Q3 2020 Bel Fuse Inc Earnings Call
[music].
Good day and welcome.
The.
<unk> results Conference call today's conference is being recorded.
Okay.
Dan.
President and Chief Executive Officer. Please go ahead Sir.
Thank you.
Joining me on the call today, it's great well Gee I suppose if that's okay.
Okay.
Director of financial reporting before we begin the call I asked him to go over the Safe Harbor statement right.
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 fourth quarter sales it.
It does lead to cost savings from the closure of our power, our utility and Mr., Switzerland, and our sales office in Germany as.
Well it was from a streamlining of our North American sales organization and the impact of potential future acquisitions 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 bizarre and market concerns facing our customers are continuing viability of sectors that rely on our products.
The impact of public health Crazy, such as governmental social and economic effect, the COVID-19, yeah.
Access business and economic conditions difficulties associated with integrating recently acquired companies.
After these supply constraints or difficulties.
Development commercialization or technological difficulties.
Regulatory in trade environment.
It's associated with foreign currencies, uncertainties associated with legal proceedings.
Market acceptance of the company's new products and competitive responses to those new products and.
The impact from changes to U.S. trade a pair of policies.
Factors detailed from time to time in the company's that'd be reports.
In light of the risks uncertainties, there can be no assurance that any forward looking statement well look back prove to be correct. You undertake no obligation to update or revise any forward looking statements. We also may discuss non-GAAP results during the 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.
Okay. Thank you for joining our call today.
You and your family.
How do you respond.
I feel like to provide an update on the facilities around the world as it relates to corporate.
Please note that all manufacturing sites or will you have the operational throughout the third quarter.
Always enjoyed your call that relate, especially I'd read that the callable.
Sure I'm going to watch the local regulations might do all that.
That's a manager manufactured soucek have shown a little lumpy dedication to go and its customers over the past everybody and we truly appreciate what they do for us each day during this challenging time.
Now turning to our results.
We are pleased that our global reduction plan over the past year has gained translated.
As again translated into meaningful gross margin improvement during the third quarter.
The inclusion of sales, where we thought originally it was you our business along with our ongoing strategy to streamline the organization or eliminating certain low margin part of that's driven lots or the pool proven results.
Our sales level remains consistent with the peak over double the third quarter of 2019, well Bell adjusted EBITDA as I Wonder I believe.
It was like 33% during this period.
[noise] excluding to you our sales in the third quarter, we were down 1.9 million from last years third quarter.
Declawing gain of course, each of all product groups the weakness in the commercial aerospace end market accounted for 7 million as of the close.
Yeah. The phone in politics power products were down 3.1 million from last years third quarter lobbied do well, it's not exactly we want is them alone walking data set of possible.
Partially offset by the growth in our circuit protection sales of 1.4 million.
Integrated conducts a module sales were lower than the prior year by 1.3 million due to reduction in demand for waterborne networking customers.
Lower sales.
It's hard to see that each of our three product groups showed improvement in gross margin compared to last years third quarter.
No well the successful execution of our global cost reduction plan.
Oh, there was visibility remains limited going forward, we anticipate fourth quarter sales to be more compared to the fourth quarter of last year.
We do have areas of continued strength.
Did you sell them to the military segment during the third quarter were up 33% leading to record should be shipping quotas for the end markets. The growth was seen in both U.S. and European defense market and there is a mission military avionics ground communication program to see you ARPU.
At a 40% increase in sales of the Standalone sales during last year's third quarter [noise].
Sure for protection sales also showed growth in the third quarter with a 43% increase over the last years third quarter.
There are expected to be continued areas of growth for Ross.
There's also the legal activity without Emobility involved.
Shipping palpable power related prototypes of several new powder or emobility products are expected to be specific to the Sun belt go long term.
As part of our global cost reduction plan to close on a Saturday. It all starts with little late August I brought on and your fixed cost down by 3 million it.
After closing the R&D activities had been shipped with the other existing Harvey good throughout the world.
Further we review those anticipated closure of our sales office in Germany, and streamlining of our North American sales organizations. These.
These auctions are expected to be incremental 1 billion of area of course, and starting the fourth quarter 2012.
Bell management team with a focus on bottom line growth.
