environment.

Our ability to generate results would be this goes much of the credit of all someone associated for making that happen under these difficult circumstances.

I had I turn the call for the Craig to run through the financial uptick right.

Interesting.

Sales bike products like until the second quarter or 2020 were as follows.

Oh solutions and protection sales were 45.1, though up 2% from last year's quarter.

Got it shouldn't be machine sales were 38.9 million a decline of Microsoft.

Got it she mentioned sales were 37.2 billion also down diapers last year's second quarter.

Yeah consolidated basis gross profit margin, excluding R&D expenses.

Increased to 26.2% in this quarter or 20, Twond, that's compared with 21% in the second quarter 20 like gene.

As a result, <unk> combination of factors.

Overhead any direct labor costs were 4.7 million lower during the second quarter 20 Twond.

Gnarly restructuring measures implemented during late 2019.

On a reduction in the cost structure for since connectivity solution segment to along with current sales volumes within that segment.

A portion of the margin improvement in the second quarter 2020.

The lower material costs start supply cost components that are pretty to keep them build up you know our supply chain that wouldn't work through its all again significantly lower material cost <unk> as compared to the same quarter last year.

The favorable shifting product mix and low direct labor costs, there's always a configurable fluctuations in foreign exchange rates were also factors contributing to the margin improvement in the second quarter. Two many children. That's considered the same theory 20 <unk> James.

Research and development costs were $6.1 billion during the second quarter 20, twond, the calling them over something other dial them. All are still in the second quarter 20 about achieved as a result of restructuring up which implemented during the latter part of 28.

Our selling general and administrative expenses were $18.1 million or 14.9% Upsells.

That's compared with $19.2 billion or 51% of sales in the second quarter.

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Well the travel expenses of $680000 a reduction of ERP cost spoke trued up $91000.

Savings from other cost containment efforts outweighed the 1.9 billion incremental that's you know expenses associated with the newly acquired she log business.

Lets choosing age sense also included a gain on the cash surrender value coli policies, Oh $1 billion into second quarter 2020.

Thank you again on these policies of $155000 into second quarter 20 <unk>.

Well I go forward basis, we would expect us to you need to between 19 and $20 million per quarter in the near term.

<unk> or traveling in a chain expand will be lower than normal for the remainder of the year.

Stock is always an income from operations of $7.5 million second quarter 2020, let's compare to income from operations or $4.5 million then the second quarter.

Yes.

Other income and expense that was to an expense of three going in $2000 split the second quarter 2020, but there are two income of $267000 during the second quarter 20 cheap.

Fluctuations from last year's second quarter.

It's largely related to foreign exchange loss of $103000 in the second quarter 20, Twond, that's compared to a foreign exchange gain of $450000 from this quarter before June.

Interest expense was $1.3 million in the second quarter of 2020 down slightly from the June quarter last year to the due to the lower interest rate in effect during the 20 twond quarter.

We expect interest expense to be lower bought approximately 600000 $700000 in the second half of the year, that's compared to the first half a point or 20 relates to the decreases in both libel and in the company's trip on its credit facility.

We had a provision for income taxes of $423000 in the second quarter of 20 to 20.

George would provision for a $21000 during last year's second quarter.

You can talk to permanent differences on U.S. tax exempt activities.

It was slightly higher effective tax rate in the second quarter or 20 Twond.

<unk> quarter 20, <unk> gene.

Well I mean, some share with class a common shares with earnings of 43 cents per share in the second quarter 2020, as compared with only 23 cents per share in the second quarter 20 like gene.

Earnings per share class B common share it's within each of 46 cents per share in the second quarter of 2020 as compared with earnings of 24 cents per share in the second quarter 20 next year.

Well, the non-GAAP basis, which excludes certain unusual and other nonrecurring items you picked up the class a shares which already has a 43 cents per share in the second quarter 20, Twond, that's compared with earnings of three cents per share.

Quarter 20 like GE.

On the non-GAAP, there seems to be P. S class B shares was 46 cents per share in the second quarter 2020.

Compared with earnings of two cents for sure in the second quarter of 22.

Now I'd like to go through some balance sheet and cash flow items.

Our cash and cash equivalents balance at June Thirtyth, 2020 of which $75.3 billion decrease of 3 million from December 31st 29 <unk>.

Our cash balance grew by 6.9 million sequentially from March 31st So.

During the first after 2020, we generated cash flows from operating activities of $16.8 billion.

