Q1 2022 Bel Fuse Inc Earnings Call
Good day and welcome to the Bel Fuse first quarter 2022 earnings call Today's conference is being recorded.
This time I'd like to turn the conference over to Jean Young with tree parts 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. These statements are based on the company's current expectations actual results for future periods may differ materially from those.
Breast or implied by these forward looking statements due to a number of risks and other factors.
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 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 Jamie and thank you all for joining us on the call today.
We used to report that all three business units performed exceptionally well with all groups showing sales and margin improvement compared to the first quarter of 2021 with a record backlog of 525 billion. We expect demand to remain strong through the balance of the year. The highlight this quarter was led by the magnetic solutions group.
Gross margin rose to 21% in the first quarter.
2022, as compared to 13, 7% in the first quarter of 2021 as a result of higher sales from our enterprise networking customers and despite the temporary government mandated factory closures in China related to Covid.
Revenue generated by our distribution partners grew by $12 9 million or 36% of the first quarter of 2021, as we mentioned last quarter demand from our commercial aerospace directed aftermarket customers continued to rebound and reached $6 2 million of sales during the first quarter.
2022 up 90% from last year's quarter.
<unk> the RMS business, we acquired in early 2021 does that market was historically running around $45 million per year.
Strong bookings from 'twenty to 'twenty, one so power products in the EV and market generated in June $5 $9 million of sales during the first quarter of 2010.
An increase of 89% from quarter, one last year and leaves us well positioned for incremental sales growth in the second quarter and beyond.
Protection line had its strongest quarter in the history of our company posting sales of over $8 million for the quarter, representing over a 100% growth from the quarter you last year.
The supply chain continues to be.
I'm sorry, the supply chain continues to be constrained and raw material availability remains tight with the PRC recent closure of Beijing, and we see impact on the timing around movement of goods around the border as a freight is now rerouted and screen through the freight forwarders and other regions of China. However, we are pleased to report.
But all our practice globally are fully operational as of today and with the understanding that the environment of operations.
Relation can change rapidly I'll like to now turn it over the call to live for the financial update.
Thank you Dan as Dan mentioned Q1 was very strong with year over year growth seen across each of our product groups. Overall first quarter sales were $137 million, an increase of 24% from the first quarter of 2021 gross margin for the quarter increased to 25% as compared to 21, 9% a year prior.
By product group power solutions and protection sales were $58 8 million up 35% from last year's first quarter in.
In addition to Dan's commentary on circuit protection and E mobility sales. The power group also benefited from incremental sales from the 2021, the acquisition of <unk>, which generated sales of $4 2 million in the first quarter of 2022.
Our <unk> business also remained strong for the first quarter, posting an increase of $3 8 million or 37% from Q1 2021.
Gross margin for this group was 27, 1% for the first quarter of two.
240 basis point improvement from Q1, 2021, driven by a favorable shift in product mix and the benefits of pricing actions taken earlier in the quarter.
Our power solutions and protection group had a book to Bill ratio of one six during the first quarter of 2022, and our backlog of orders of $277 million, an increase of 15% from the 2021 year end.
Turning to our connectivity solutions group sales were $43 7 million, an increase of 15% from last year's first quarter with the continued rebound of the commercial aerospace end market, which improved by $2 9 million or 89% from last year's first quarter.
Sales of connectivity products through our distribution channels remains strong in the first quarter.
<unk>, a 22% increase from last year's first quarter.
Military sales continued to be challenged this past quarter, resulting in a 15% decrease in the defense end market.
Gross margin for this group came in at 26, 5% for the first quarter of 2022.
Up from 25, 7% in the first quarter of 2021.
The connectivity solutions group had a book to Bill ratio of one two during the first quarter of 2022, and our backlog of orders of $92 million as of March 31.
An increase of 8% from December 31.
Lastly, our magnetic solutions group had Q1 sales of $34 2 million up 18% from last year's first quarter led by higher demand for our integrated connector modules that are used in next generation switching applications.