While our tech actively looking at strategic acquisitions that would better position go for the future I.
And with that I'd like to turn the call over there Craig for both with the natural uptick Craig.
Thanks, Dan.
Sales by product segment for the third quarter of 2020 words falls.
Our solutions are protection sales were $47.8 million, 18.5% from last year's third quarter connect.
Connectivity solution sales were $38.5 million, but declined to 13.5%.
And magnetic solution sales were $38.2 million down 3.7% from last years third quarter.
On a consolidated basis gross profit margin, excluding R&D expense increase.
<unk> increased to 26.9% in the third quarter of 2020 as compared with 23% in the third quarter of 2019.
As a result of a combination of factors.
Overhead and indirect labor costs were 3 million lower during the third quarter of 2020.
Primarily due to restructuring measures implemented during late 2019, and a reduction in the cost structure of our search connectivity solutions segment to align with current sales volumes within that segment.
A portion of the margin improvement in the third quarter 2020 related to lower material costs and stocks of hard parts components of it previously you could build up in our supply chain.
Having worked through resulting in significantly lower material cost seem to be you know as compared to the same quarter last year.
Research and development costs were $5.7 million during the first quarter of 2020, a decline of $450000.
Third quarter of 2019, primarily due to restructuring efforts implemented during the latter part of 2019.
Our selling general and administrative expenses were $18.9 million or 15.2% of sales as compared with $18.5 million or 14.9% of sales in the third quarter of 2019.
Lower travel expenses of $514000 a reduction in ERP costs of $242000 in savings from other cost containment efforts largely offset the 1.9 million of incremental that's due to expenses associated with the recently acquired C. you our business.
<unk> expenses also included an incremental gain on the cash surrender value of coli policies $408000 in the third quarter of 2020 compared to the third quarter of 2019.
On a go forward basis, we would expect that's you need to run between 19 and $20 million per quarter in the near term as we expect our ticket <unk> spend will continue to be lower than normal for the remainder of the year.
These factors resulted in income from operations of $8.8 million in the third quarter of 2020 as compared to a loss from operations of $5.2 million in the third quarter of 2019.
If you recall the third quarter 2019 included an $8.9 million impairment charge related to work goodwill.
Other income expense not looking expenses of $1.2 million for the third quarter of 2020.
As compared to income of $629000 during the third quarter 29 G.
The fluctuation from last year's third quarter was largely related to a foreign exchange loss of $1 million in the third quarter of 2020 as compared to a foreign exchange gain of $600000 in the third quarter of 2019.
Interest expense was $1.2 million in the third quarter of 2020 down slightly from the same quarter last year due to the lower interest rate in effect during the 2020 quarter Weve.
We expect interest rates to be lower in the fourth quarter related to the decreases in both LIBOR and in the company's spread on its credit facility along with reduction in our outstanding debt balance.
We had a benefit from income taxes of $1.1 million in the third quarter of 2028 compared to a provision of $590000 during last years third quarter.
Changes in federal tax law around the guilty tax coupled with a reversal of uncertain tax positions lets you will benefit from income taxes in the third quarter of 2020.
The tax provision for the third quarter of 2019 was unfavorably impacted by the impairment of goodwill in our North America segment.
Earnings per share for the class a common shares was earnings or 57 cents per share in the third quarter of 2020 as compared with a loss of 51 cents per share in the third quarter of 2019.
Earnings per share for the class B common shares with earnings of 61 cents per share in the third quarter of 2020 as compared with a loss of 53 cents per share in the third quarter of 2019.
On a non-GAAP basis, which excludes certain unusual and other non recurring items.
Yes for class a shares was earnings of 58 cents per share in the third quarter of 2020.
As compared with earnings of 19 cents per share in the third quarter of 2019.
A non-GAAP basis EPS for class B shares or 62 cents per share in the third quarter of 2020 as compared with earnings of 20 cents per share.
In the third quarter of 2019.
And now I'd like to go through some balance sheet and cash flow items.
Our cash and cash equivalents balance at September Thirtyth 2021, Steve you $1.1 million, an increase of 8.8 million from December 30, Onest 2019.
Our cash balance grew by 5.8 billion sequentially from the June Thirtyth bounce.
