Q3 2022 Bel Fuse Inc Earnings Call
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Okay.
Good morning, ladies and gentlemen, and welcome to the bulk fused silica quota, we need 22 earnings call.
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I'd now like to turn the conference over to Steven Hooser, What's the Seaport Advisors. Please proceed sir.
Thank you Claudia and good morning, everyone. Thank you for joining our third quarter 2022 earnings call 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 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 on our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, and our subsequent subsequent quarterly reports and other filings with the SEC from.
Time to time, we may.
May also discuss non-GAAP results during this call and reconciliation of our GAAP results to non-GAAP results that have been included in our press release.
Our press release.
Our SEC filings are available on the IR section of our website.
Now joining me on the call today is Dan Bernstein, President and CEO , Farooq, <unk>, Chief Financial Officer, and Lynn Hopkins Director of financial reporting.
I'll now turn the call over to Dan Dan.
Thank you Steve and thank you all for joining us on the call today.
I'm once again pleased to report a new record breaking quarter for Bell revenue adjusted EBITDA and backlog were all the highest in our seven year history.
From an adjusted EBITDA margin perspective, you would need to look back to the mid two thousands to see this level. The strong results were led by the collective efforts of our global team as we work together in a growing and are chancing the quality of our top line increased profit margins and simplify the way we do business.
Across all three of our product groups. We again, we continue to achieve certain target margins. There are specific to each SKU, you, including addressing negative or low margins. We are not done yet and it's still a material part of our revenue that still is being re size given certain agreements aside from price.
We continue to see rebuilt robust demand for many of our end markets sales into our commercial aerospace customers were $9 million for the quarter, an increase of 140% over last year's third quarter as.
As demand continues to ramp up for both new aircraft production and aftermarket requirements. The premise wiring market hit a three year high which contributed to $3 million or 36 36 increase in sales of our passive kinetics products over Q3 'twenty one.
End market sales continued to be strong up $2 4 million or 60% from last year's third quarter. In addition revenue generated from our distribution partners across all of Bell's groups grew $9 3 million or 19% over the same period last year.
This growth coming from a number of end markets and products is a testament to the diversity and resiliency of our business has been built over the years.
Lastly, as similar to last quarter, we had $9 5 million of raw material surcharges included in the third quarter sales, which is passed along to our customers.
Certain of our customers have been shortening the length of their purchase commitments with us.
Resulting in reduction of backlog that was particularly within the magnetic group the reduction that we're starting to see as expected and will continue as long as there is a labor shortage.
I'm once again very proud of our team and their continued effort that resulted in another record breaking quarter for Bell I look forward to closing our 2022 with the same level of momentum.
Before turning the call over to Lynn I like to take a moment to acknowledge three very long tenured partners of mine with Bell as previous announced Rey Raymond Chang, our VP of operations in Asia and Mr. Cho bells operation director of manufacturing site in Zhenjiang, China, where both we retired in January .
First on the corporate tax side, Joe will also be stepping down from his consultancy and advisory role next month.
Raymond joined Bel in 1991 has been vice President of Asia Operation Since 2007 under Raymond leadership, Our Bell Asia business has been successfully growth growth to be one of the most stable reliable companies in the electronic industry. Raymond has been instrumental in building long term customer relationships and also establishing silo alliances.
With Bell partners across many Asian countries.
We are at the core of Arabian our colleague just as probably a good trend for the past 31 years.
Mr. Cho one bell as long as 10 years associates for over 50 years, we have benefited from his dependable lobbied as a manager over thousands of our associates in China and sometimes on the most challenging circumstances.
As a former board member Joe has been a trusted advisor confidence the past 50 years first with my father, and then with me. He has been with US the current countless acquisitions change in tax regulation and he's been intervention instrumental in setting up the global tax structure that bell has today.
Not enough words to express our thanks to Raymond Chabot, Joe for that service and friendship over these many years and we wish them and their families. The very best in their future endeavors.
I'd like now to turn the call over led to provide further financial update update me.
Thank you Dan as Sam mentioned Q3 was very strong with year over year growth senior class each of our product groups overall third quarter sales were $178 million, an increase of 21% from the third quarter of 2021.
Gross margin for the quarter increased to 29% as compared to 24, 5% a year prior.
By product group power solutions and protection sales were $76 4 million up 27% from last year's third quarter and.
