Q4 2021 Bel Fuse Inc Earnings Call
Okay.
Good day and welcome to the Bel Fuse, Inc, fourth quarter and full year 'twenty 'twenty. One results conference call Today's conference is being recorded.
At this time I'd like to turn the conference over to Jean Young from three part advisors. Please go ahead.
Thank you Emma and good morning, everyone before we begin I'd like to remind everyone that this conference call contains certain forward looking statements regarding the company's expected operating and financial performance for future periods.
Statements are based on the company's current expectations.
Actual results for future periods may differ materially from those expressed or implied by these forward looking statements due to a number of risks and other factors.
Additional information about factors that could potentially impact our financial results is included in yesterday's press release and as discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K , and our subsequent quarterly reports and other filings 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 us on the call today is Dan Bernstein, President and CEO .
Two week, CFO , and Lynn Hopkins director of financial reporting.
Now I'd like to turn the call over to Dan.
Thank you gene and all of you for joining our call today our team at Bell has performed extremely well in these challenging times. They have embraced our efforts to improve the company I would like to thank every associate for their hard work and dedication to bell for enabling us to have what about best quarters. Recent Peberdy, we achieved all four quarters.
Strong year over year sales sales growth with new record highs in both quarterly bookings and then our backlog of orders are caught in this increase in demand is across each of our three product groups.
And the majority of our end markets our backlog remains at an all time high totaling 468 million at December 31st.
2021 we launched 1800, new standard part numbers into the channel this will bode well for us for future growth.
The acquisition of RMS and Eos completed last year are fully integrated and have contributed to Bell's bottomline through combined had earnings of 1.9 million in 2020 one.
See you all acquired in late 2019 continues to be a strong performer with sales growth of 20, 29% from 'twenty to 'twenty to 2021 on the cost side, we continue to navigate direct and indirect supply chain challenges and not included those related to raw material logistic labor availability.
<unk> retention and overall inflation.
Last year, we completed a four year ERP conversion project, combining five systems into what we have to transition from a functional used to the system to data analytics and now have better visibility on margins by S. Q U.
Although still in the early stages of Adaptational. Instead has quickly become the foundation of our day to day business decisions on how best to allocate ourselves engineering and manufacturing resources overall, we invested $7 million in the ERP conversion and have recognized an annual cost savings of $2 million.
With our legacy systems to a fully integrated where you'll you we will utilize our internal resources to market. Our recent acquisitions onto the new system as well.
Last quarter, we appointed Jackie for you all to our board and she has provided to be a very valuable addition, as with many companies Bell has been challenge with associate retention and job satisfaction with.
With Jackie strong background in human resource development. She has been tasked with doing a cultural assessment of the copy and Hal and the identified areas for improvement. This assessment is completed and we are implementing the recommendations to ensure chassis associates experience at bell.
And furthering our commitment to becoming a better corporate citizen. We then implemented two new programs in 2022 around community engagement charitable contributions to align with our values associates will now be provided with time to pay it off the volatile within the communities and bell will be donating about and matching.
Patients to local charitable organizations of choice.
I'm very proud of the progress we made throughout the company and where you would continue to continue on our journey in 2022 to make sure a bell is the best it can be for our associates stakeholders and customers and communities, which we working well.
I would like now to turn the call off to land for the financial update.
Thank you Dan as Dan mentioned Q4 was very strong with Europe for your growth seen across each of our product groups overall fourth quarter sandals for 147 million, an increase of 27% from fourth quarter of 2020.
Gross margin for the quarter increased to 26, 7% as compared to 25, 3% a year prior.
By product group power.
Power solutions and protection sales were $58 7 million up 12% from last year's fourth quarter, the largest contributing factor to power sales growth during the quarter related to our 2021 the acquisition of E O S, which generated sales of $4 6 million in the fourth quarter.
Notable growth came from sales of our circuit protection products, which were up 2 million or 46% from Q4, 2020 and sales through our C. U E business and into the E. Mobility end market also remained strong in the fourth quarter.
These areas of growth were offset in part by a $1.5 million decline in our custom modules product line, which we continue to exit.
That low margin business.
Future year over year variances related to this exit should be minimal going forward.
Gross margin for this group was 39% for the fourth quarter of 320 basis point improvement from Q4, 2020, driven by a favorable shift in product mix.