During the first nine months of 2020, we generated cash flows from operations.
Of $34.8 million.
Good net payments of $18.2 million towards our outstanding debt balance and use cash for capital expenditures of $4.5 million dividend payments of 2.4 million and interest payments of $3.4 million.
Accounts receivable were 69.7 million at September Thirtyth 2020, as compared with 76.1 million at December 31st 29 gene.
Days sales outstanding decreased to 52 days at December So September Thirtyth 2020, as compared to 60 days at December 30, Onest 2019, the decrease in our accounts receivable balance was largely due to lower sales in Asia, where payment terms tend to be longer.
Inventories were 103.6 million at September Thirtyth, 2020 down 3.6 million from December 31st 2019.
Decline, we're seeing in raw materials due to the reduced material intake in anticipation of a slower fourth quarter.
In 2020.
Accounts payable were 40.1 million at September Thirtyth, 2020 down 4 million from its level of December 30, Onest 2019, primarily due to lower purchases of raw materials during the third quarter appointing twice.
Bell's total outstanding debt balance was $125.4 million as of September 30 of 2020 net of deferred financing costs, a decrease of 18.3 million since the since been 2019 year end balance.
This primarily reflects voluntary debt repayments of 18.2 million made during the first nine months of 20 Twond.
Book value per share, which is calculated as stockholders equity divided by our combined a and b classes of common stock outstanding.
Was $14.46 per share at September Thirtyth, 2020, as compared to $13.69 per share at December 30, Onest 2019.
And with that I will turn the call back over to Dan <unk>.
Thank you Craig.
This time data could we please open the call up for questions.
Yes, Sir.
I would like to ask a question.
Start on your telephone keypad.
We are using a speaker. Please make sure your mute function is turned off by or something else.
Again that is star one.
Good question.
Well take a question from Mike Smith.
<unk>.
Hey, guys. Good morning, Thanks for taking the time for the questions today.
First thing I wanted to ask you about words this is God's to the flat year on year revenue as we look to Q4.
And I know that you guys are are walking away from some of this low margin business now from two customers and you have to see see why acquisition under your umbrella now as well.
Talk to I got some of the puts and takes would be the underlying organic business just wanted to get a sense of how.
Do you guys see the different segments, playing out in Q4 to help you get to a to flat buttons for me you're on your perspective.
Again just no.
No, we actually technically and participants as we mentioned that I see you I have I have had this requiring them to have done a tremendous job on topline growth Hockey's group has done very well on top line growth. The Cisco has really got hit the standard pretty hot because Ah well you guys what are they.
Good.
Aerospace companies are not quite it not allowed to fly we're hoping that they have commissioned by the end of this year, but once when they do get their capital yet have any allies already buying airplanes. So.
So we are so we have no idea. So I was like they said that they would get back to that 23 before now the latest news is 2022. So they just that's limited visibility on the aerospace side. This is stuff. That's certainly how we vote will follow that with top line growth and the other day I will get out substantial military globally really.
Pleased by that and if we can maintain that military growth, but it's difficult to offset what we lost in aerospace.
Again I want to see you all I addition has made.
That groups are said to the power groups of kids each dog at the top why go I'm also circuits attach as we've actually has had 40% growth.
We didn't do a lot with little ability a weve gotten so at about 50 days a month.
So there's a lot of activity. In addition to that I, Oh, Allergan, we've been averaging about $10 million or a weak bookings and this past week. We did about 5 billion. So I do not know if that's a good sign or not but as the best Bookie look we added probably three years.
And then then I think the magnetic or I did that has very ive. All the goods. We have that probably has the most limited growth potential at this time.
Because of the limited customer base, we have within that group.
So we still think we still have a lot of potential again.
The stage military side, and then again on the power side I think we have growth in mobility Circuit protection has adapted and also we are doing a lot on basic power products, we build ourselves before the acquisition.
That's helpful. Thank stakes to walk you through that and I guess, another way than I wanted to touch on again. These gross margins continue to grow and be a quarter of a positive point to the Bellevue story, just curious if you could talk to any.
Anything that might have been one time in Q3, I know you spoke to the.