In addition to Dan's commentary on the EV sales and raw material surcharge invoicing. The power group also benefited from strong sales and our CMI business, which posted an increase of $3 million or 18% from Q3 21.
Gross margin for this group was 32, 4% for the third quarter of 630 basis point improvement from Q3, 21, largely driven by a favorable shift in product mix.
The pricing actions taken over the past year and some favorable impact from FX.
Our power solutions and protection group had a book to Bill ratio of 1.2 during the third quarter of 2022, and our backlog of orders of $356 million, an increase of 48% from the 2021 year end.
Turning to our connectivity solutions group sales were $53 million, an increase of 25% from last year's third quarter, mostly due to the continued rebound of commercial aerospace and premise wiring and markets.
Military sales continued to be challenged this past quarter, resulting in a 10% year over year decrease in the defense end market.
Gross margin for this group came in at 26, 1% for the third quarter of 22 up from 24, 8% in the third quarter of 2021.
While we've seen improvement in margins for this group over last year's third quarter.
<unk> below our target expectations.
As such we believe there is still much improvement should go on margins here and we'll be hearing about such activities over the coming months.
Throughout the majority of 2022. This group has been impacted by inefficiencies related to a ramp up in workforce needed to accommodate the rebounding commercial air.
These inefficiencies will be reduced over time.
The connectivity solutions group had a book to Bill ratio of 1.3 during the third quarter of 2022, and our backlog of orders of 116 million at September 30, an increase of 37% from December 31st.
Lastly, our magnetic solutions group had Q3 sales of $51 1 million up 10% from last year's third quarter.
Gross margin for this group improved significantly to 34% in the third quarter of 2022.
From 23, 1% a year prior.
Margins for this group benefited from the higher sales volume and also a favorable shift in exchange rate.
Chinese renminbi versus the U S dollar, which lowered our labor costs in China versus 2021.
The favorable effect of FX was really felt in September .
Our magnetic solutions group had a book to bill ratio of.
0.4 during the third quarter of 2022 and finished the quarter with $111 million worth of orders down 22% from the 2021 year end level.
This group is seeing most of the supply chain management on orders from our customers.
At the consolidated level, there were $34 million of orders that were scheduled to ship in Q3, which did not primarily due to component availability. This.
This is a similar level to what we've seen in prior quarters and we anticipate this waterfall effect will continue in the near term.
Our selling general and administrative expenses were $22 2 million or 12, 5% of sales up from $21 2 million in the third quarter last year, but down as a percentage of total sales.
Within SG&A the primary increases were related to salaries fringe benefits and rep commissions.
Turning to balance sheet and cash flow items, we ended the quarter with a cash balance of $70 9 million an increase of $9 1 million from December 31st.
Our working capital increased by $23 3 million from the 2021 year end.
We saw an $18 2 million dollar increase in our accounts receivable balance.
Our DSO were 53 days at December I'm, sorry at September 30th 2022, compared to 54 days at December 31, 2021 inventories.
Inventories increased by $33 9 million from year end.
Well there was continued investment of cash in working capital during the third quarter. It was to a lesser extent compared to each of the first two quarters of 2022.
In addition to changes in working capital other items impacting cash flows for the first nine months of 2022 included capital expenditures of $5 6 million and our continued dividend program, where we made payments of $2 5 million.
Cash paid during the first nine months of 2022 for income taxes was $7 5 million in interest payments totaled $2 1 million.
I'll now turn the call over to Farooq for additional color outlook and expectations for thanks.
Thanks Lynne as.
As we've noted in the past that was on a journey to better serve our stakeholders by streamlining the way, we do business optimizing our operational footprint and improving profit margins.
When I joined about 18 months ago, there was work to be done and while we can certainly celebrate our successes to date, our third quarter results reflects just another step in this journey.
Phase one of the journey was better alignment to our customers Skus and proper margin strategy.
And as Dan mentioned, we're not done yet and more progress to be made phase two is operationally focused to ensure we are better positioned for the exciting road ahead of us.
The operation standpoint, we continue to see better ways to optimize our business as noted yes, certain yesterday's earnings release, we have recently launched a series of initiatives to simplify our operational footprint.
The project is expected to be completed by mid 2023, we will initially be consolidated two of our magnetics sites is on churn and thing while China spread across nine manufacturing buildings in total.