Our power solutions and protection group finished the year with a healthy book to Bill ratio of 1.7, and a robust backlog of orders of $240 million, an increase of 270% from the 2020 year end.
Turning to our connectivity solutions group sales were $43 6 million, an increase of 27% from last year's fourth quarter with the continued rebound of commercial aerospace end market, which improved by $3 million or 140% from last year's fourth quarter.
To provide some context on where we are in the ramp and commercial aerospace sales into that end market were $30 million in 2018.
They were as low as $12 million in 'twenty 'twenty, an increase to just under $18 million in 2021.
Fourth quarter bookings in commercial aerospace were $7.7 million, which was equivalent to the full year of 2020 bookings for that end market.
Sales of connectivity products through our higher margin distribution channels remain strong for the fourth quarter, reflecting a 46% increase from last year's fourth quarter.
Military sales continued to be challenged this past quarter, resulting in a 24% decrease in the defense end market.
Gross margin for this group came in at 23, 7% for the fourth quarter of 2021 up slightly from the fourth quarter of 2020.
The connectivity solutions group closed out the year with a book to Bill ratio of one point to another.
Backlog of orders of $85 million, an increase of 79% from the 2020 year end.
Lastly, our magnetic solutions group had Q4 sales of $44 8 million.
52% from last year's fourth quarter led by higher demand for our integrated connector modules that are used in next generation switching applications.
Gross margin for this group declined to 22, 9% for the fourth quarter from 23.3% a year prior.
These products are primarily manufactured in China, where wage rates have increased and margins have been further impacted by the unfavorable shift in exchange rate of the Chinese renminbi versus the U S dollar.
Estimated a 50 basis point impact on fourth quarter, 2021 margin related to FX alone.
Our magnetic solutions group finished the year with a book to Bill ratio of 1.6, and $143 million of orders, which are largely scheduled to ship in 2022.
This represents a 233% increase in backlog since the 2020 year end.
Our selling general and administrative expenses were $21 9 million or 14, 9% of sales.
Up $2 3 million from a dollar perspective from the fourth quarter, but down as a percentage of sales.
The dollar increase one 4 million related to the inclusion of SG&A expenses for iOS, which was acquired in March of 2021.
Turning to balance sheet and cash flow items, we ended the year with a cash balance of $61 8 million a reduction of $23 2 million from the 'twenty 'twenty year end balance.
Our working capital increased by $24 3 million from December 31, 2020.
We saw a $13 million increase in our accounts receivable balance due.
Sales growth experienced during the second half of 2021 versus the same period of 2020.
Our DSO improved slightly from 57 days at December 31, 2020 to 54 days at December 31, 2021 .
Inventories increased by $34 million as we have been purchasing a higher volume of raw materials to accommodate the increase in demand from our customers.
This in turn resulted in a similar increase in our accounts receivable balance since December 2020.
In addition to changes in working capital other items impacting cash flows for the year included net payments of approximately 17 million for acquisitions.
Capital expenditures of $9 4 million debt payments of $4 3 million.
And payments of $3 4 million and interest payments of $2 1 billion.
We also received $7 3 million in proceeds from the sale of properties during 2021.
I'll now turn the call over to Farooq for items that we see impacting us in 2022 Farooq.
Thanks, Lynn and good morning, everyone.
There are a few items that I wanted to touch upon as we focus on look out towards 2022.
With regard to pricing, we continue to monitor the impact of supply chain concerns raw material sourcing and the overall cost of doing business.
Sure, we're responding in an appropriate and effective matter as of today, we have implemented another round of price increases that started in late fourth quarter of 2021 and continuing through Q1 this year.
There are more we have implemented various price processes and procedures that will allow us to react to the dynamic market in a more expeditious and targeted manner looking at 2020 to first quarter margins have historically had downward pressure due to production inefficiencies related to Chinese new year.
We do expect to see a favorable impact of our initiatives as we progress throughout the year on the supply chain side, our best estimate at this stage is that shipping logistics and procurement of raw materials will all remain a challenge throughout 2022 as it seems as if it's a little bit of a new norm. This will remain a key area.
And focus for sourcing team and the various other teams around the world. We're also keeping a close eye on all things COVID-19 at the local operating levels. Given we are exposed to a number of regulation in the various countries, which we operate.