Net payments up $8.2 million towards are outstanding debt balance and you just cash for capital expenditures of $3 million dividend payments of 1.6 million an interesting, it's a $2.3 million.

Accounts receivable were sitting at $8.3 million at June Thirtyth 2020.

I was compared with 76.1 billion at December 31st 20 I can't.

Day sales outstanding decreased slightly to 59 days at June 30, 2020, that's compared to 60 days at December 31st 20 vaccine.

Three center accounts receivable balance was largely due to higher sales volumes second quarter, once or twice as compared to the fourth quarter 20 like gene.

[noise] inventories were 104.7 million.

At June Thirtyth, 2020 down 2.6 million from December 31st 20 like T mobile.

The decline was seen in finished goods, partially offset by increases in work in process. The reduction in inventory. It's also partially due to the write down of excess stocks related to projects.

Accounts payable were $44.8 million acumen, 30, 20, twond up $657000 from its level at December 31st 20 like to primarily due to the implementation of news supplier payment God logs to better manage your cash reserves.

Sales total outstanding debt balance was $135.2 million as of June Thirtyth 2020 that have deferred financing costs decreased $8.5 million since the 20 like junior on balance.

It's primarily reflects the voluntary prepayment of 8.3 million.

Made during the first quarter 2020 in connection with an amendment to our credit agreement.

Book value per share, which is calculated that stockholders' equity divided by our combined a and B class. It's common stock outstanding there's $13 at 57 cents per share at June Thirtyth 20 Twond.

Oh, that's compared to $13.69 per share at December 31st James.

And with that I'll turn the call back over to bad debt.

Thank you Craig at this time, Steve we would like built up the call that he had questions people might have.

Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using to speakerphone. Please make sure. Your mute function is turned off to labor signal to reach our equipment again, that's star one to ask a question.

Well take our first question from Mr. Theodore O'neill with this feels research. Please go ahead.

Thank you congratulations on a good quarter earnings wise.

Thank you.

Yeah I'm just one question here talk in the press release about rationalizing their customer base and the product portfolio and I was wondering if you could talk about.

Give some more color on that and which vertical have was impacted the most by that and if there were.

Opportunities, where you could sort of.

X out a customer that also took care of the product as well or was it two separate.

And Alex is going on.

Well I'll do we had one major or building a product why the big data storage people that you know, there's an internet company that had their own data storage and and it was a power supply that we do.

Has the capability to work with second to third care companies, which we think we could do a better job if you're looking at the Amazon Google is the facebooks they tend to be all very price sensitive.

And the volumes just got the cost is can we can't compete that market any longer. So that was one situation. The other major situation that were getting out of which represents about 12 to 13 million.

As a modular product we go a constant though product where we get the manufacturing for a company in private label it.

The margins I guess, two well, but we are working with other companies on doing OEM already I'm work.

Well, we act as a designer manufacturing and those opportunities where we can offer more value I think we can be competitive those type of kotick, but again, just being very sensitive at this time as you know.

I think historically, we have always looking at topline growth and took product in that maybe we should not just to have that goes I think at this point in time, we really want to focus on giving cash into the company and working off like that.

Great. Thanks very much.

Again, that's star one test. Good question. If you find your question has been answered you may removed yourself from the Q by pressing star too.

We will take our next question from Jim We're shooting with Needham and company. Please go ahead, hi, good morning.

Thank you good morning, or even just a follow on yes question, just an easier way to the aggregate all of this and in terms of total revenue in tax I mean, you gave us some of it in peaches and I'm just wondering if there's a way to think about it and in totality because there's some offset.

Well I guess.

I think the two big pieces.

I think both one customer we walked away from again and that was a data center company customer I think that shows are going anywhere from 12 to 15 million annually.

Going forward.

Starting in the fourth quarter I'd, probably be another 10 to 13 million.

Okay.

Got it hits and rather no problem is but the volumes are not that that's substantial.

Got it does not are also I think we're also looking at no individual products and and certain customer portfolios, where they may not need to meet the margin.

No standards that group that we're setting so been messenger, Sarah would you ever them yourself to a customer book products within the portfolio might not be suitable anymore.

Understood you called out some of the intact to you.

Experienced in the commercial aerospace market I got the number right, it's about <unk> point Sixmillion and.

In the quota.

That's correct that's correct.

Yeah, I want to enjoy.

I don't recall, what we've said they'll bring in Q1.