Bringing them together into a single centralized site and Dominion County of southwestern China Reese.
Restructuring costs of $10 million or expected related to the China initiatives of this amount $3 6 million was recognized in the third quarter and we expect the balance to be recognized ratably through the third quarter of 2023.
Incremental capex spend of approximately $3 million as expected over the next 12 months weeks.
We expect to realize annualized cost savings of approximately $3 million of the China initiatives beginning in the fourth quarter of 2023.
As we set out on this project, we examined our options outside of China and concluded that a consolidation in southwestern China was the most logical choice driven by labor availability and predictability wages raw material availability the location of this segments customers and manufacturing partners our long tenure.
Engineering talent desires, our operational complexity of such move internationally in the midst of a zero, but we'd like to own policy to name a few.
Further the new site location is desirable given its geographic proximity to our existing manufacturing partner in Vietnam.
This project is complete we will have slimmed down our merchandise operations into two locations two main buildings.
On the connectivity side of the house a number of actions are now underway in both the U S and in Europe , and the U S. Our Tempe, Arizona, and Melbourne, Florida sites will transition their manufacturing operations into our existing site and well see come in the soda our Arizona facility will ultimately close in Florida will continue to focus on the high Tech engine.
Work do you do.
These actions are expected to result in a restructuring cost of $600000 primarily over the next two quarters with incremental capex spend of $350000. We expect to realize annualized cost savings of approximately $1 1 million on the U S initiatives beginning in the second quarter of 2023.
In Europe , we plan to exit our facility in Sudbury, UK and consolidate those operations into our existing sites in Chelmsford U K.
These UK actions are expected to result in a restructuring cost of approximately 250000 spread over the next two quarters with incremental capex spend of $1 million we.
We expect to realize annualized cost savings of approximately 650000 on the UK initiatives beginning in the third quarter of 2023.
Separately as previously announced we closed on the sale of one of our corporate buildings in Jersey City, New Jersey, resulting in a $1 $6 million gain being recognized in the third quarter.
These initiatives are a continuation of our operational work that gets us excited for the years ahead as a healthier company as.
As we look ahead to the fourth quarter, we expect topline growth in the high single digits versus Q4 2021 with a gross margin expansion from last year's fourth quarter to be more in line with margin levels from the third quarter 'twenty wanted to the one we just had.
We expect to see more favorable FX in this quarter as well.
On the backlog side, we know not all backlog is created equal and the shifts that we're seeing is a decline in lower margin products in exchange for a pickup in higher margin longer cycle end markets. We believe this favorable shift in product mix will position us well for 2023.
And beyond overall, we are very happy with our results this quarter and the momentum for positive change that continues to drive our global team.
While we've shared some of our recent initiatives with you today, there's still additional work to be done as we continue on our journey.
And with that I'll turn the call back over to Dan. Thank you Farooq as possible can we open up the call for questions now.
Okay.
Thank you we will now begin the question and answer session.
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And then two at this time, we will pause momentarily to assemble the roster.
Okay.
Okay.
Okay.
Our first question comes from Theodore O'neill from Litchfield Hills Research. Please proceed with your questions via door.
Thank you very much congratulations on the great quarter.
Yeah. So the consult a question on the consolidation of our operations.
You give us an idea of like why now is the right time for that to happen and it hasn't happened until now is there. Some event that occurred no no I think we have done substantial.
Validation over the past years, just as the same strategy going forward.
And looking at everything with a fine.
Sure.
I think you set it up with this one specifically and magnetics.
It's been on the docket.
But obviously, it's been a little bit of a rough last call. It three plus years.
And as we assess where we are we have a balanced the need of getting going on this with obviously some of the world.
Zero Coke zero Coke zero Lockdown Covid policy in China today.
So we ultimately took us a little bit longer to get going and alignment and so on but this was the time and we are we're excited about it and ready to go. So we feel confident that we are that this is the right time for us.
So you can never designed these things ideally, but this was the right time for us and we're excited to move ahead.
Okay.
And on the balance sheet if.
If if backlog continues to sort of stagnate here or not change very much do you expect to see inventories and accounts receivable. It would go down over time.
So just maybe on the backlog comments.
As you know historically, we have eight to 12 weeks as it depends on the business, let's just call. It a quarter worth of backlog today, we have roughly four quarters worth of backlog and partially to all the complexities within the supply chain elongated lead times at all the kind of things that were happening last few years. So I think our expectation would be.