<unk> mentioned earlier, our financials are impacted each year with fluctuations in foreign exchange rates.
Particularly the Chinese renminbi and Mexican peso.
Are the currencies in which a large percentage of our labor is paid this past year, we meaningfully expanded our forex hedging program to mitigate financial impact related to these currency as well as initiating for a first time interest rate swap on the interest rate swap, we moved roughly 60 million.
Yeah.
Being variable rate to fixed that is our view that interest rates will climb over the term of the revolver and as a reminder, we put this in place in Q4 and with some of the things that we saw from the messaging coming.
Coming out of the Federal reserve Yeah, we are.
We think this will serve us well.
These are simple programs. The idea here is to really minimize operational variability will provide us with better visibility into pricing and operations and take a couple of variables or minimize the impact there as well.
The M&A side the market has really seen aggressive valuations in the recent history and we expect that to be the same in the near term representing a challenge for US with that said we are continuously on the hunt for new opportunities and as things come our way that makes sense, We will act upon it.
Dan stated, we're focused on and committed to demonstrable margin improvement across the business and are taking a targeted approach with appropriate sequence. We're examining various aspects of our business down to the SKU level and up to our operational footprint as we embark on these initiatives, we do expect to incur some upfront one time investment.
We will be sharing more details as things develop in the coming quarters. Please keep in mind this will be an ongoing process.
And then as a stronger company.
I'll turn it over to Dan Dan.
Thank you.
Eric can you. Please open up the call for questions.
Certainly thank you, ladies and gentlemen to ask a question over the telephone please signal by pressing star one.
Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment.
Again to ask a question please signal by pressing star one on your telephone.
Well pause for just a moment to allow everyone an opportunity to signal for questions.
Well take our first question now from Theodore O'neill from Litchfield Hills Research. Please go ahead.
Thank you and congratulations on the good quarter.
A question for you given what's happening in Ukraine, I just have to ask you about your operations in Slovakia Youre.
Are you seeing any impact there and are.
Are you planning for logistics issues, either in that area in the operations and.
Nearby.
I think we do have operations in the Czech Republic, Slovakia and throughout Eastern Europe et cetera, There's a tremendous concern of what's going to happen at this point I think we're roughly about 350 miles from the border.
It is a concern however at this time, we are keeping a watchful eye on it.
And it is a concern mostly for the people and their families in the area and the uncertainty that it brings to everybody.
And were.
We're seeing some companies that are redesigning products to use components from multiple sources and I'm wondering if that's impacting you at all.
No I think everybody you know realize you know in the past you've started with Sars and now with Covid that you can't be overly dependent on one country or one source.
So everybody I think throughout our industry are trying to get a minimum of a two to three sources.
However, you know we're doing the same thing you know.
Tried to diversify our production, where we're getting parts from and then be having multiple sources from different locations, but it has been a slower process than what we would like.
Okay. Thank you very much.
Thank you.
A reminder, ladies and gentlemen to ask a question. Please signal by pressing star one on your telephone.
I wanted to ask a question.
Well now go to our next question now from Hyundai Santa from Cotton Valley funds.
Good morning, Ben Barak and Lynn.
Good morning.
Thank you for the information on the commercial aerospace so Dan.
In terms of backlog any.
Any data point that can help us to somewhat like forecast.
Our expectation for commercial aerospace sales in 2022.
When it comes to forecasting and those questions that I'm going to pass it on.
Two farooq.
Or Lynn, who wouldn't want to grab that one.
Yeah. So the question is specifically on how much commercial air backlog.
We're sitting on right now.
I think a question.
What.
Revenue.
Yeah revenue wise.
The pace of the recovery in commercial aerospace.
Got it.
You can feel free to jump in here.
Maybe just to kind of recap what was said in 2018 commercial aerospace we had roughly $30 million of sale.
'twenty. If you went all the way down to 12 and in 2021, we're back up to 18.
No were still off from that 30, Mark in 2018. The other thing I would say this is obviously legacy Bel numbers now with RMS The equation has changed a little bit. So we do expect that to be north of there, but the ramp is pretty steep but it's taking a lot of time from the connectivity folks perspective.
But.
Yeah.
We don't I don't know Linda you would have a number on that handy yeah, I don't have a backlog number but to give you some perspective, our sales into commercial aerospace and these are this wouldnt include anything through distribution.