The the material cost in Q3 did you guys were you able to size up what the benefit was for Q3 from those material cost and that that becomes a headwind now in Q4 as well as.
Nichols' seasonality going from Q3, Q4, I believe that those goes mortgage typically come down sequentially.
Any input there would be beneficial.
Okay, Craig do you want to address this into our little to discuss it.
No I couldn't I can't address part of it I think with respect to you know maybe some one time items that may not continue going forward or I mean that we did receive a additional subsidies from the Chinese government during the quarter.
To the extent of about.
No $100000.
So whether those continued into the you know into the into the new year. We don't know there will be some impact in the fourth quarter, but not a substantial we don't expect and what.
But I think you know what will what we'll see going forward is kind of a continuation of the impact of routes streamlining our product offerings and so on and so forth. So while we know you know with the with the sales volume expectation.
Expectations are being comparable to last year, I think you will see a little bit of margin degradation. The overall percentage wise.
The speech, just because of the volume but.
Don't know if there's any other significant one time items that would be that would be rolling through here when do you agree with that.
Yeah, I agree and Mike just to answer that part of the question on material costs.
So the lower material costs in Q3, 20 contributed 270 basis point she'll our gross margin for the quarter.
So to put that in perspective in Q3 19, our material costs as a percentage of sales was 44.9%.
And that declined to 42.2% in Q3 20, if you recall, we still had very high material costs running through RPM. Allen 2019, So we have seen that come down a in the 2020 corners and and we expect that to you could say as a gender.
Really around that this lower level that it may tick up a little bit, but I think the 2019 level was unusually high.
That's great. Thanks, Thanks for all the color there and then one more if I may just to squeeze it in but question on the the streamlining but you're talking about for the North American sales organization I know that you announced yesterday in conjunction with the closing of the German facility.
What do you see that you guys have to do on that front, just curious from an operational standpoint the mechanics.
That I guess million in annualized cost savings to start flowing through the piano. Thanks.
Thank you.
Great you would do with the cost savings lift so sorry for the you know.
Craig I'm not that help.
Oh, Yeah, let's go ahead, whether that's from idea I know so the aggregate cost savings for those two actions will be just over a million dollars.
And we expect that's mostly starts in 2021.
It's just a small amount maybe 50000 or so in Q4 20.
Q1, 21, we expect about 125000, and then going forward. It would be 275000, a corridor in cost savings through the end of 2021.
All right. Thanks for all the color guys I'll turn it over to anyone else and then a question. Thank you.
Thanks Ben.
Well now take a question from Theodore O'neill.
Phil tells me there.
Thank you very much.
In the prepared remarks last quarter, you talked about a $1.6 million award for power supplies for a cost effective and later has.
Has that sort of has that shipped yet and is there any follow on business from that.
I think where the cost against it.
I do believe we have other additional orders, but not to the extent we thought probably.
And then the I think the the cost for that with the Canadian Army.
Yeah. When I finished even government you know we have started shipping we could start shipping that in the third quarter.
Okay, great. Thanks very much.
Once again that is star.
To ask a question.
And well now take questions.
[laughter] with Gabelli.
[noise] good morning, Dan crank up man.
Hi, good morning.
That tenure here unless you are seeing in China. Other companies have talked about the impact on [laughter] shiffman bad to qualify.
And that's going to happen.
And that's all told what are you seeing in your markets in China now.
I bet for us a walk away they have a bit of a big customer of ours.
And China, we do see certain customers might have customers that are having a difficult time to deal with American based companies.
At least we're starting to see some prejudice, but none of our key cost, whereas most of our major customers in China or the large subcontractors that go for their Cisco HP <unk> of the world. So like a hot Hey, slashed Fox all Flextronics J.
Well Ivy.
These type of.
Thanks, Rod C. yen you know Joe.
Generally have to buy off the spec of the American customers or the European customers and that's where the majority of our business goes to China.
So there is always some concern about the political situation. They charge you got a between American try to be between Hong Kong, and China, and see between China, and India, So get a tremendous amount of uncertainty.
That we are Oh, we are concerned about and why the recent yeah. We are looking at other areas of manufacturing Besides China, they give us the state local or not.
Not to say that we would move out of 100% of manufacturing, but I think we would like to get to a point that we're not so dependent on the low cost manufacturing in China.