You guys had that you're.

Ready I thought we can discuss it off line, what I'm trying to do it was and try to I mean, it doesn't look like we're going to see.

Recovery anytime soon in the commercial aerospace market or maybe there's some aftermarket that you're going to gets but I'm wondering if we should think about this as kind of us a 20 million a dollar war and more headwinds that you have that you're going to probably have to deal with over the next year.

So.

I think Jim I think we've dealt with it we realigned our manufacturing I think that's right yep.

That would get so while this quarter on the aerospace though is that we are we did lose those sales. If you looked at yesterday's Wall Street Journal, where they get a Boeing had statement that they're going to they won't hit their initially going to hit 31 planes in 2021, they pushed that back by year end they get no visibility.

Hi, while they're going to do.

So again based on that.

It's going to be tough sledding for the next 18 months in aerospace business I think were aligned.

No more alignment we have to do.

To address this.

No. What you know we know what it is having typically with taking the steps already.

To address the new sales volume, we're going to have it with these customers.

Yes Hello.

And just looking at the margins things like that.

Just to answer your question Jim initially.

In the first quarter.

<unk> Aerospace sales were down 3.4 million versus last year's first quarter.

And then in the second quarter, we thought.

Hey, ERP your declined 5.6 million that we had mentioned so overall about 9 million down versus the first six months of 29 team.

Got it and to your point, Dan I mean, it sounds like you've already a lie in the cost structure and other not all year, but in other parts of the topic, but I guess, what's the other question. How are you. There are lot puts and takes here a lot of moving parts to gross margins and I'm wondering how each night to think about gross margins given.

Some other things you're doing areas, you're de emphasizing areas, where you've got some opportunities. It sounds like there's still some nice pipeline and defense side of the business and just generally given the overall macro environment. So anyway to think about gross margins.

I like that actually very outlooks.

Thank you know in nickel and ending the quarter. Jim. We did you know there were some there was some favorability we gotta look at more of a like a one or one time impact.

Well you could get big looking forward.

Obviously, we can't look too far forward, but we would take probably are.

More normalized margin might be a bad or maybe 23, 25% bridge.

Are you taking out the sneeze onetime.

Influences that we had.

Got it okay.

Hey, good incremental incremental improvement over last year's leased the quarter show, but yeah look what maybe not quite as good as we saw this quarter.

That's helpful. And then final question for me is that it sounds like it a lot of the focus here is a is on.

Paying down debt strengthening the balance sheet.

Oh, good stuff I'm just wondering.

Is it everyday at least for the time day off the table or are you just.

Just still you know looking at the various.

Potential assets that might be out there.

What's your what's your point of view in terms of near term on that are you taking more of a you know kind of wait and shape.

No I think we were still very active in the M&A area. However, as you know there's not much activity going on.

Well, we do have a small.

So we are talking a two or three potential company out there that we're looking at however, they tend to be on the smaller side more strategic fits.

However, you know if something comes across our table that makes sense, we would definitely would look at.

Possibly of acquiring another company yes.

Still being as active as we said.

Got it that's it for me I'll jump back into queue. Thanks, a lot.

Thanks, Jim Thanks, Jim.

We will take our next question from Lenny Dunn with mutual Trust Cole of America. Please go ahead.

Yeah.

Great.

Sure.

Correct.

Right.

Acquisitions.

Right.

Okay.

The balance sheet stronger working on gross margins.

So.

So I just want to express.

But even if we do see a big acquisition, though.

I might have to take a look at it so it's hard to tell you that.

Okay.

Understand book or at least you're not aggressively.

Going just your topline.

Yeah.

So things have been disappointments.

Last few years.

No.

It sounds to me.

Point.

Action.

If you I guess, if you see something.

Make sense for investors.

It makes a lot of sir.

Sure.

So yeah balance sheet.

Yes, I mean, it correct about that.

Great. Thanks.

I thought the numbers were better than I expected.

Very good quarter.

I appreciate.

What you've done.

What I would consider.

Conditions.

Thank you.

Yeah.

It appears there were no further questions at this time.

Mr Bernstein I'd like to turn the conference back over to you for any additional for closing remarks.

Thank you Steve again, we appreciate everybody joining our call today during these difficult times and we're just we're hearing your family the best.

And looking forward to speaking to again next quarter. Thank you.

[laughter].

This concludes todays call. Thank you for your participation you may now disconnect.

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