But it was as I mentioned, just under $18 million for 2021 from a bookings perspective.
It was just about 20 and a half million of bookings that were received in 2021 .
And Q4 bookings was 7.7 Milligan Ah, which you know definitely indicates that we are on an increased path here.
Hum.
I do not have the the bookings or what is scheduled to ship specific to that end market, but I think I.
I think we can continue to see growth there.
We can say based on the readings that we've done in commercial aerospace that we think things will get back to the pre COVID-19 level not this year, but in 2023, it should be back to pre COVID-19 level of commercial aerospace building.
That's very helpful.
And then given the.
Strong demonstration of gross margin improve.
Like how you manage gross margin despite exabyte income strain.
Any.
Any qualitative guidance that you can share with gross margin expectation.
Oh sure Hendi so.
Yes so.
You're right. It is a challenge because you.
In addition to just regular way business Theres, a lot of geopolitical issues and supply chain issues and all those kind of stuff. So resin remain a challenge, but to Dan's earlier comments and now one of the nice things of having an ERP system as we're able to identify down to the SKU level important number where the IB.
Issue is so we can be targeted and we've introduced some processes internally, where we can identify earlier and address it on the front end. So the idea is as more being proactive we've also.
Put in various procedures, where things get out of hand down the road, we'll be able to address it. So it's really about our ability to pass things on.
And we're also taking another strategic look on where we think can take.
Market share in or lean into some of our higher margins.
Our business as we look out to 2022.
Obviously some of the challenged do continue with the inflationary pressures, we're addressing a lot of these things.
And I'd say, we are addressing them and should be fully addressed assuming the world holds in Q1 here. So coming out of Q1, we should have put things in place that will stabilize and lead us to something a little bit better as we look out specifically to maybe Q1.
We do expect to be ahead of last year Q1.
And obviously Q4 was a very high great quarter for us. So Q1 is historically a little bit weaker for us. So it will be somewhere between last year Q1, and where we were in Q4 on the margin side.
Obviously as we had also said.
It's really we're trying to up the gross margin.
And I think we will see some of the benefits of that.
Throughout this coming year and as we go through the year, we'll be sharing a little bit more specifics on what's being done on that front.
But just to add a little bit more color to that you know historically when we quote a customer. It's 90 days, we would never change pricing our backlog quotes would be for them for 30 days all of our customers have received a letter stating based on the current conditions.
You are raw materials change quickly, we will have to change our pricing and quoting at.
At the same time, and we will have to change backlog. So historically, we could have orders on the books for six month, she and a price increase and not be able to make a change now we can make any for any backlog or are we we have the ability to change an order within 30 days and then you open quote we have the ability to change immediately so again at a much.
More.
Proactive approach and then and moving a lot quicker than we have in the past to deal with the changing environment, we're living in today.
That sounds very positive then thank you.
And then my last question is on the E mobility any particular.
Geography and end market.
Okay.
Lynn.
I think maybe they can go over the backlog or are you allowed to discuss the backlog and I don't know, but I think it just from an overall standpoint from a marketplace, we really focus on our niche markets.
Not a high bar for our power group, which is a driving force in EV should we look at you know smaller companies are retrofitting bands ready retrofitting trucks.
Not for G M or those type of companies. However, when it comes to our circuit protection group.
So it's not us.
The pricing is aggressive.
We service all EV vehicles with our circuit protection group and we have seen some some nice growth through there in those markets than you wanted to just follow up on the <unk> Yeah sure. So I can share that so sales are within our EV market.
Did go up by over $6 million from 2020. So we are starting to see some some continued growth there. It's always been a relatively small dollar amount, but we're starting to see the pick up there and from a bookings perspective.
<unk> bookings increased by $47 million from 2020 to 2021 in this end market.
And a lot of that I think is related.
Related to North America European.
E mobility applications as Dan mentioned.
Okay.
So that's all it is concentrated in North America, and European and then China market is not there.
Big portion of that.
That's not from the power side, but from the circuit protection side.
I see okay. Thank you. Thank you so much and then all the best of 2022.
Thank you. So we have no further questions at this time I'd like to turn the conference back to your management team for any additional or closing remarks.
Uh huh.
Just like to thank everybody for joining our call today. We appreciate your time and looking forward to our reporting in April .
Thank you. This will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.