Got it and.
I know some companies have I'll hop out in battery capacity digestion, a bomb Dave with that there's not any insights.
Insights into that.
About a capacity capacity regarding capacitors.
I know [laughter] faith.
Companies have talked about the fact that south the basis that there has been strong in the first half off planting plan B and then now we may see asylum impact those digestion.
No. We I don't think we have seen anything yet sorry.
Yeah, I think what I think we are I think where you live we may have benefited a little bit in the first half from that Andy They [noise] you know.
Going into the going into the fourth.
The fourth quarter, we have seen our.
Our order book or soften a little bit with respect to to some of those networking data center clients. So you know I think we are seeing a little bit of that.
Yeah [laughter] when you when you when you share.
She has had positive growth in mass effect, if I'm wondering if now.
What can be done next growth driver for the Mexican heckman.
That's a good question I get I think our focus would probably you know I think the magnetic group you know at some point it might fall into the power group go every power supply needs a magnetic.
But I think there's a again you know we make a very specific product.
That we're the market leader on are we control, 70% are good percentage, where the high end customers on that product. So when you can show 70%. The market you know available market I think it's very difficult for us to grow it.
So again, I think really where our focus now is you know how we can combine jar magnetics, we have there, which see you I would say go transfer, but with our power surprise I think we had what we're looking at is how much better we can solve our customers' problems like the O. a one stop solution company.
Especially for the second tier third tier accounts.
So again is how do we bundle all this.
Products, we have that are very similar in the first step with that was combining the sales force. So before we would have a direct signal transformer guys go to a new England than we ever see IRI Guy go to new England than we would have a bad Guy go to new England. Now we have one point of contact that would go to new England that can sell all these products. So we're hoping.
But having one point of contact and make it easier for our customers and channel partners to deal with us that we should get a greater sales at these customers.
I see and then one.
One more quick question far less well then you talk about the benefit healthcare peeled off coming down from 2019.
Well well grow our material cost the high now or do you still have come a long way and then secondly, how I think in the past we indicated that gross margin to normalize it could impact it could be 25% to at least the basketball hockey and brands.
[noise] I. So the first part of your question on the material costs.
I think we're probably.
Where we will land I I think that the Q3 material costs and correct me if I'm wrong.
It's probably where we will land if anything it might go up a little bit I know the Pos some of their precious metals had been increasing so that might put some additional pressure on it but I.
I think we can use Q3 as a basis for that.
Ah regarding a normalized gross.
Gross margin.
I mean really the only thing that was in our margin this quarter as Craig mentioned, please see the 900000 of subsidy.
We have signed it I think the receipts, which would be non nonrecurring.
I'm trying to think other than that.
You know the the renminbi, we do need to keep an eye on you did have some higher labor costs.
In this years third quarter, just due to the unfavorable comps and the FX, but.
Since last year, so that is something that both will impact our margins going forward if that continues to trend in the non favorable direction.
You know I think if we had to put a range on it you know mid 20.
You know, maybe maybe 24% to 26% Craig do you have any thoughts on that.
No I think that's I think that's right.
And it's all you know obviously dependent on the on the on the mix of revenue that we have.
You.
You know obviously you know as you know.
Commercial or <unk> or <unk>, when the commercial aerospace recovers several federal influence margins and and you know how successful we are with some of our other cost actions will influence margins, but frankly, the 24% to 26% range is a reasonable reasonable range for.
Projection purposes.
Got it and get it thank you for that land right. Thank.
Thank you evidently they send it.
Well I'm asking a question from John had mentioned with a private investor.
Morning.
Hi, Dan.
Hi, John.
Relative to.
Operations in China.
And.
Hey.
Recognize the issues between the Chinese government and the U.S. government.
I don't need any further comment on that but I'm interested it appears to me that the relation between the company and the Chinese government has been basically very good over the colder period and part of that as indicated by those subsidies of the Chinese government.
Provided.
And I just wonder.
Is that your opinion and how do you see specifically the relationship between the two.
<unk> government and the company today.
I you know generally when we talked to government, we generally deal with a low because we're not that big of a player in China. So we generally deal with the local government and we've been there substantially longer than a lot of other companies every all the communities. We deal with we are all large employer.