Gross margin for this group increased significantly to 21, 21% in the first quarter of 2022 from 13, 7% a year prior.
Margins for this group benefited from the higher sales volume despite higher wage rates in China, and the temporary shutdown of related factories in China strong part of March due to Covid outbreaks and the provinces in which our factories are located.
Our magnetic solutions group had a book to Bill ratio of 1.4 during the first quarter of 2022 and finished the quarter with $156 million of orders and backlog.
Which are largely scheduled to ship by the end of 2022.
This represents a 9% increase in backlog since the 2021 year end.
Our selling general and administrative expenses were $21 million or 15, 4% of sales.
The same from a dollar perspective from last year's first quarter, but down as a percentage of sales.
Within SG&A.
Increases in sales commissions and property insurance were fully offset by a reduction in legal and professional fees as compared to the first quarter of 'twenty one.
Turning to balance sheet and cash flow items.
We ended the quarter with a cash balance of $51 2 million a reduction of $10 5 million from December 31.
Our working capital increased by $7 6 million from the 2021 year end.
We saw a $6 $7 million increase in our accounts receivable balance offset by a $7 $7 million reduction in our Unbilled receivables balance at March 31, compared to the December 31 balances.
This shift was the primary driver of our DSO, increasing to 62 days at March 31 2022 from.
From 54 days at December 31, 2021.
Inventories increased by $16 3 million from year end as we have been purchasing a higher volume of raw materials to accommodate the increase in demand from our customers.
In addition to changes in working capital other items impacting cash flows for the quarter included capital expenditures of $2 million.
And dividend payments of $823000.
Cash paid during the quarter for income taxes was $1 2 million in interest payments totaled $461000.
I'll now turn the call over to Farooq for items that we see impacting us in future quarters, Kurt Thank you Linda.
Dan mentioned, we are encouraged to see continued year over year margin improvement from streamlining the organization and benefits of our updated pricing policies starting to pay off in the back half of the first quarter, we expect to see stronger contributions from our pricing actions in the second quarter onward.
Our new ERP system has been instrumental in providing the visibility we need to more thoroughly assess the business and looking at our backlog trend over the past three months, we can see meaningful improvements in our gross margin associated with our backlog balance which is a potential indicator of further margin expansion in future quarters.
Regarding upcoming management activities, we have kicked off our efforts towards our corporate segment wide strategy refresh is a key part of our strategy will be developed and clearly defined goals and objectives, along with incentive system to reach these targets. We're pleased with these efforts of our associates in achieving our results in this quarter and have confidence that we'll be able to build it.
Upon this progress in future quarters.
With that I'll turn the call back over to the desk. Thank you farooq.
Could we open up the call for any questions.
Certainly if you'd like to ask a question you can do so now.
I think star one on your telephone.
Star one to ask a question we will now take our first question from Theodore O'neill at Litchfield Hills Research. Please go ahead. Your line is open.
Oh, good morning, and congratulations on a good quarter.
Thank you for your question.
First question is on the season that seasonality historically Q2 revenue was $20 to 30% above Q1, and I realize you probably aren't giving a guidance, but can you give us your view on seasonality now that youre, what sort of one month into Q2.
Yes. Thanks for you for a further question.
So we do see as we stated our backlog.
And our bookings continue to be robust, we do think Q1 will be a little bit of a step back to what we think Q2 will play out.
Last year Q2 was around 139 million of sales.
We do expect obviously, we are in a little bit of a fluid world as we think about push outs, China supply chain, but our best guess today based on what we're seeing is we do expect to be north of the $139 billion marker from last year, and we do expect to be north of the 137, let's call. It this quarter as well.
Okay fair enough.
Fruit do you have any view on potential double ordering.
Hi, Shane issues.
I think we haven't really seen tangible evidence of that.
That is definitely a concern of ours, especially with stretched out lead times.
Do try to assess the authenticity of orders on the front end of their coming in kind of challenging.
But we haven't really seen tangible evidence of that today is it something that we keep in mind on the look out yes does history stake potentially there might be something in there, possibly but today, we just don't have concrete evidence pointing towards that.
Okay. Thanks very much.
Thank you.
Take our next question from Hendi <unk> from Gabelli funds. Please go ahead.
Dan Farrell and Lynn.
Good morning.
Yes, a follow up.
My first question is.
Would you be able to quantify the impact of COVID-19, Lockdown in China in the month of April .
In April its a little bit too early for us to do that but as of April all of our factories were up and running so we are able to make stuff and ship things out as Dan noted where the concern is.
The shipping side of the house and the logistics of it.
But right now, it's a little bit too early to tell but our expectation is.
I think for April at least we haven't seen the numbers, obviously, but I think it will be pretty minimal.
And then in the context of some companies at that.
Some customers like postpone.
Some shipment due to.
It sounds like supply constraints on other components.
And any any business plans that you like that.
And the business trend that you see with that regard.
Yes, hi, and we actually do see that in certain cases, where they don't need our parts because they are waiting for the IC. So it's not a cancellation is a pushback of orders, but it hasnt been anything drastic at this point in time.
A lot of customers now that they pushed back the orders that other people will use those components. So I think most customers are overly aggressive by taking in any matures. They can get and they have to have to wait for the IC as they wait for the Ics and.
Maybe can you just to kind of put some to box there as well for Q1.
We had roughly call it.
Not an insignificant amount roughly maybe call it $30 million to $40 million of orders that did not ship because our customers affected were rescheduling pushing it out because they were not ready.
As you know we are a small piece of generally bigger system and have been and get all the pieces. When you get a call and say go ahead and sit on that.
I see.
It's something that we've been seeing over the past few quarters. So.
Coming out of Q4, there was also a $25 $30 million.
That had not shipped in Q4 that likely got pushed to Q1, so we have a bit of a longer haul effects here.
<unk>.
Yes, it is something that that we're seeing just general.
We've talked about that right now quite frankly, we know the orders or their doors or it's just kind of the supply chain, both impacting our ability to get raw material, but also our customers and their ability to kind of get other things and therefore, we can get resolved the situation, but from an outlook perspective.
Again, we still have the orders they will be going out and just not necessarily on time.
I see and then a follow.
The updated pricing policy, which is beneficial for Bel fuse.
Is there any guidepost on what segment margins may look like whether or not there is still some like system a little bit in gross margin from one quarter to another.
Or whether it will be more like like unit.
Uniformly distributed across quarters.
And then like any any insight would be helpful.
I think seasonality will not disturb anything we ever get away from the.
The objective is to kind of.
Tried to minimize the peaks and troughs, both on the margin side and maybe on the revenue side, but the reality is seasonality impacts not just us our customers, especially as we think about kind of China and new year's and overall weakness in Q1. So we will always have an element of seasonality to the business but.
But we do try to focus on and control the things that we can control predict and see coming our way so on the gross margin side.
As we look at backlog and kind of getting the data from the ERP as you were talking about it has allowed us to be laser focused.
On addressing cut out some of the pain points to potentially minimize the again.
The wide range of the gross margins, we see but on a net net basis, we do see an upward positive trending in our gross margin now that we're able to see it I will caveat that.
We've done work, we're seeing benefits more work to be done.
But we're definitely feeling very excited about as we go along that's for sure.
Okay.
Thank you and congratulation on very strong Q1.
Okay.
Thanks, Andrew.
Thank you we will now take our next question.
From Chris Green <unk> from Needham and company. Please go ahead.
Hi, good morning, and thank you for taking the questions.
Just with respect to the.
The investment in inventory would you expect.
Sure.
Two to burn that down or would you expect additional investment.
There. Thank you very much.
Yes, so I'd say, if you look historically generally Q1.
Let's call it a bulking up quarter in terms of ordering raw material and as we think of planning up for the year.
So really this is kind of the.
Historical playbook, obviously were a little bit more robust demand and longer lead times at kind of amplified the impact of that.