So historically, we employ a lot of people in the local town. So we do have a very good relationship with the local community and the tail government and I think that's why we've been able to do that.
That EBITDA work, so well talk.
Our concern again is you know the political unrest and the tariffs.
Now you know U.S. government use things going forward and again, we do have a good portion of our tax.
Activity is done in China, and I spent there'll be four call that you know I I did a tour of the or the Philippines, Vietnam, Malaysia, you know looking for another facility to just as a backstop and we're hoping that we can have an announcement shortly of whereas things we look at the.
From our standpoint, you know I think if we had a it was setting up a greenfield operation from scratch.
I think we would be a lot more in the area of acquiring a company that has manufacturing where those low cost areas. So when you get up and running very quickly and not worry about the political and you know who you have to know to get things done type of situation.
So again you know at this point knock on wood.
Things are okay, but when it comes to try the cycle that and and again you know we do have Oh, we do have some people we have it here.
50 people at a hog tied to that work for us.
You know what they are going through now in China is very upsetting.
And the relationship between the hard kind of people to try to people is that a good situation.
So you know, it's something that we do keep a watchful eye on.
Sounds good thank you.
Hello, Mike.
He comes with Needham and company.
Hi, guys, just just one more if I could picky about the.
Let's see why acquisition seems to be going at least better than what we get initially thought so curious on what your assessment as have been acquisition and then the follow up to that would be if.
If you're if you're looking for different opportunities on the M&A front what.
What kind of technologies would be of interest to you is it focused on a specific segment or would it make it caters to this diversifying your manufacturing footprint that we were just talking about.
I don't leave it at that thanks, guys.
Okay, let's just discuss see right for a minute first so we've been we it took us three to four years to finally acquire see why again, what we find very interesting with them is it's a different model than historically bell as a belt was always built everything we've sold so you are it doesn't manufacture anything.
Thing that private label, a they have a very tremendous diversified customer base, what that what they have done better than any other company out there is more from a marketing and PR new product introduction Ah well now I was started in the business everybody wants to see a sales guy everybody wanted to go out to lunch.
I'm now nobody wants to see a sales guy nobody wants to go out to lunch.
Just want to go on the Internet and get that talks as quick as possible I get designed in and this is where I see you I really shines. So they work with built the largest E. Commerce catalogue houses like Digikey now serves and they do a great job with them to get that product out that to a diversified customer.
Base.
And that customer base could be four to 5000 customers.
No customer accounted for more than 5% that's why they tend to be very profitable and that's the same model that signal transformer has.
So again, we looked at that May well, you know were tremendously pleased with the sales growth in the booking growth say had since we acquired them and at this point now where we really have to do is capitalize on their marketing NPR y and bring it to the other <unk> products and how do we market.
As one company to solve customers problems. So I think from that side as I mentioned before I think this tremendous upside that we can to penetrate our existing customers and there hasn't been as well as I like on the cross selling opportunities between our product groups and that will change very quickly.
As we go forward looking at products.
You know again, we'd like to fill out our portfolio and connectors and power.
Again, you know our goal is very simple.
If a customer calls us up if we can get more of the products. They want we think that's what's gonna count going forward and as I said is as it again, if we can solve they can go to one shop, you know one stop and find all that magnetic needs or that power supply needs all that connector needs a that's tremendous for us as more and.
More engineers are moving away from doing whatever one with you know with this what a one contact in person contact and I think we call that just escalated you know where the where the world is going.
And I think instead of saying, it's going to be like this in four years it might be like this in two years. So again no. One other things that we started up is a you know.
Digital marketing sales transformation of how do we address customers a lot that up through Facebook Wellington.
And putting a lot more resources.
In that group that we do with that you know outside sales people going forward.
So again I think what you know in short there's a revolution going on we believe.
And we're hoping to do everything to straighten it so when the world changes will better position than we were a year ago.
And any company that can help support US is that's what we're looking at.
That's great. Thank you guys best of luck.
We have no further questions and I won't terminate this conference. Thank you for participating.
Okay. Thank you everybody for joining or they wouldn't look forward to talking to you again.
Yeah.
[noise].
[noise] Hmm.
[noise].