Obviously, we are monitoring our inventory.
Closely here, but I think part of it is just regular way planning cycles with our customers now under the stretched out lead times. So we do expect to burn it down.
And obviously, if we had any concerns about that we wouldn't so putting out the orders there. The other thing I would say is regarding inventory is right.
Security is a little bit king of the hill. So we may not necessarily something right now in the next month or two but if we get a call out some of the heart to chase are hard to track down parts. We may do some security buys.
Again to make sure that we have some of the critical component, especially as we think about kind of.
Yes.
Also we are seeing a little bit of.
Let's see strong inflationary environment of some key components.
Sure.
The prices have doubled to extreme highs and where the customer says.
Not really too fussed about the price just go get it we are charging special pricing to the customers for us to go pay the unnatural unplanned pork costs. So we're seeing a little bit of that inflation in inventory.
Obviously, when a customer pays for it it's a good indicator that will come out and it will translate into obviously revenue and cash. So there is a little bit of a.
Natural and what's going on in there.
Got it very helpful. Thank you very much and.
With respect to Europe are you observing any signs that that demand could be impacted there are changing there.
Either in.
In connection with the conflict or just broader macro issues that Europe is facing thank you.
Hello again.
Everybody in the World today is deeply concerned with Russia, and how aggressive they will get in Europe , but from a balance standpoint at this time, it's the only affected about $1 5 million impossible SaaS and that's the amount of sales we do it in Russia today. So it hasnt had a great impact to us at all.
Perfect. Thank you very much and congrats on the great results.
Thank you okay.
We will now take our next question from Robert Marson from Penn Capital. Please go ahead.
Thanks, guys, congratulations on a solid quarter, I'll say, great and excellent and performing exceptionally well.
Or when you guys start to generate profit.
Profit margins have held that 30% gross margins and 10% after tax which is sort of what a basket of your peer group does.
Anyway once again.
<unk> paid.
To say that.
Okay.
Oh Hello Farooq.
Over and over again from our conference call.
Anyway.
Let's start with M&A.
Are you guys de leveraged enough to to do some bolt on deals this year and next year or are you still going to work on fixing the core business and getting those operating margins higher before you wanted to.
Might off some more deals.
Could you speak to.
So Bob I would say.
I don't think.
It's really.
Sequential playbook.
It's in parallel right. So we know that we are working on all things margins on our side.
And then also we continue to be out there looking for accretive M&A.
Free cash, but just to kind of folks I think we've spoken a lot about the gross margin.
A bunch of.
Initiatives launched so we're kind of well on our way and we're seeing early dividends about and obviously more to come a little bit of a journey on the M&A front, we're not from a kind of a.
Kind of a liquidity perspective, we understand our position there and kind of where our tolerances are we also appreciate the M&A environment remains hot so I think given our focus on margins the what qualifies as a good M&A candidates or target has been.
Davita it both from a quality of business perspective, and affordability perspective, so because of that we're not going to right now be chasing 12, 13, 14 times deals what it can be a distraction to us we just can't really afford that so as a result of that we're picking and more selective with our spots we were always looking.
And same thing in Q1, and Q2, we poke around it.
Obviously, I think we have a little bit lower check success, given the size and we're just not going to go crazy with.
Unnatural things, where it doesn't make sense. So the answer is in our minds, we're always poking around and we can kind of walk and chew gum at the same time here.
Okay. Thank you.
The last round of acquisitions.
Acquisitions worked out pretty well prior to the last few the company's history was very spotty. So I guess, we would the shareholders would prefer.
The next few to look like the last few rather than the prior seven or eight or nine or 10, where.
The combined acquisition prices are still higher than today's market cap.
So good work on the last round anyway on the on the electric vehicle EV Tech.
Would you would you guys be able to sort of you're pursuing a niche strategy or avoid avoiding the teslas and gms of the world and going for.
Like special types of vehicles would you be able to size that tam or you're just scratching the surface.
At this $6 million a quarter business in over three to five years does that have the potential to be a $50 million business $100 million business of $200 million and a way for us to sort of think about where that could be if you succeed exceptionally well in that business in the next three to five years.
I think some of the market, we're looking at and again, we're looking at a very niche marketplace.
<unk> to be about $350 million to $400 million market in three years, and we are hoping to get to that 33% level would be.
A target for us.
Excellent. Thank you very much for that specificity.
Do you guys now that you're sort of making progress on for routes profit margin goals would you be comfortable setting a 345 year revenue target that would include organic and acquired growth and some longer term range of profitability targets, so that shareholders could.
Really try to forecast, where this business might be on a cash flow and sales and profit basis in 2025, or some sort of timeframe like that or is it premature.
I think the answer is we would like to move into that direction, but right. Now we are doing a lot of work going on internally in terms of down to the SKU level to every car quite frankly level were in end markets and as we alluded to earlier, we're going through our kind of strategy of refresh.
Which will also for the us kind of where ultimately we want to go and be and look like.
Down the road.
Hope to obviously share some of that stuff with the street here.
But for right now that Theres a lot of variables that'll pieces. Obviously, we're in a lot of end markets a lot of regions and we just want to make sure that we are thinking through all of the scenarios before we share something but from a management perspective, our goal is to be able to share something ultimately with the street, but we're going.
Make sure we're going to do it methodically and appropriately before we put it out there.
Alright, and rather than a lot of great areas and there still is.
Unlike most companies that are earning.
At levels that one could even question the long term sustainability or sort of underwriting. So if you. If you put together a period of three or four years of double digit compound revenue growth and margin improvement.
There could be some significant earnings per share leverage over that period and it.
It would be good to see that as.
As a plan or a target.
Last question supply chain and raw cost do you guys think you're finally placed.
Pricing has caught up to the spike in supply chain and raw costs or do we do we still have further price increases to implement going forward.
Yes.
I think.
I'm, hoping it's leveling off but I'm not positive so much depends on.
Our company is going to increase production.
It's going to happen with China, and Taiwan, So theres still a lot of variables out there that we're debating with the auto industry and so forth. So again.
<unk>.
It's not as crazy as it used to be but I don't think I don't know if we can get back to normal for at least another six months.
And let me slip one then can you support 20%, 30%, 40% top line growth without significant plant expansions or capacity.
Capex.
Increases.
I would just say.
Bob.
Going through the exercise because we have one of the things that we're obviously thinking through right now right is one.
Our revenue line appropriate both on the pricing side, and where we are picking our spots. Once you address that then you can kind of back into do you have the appropriate footprint.
And what are you, making aware so it's something we definitely always thinking.
Around but we do know that if we need to increase our capacity and the output. We can run it obviously there'll be some cost where there will be additional shifts and we've seen that a couple of other places as well. So so we could another question to your point at this point I think to 2030%.
We're not comfortable saying the answer to that just now and again with the three product groups. Each one is different.
Manufacturing footprint of what's necessary to increase production.
Alright, thank you.
And we've got certain product groups is highly automated some other product groups are labor intensive.
So it just depends on what product group.
What we.
You can do certain things.
I think again with fluke are just so you know it's a little top line growth is not a high priority, we're more focused on margin improvement.
Alright.
But theres no product lines that are literally bursting at the seams that require significant capital expenditures to grow.
So you could pick and choose how you want to grow this year.
Yeah.
Alright.
Hopefully there is any real constraints right now.
Or anything that is.
Keeping us up at night, obviously, we're always looking to be more.
<unk> is an operating better sure and we're looking at are just kind of footprint, but nothing that we're really nervous about in terms of we're busting up it seems.
Okay. Thank you.
Solid quarter guys.
Thanks, Bob.
Yeah.
Thank you.
There are currently no further questions in the queue at this time I will turn the call back to your host.
Thank you very much for joining the call today and appreciate everybody looking forward to speaking to you next quarter.
Ladies and gentlemen.
That will conclude today's conference you may now all disconnect.
Okay.
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