Some kind of level ization or maybe a little bit returns to potentially.
My guess is that in the near term, but maybe we come back a little bit below that four quarters. So as we think about where we are today, we're seeing some of the management for some of the things that are scheduled to call. It a ship out late next year Q4 'twenty. Four. So this is really more of a management of that of that.
Supply chain, if you will from a customer's perspective, but we think fundamental demand remains strong.
On the inventory side.
I think we expect our sales to continue to grow I think in the backlog and it was a little bit different.
Inventory has.
More than we'd like it to be partially as a flight to security on acquiring raw materials, where maybe normally you wouldn't do that and as.
Linda said, we had $34 million, we expected to ship out that all of a sudden now sits in my inventory.
We do think a little bit of normalization of inventory will occur. It's just really hard to figure out when and where especially with the environment that we're in and stuff.
Okay. Thanks for the clarification on the backlog.
Thank you.
Sure.
Okay.
Okay.
Thank you. The next question comes from Jim Ricchiuti from Needham <unk> Co. Please proceed with your question Tim.
Hi, Good morning, this is actually Chris on for Jim.
Could you talk a bit more about the drivers of the gross margin improvement in which which contribution came from price and mix and how do you think about the sustainability of gross margins that level. You had mentioned the guide for the Q for the next quarter and do you expect.
The consolidation efforts to have an impact on gross margins. Thank you.
Maybe I'll just address that.
Got you.
As Dan said, we're focused on margins and they're.
Theres going to be a series of initiatives and the alignment that we've talked about here on the cost side is really to optimize our cost structure. So our expectation there would be is that it would be contributory in a positive way to our profit margins.
So our expectation is that we're not done yet right. So our expectation is continued improvement.
And we are liking the early signs of that improvement is going to come from quite frankly, better mix of products as we pursue new new products, ensuring that there's proper margin and customer alignment there.
And also kind of the cost side of it which we started so it really has to be a multi pronged approach and our perspective.
Change I would say is rarely linear we like our linear path that it's been on for the last handful of quarters here, but our expectation is we're not done and continuing forward momentum.
I would say on the margins this quarter here you know.
Les elaborate on it but kind of two things that for the most part offset here.
Kind of the low margin.
PPV.
Which obviously is a isn't the tractor to our gross margin profit. But then also we were favorably affected by effects, but fundamentally those two are kind of net to enlarge so wouldn't want to give color on that yes, sure. So just kind of building into it by product group on the connectivity side the margin improvement.
They're largely resulted from the the rebounding in the commercial air business that we mentioned so that had been depressed for several years and and that rebounding.
It was a pressure on our margins as we integrate the additional workforce in and up to speed.
The increase in that end market is certainly helping us there.
In addition to our distribution end market.
That was across the board across all three product groups was very strong this quarter.
So that aided the margin expansion as well.
On the power side.
This was largely the efforts of the team over the past several quarters here.
We've kind of right sizing our pricing.
And there was some FX.
Benefit in the power group like you have some manufacturing in China related to that group.
And then the.
Other factors for the EV end market, which continues to be small, but is steadily increasing year over year.
That tends to be at a higher margin.
And our <unk> business had a very strong.
Quarter. So those were kind of the main drivers.
On the power side and then magnetics. This is the business that would have had the most impact related to a favorable FX.
The majority of that manufacturing in China, but also included in that group is our signal business.
And a lot of work has been done over the past cut.
A couple of quarters.
Taking a a.
A better look at that business.
The profitability, there and just kind of a renewed focus and and so that's also contributing to the margin improvements in that business.
Okay.
Great very helpful. Thank you.
And with respect to the consolidation what does that process.
Particularly in China entail and how are you thinking about minimizing disruption during that transition.
Yeah. So we have a sites and we've already hired kind of initial buildup crew the site.
Already starting to.
Get set up.
And we already have.
Not an insignificant amount of people there already.
The product that's moving over from from our facility. There is a lot of know how and knowledge and quite frankly pretty pretty high level of engineering that goes into that product, so thats going to the challenges ensuring.
That we move it over so I'll disruption, so I would say we're being.
Extra careful here.
We have alignments internally and.
And we've kind of set up various process to ensure that obviously also we have to work with our customers as we get qualified up for the new site. So.
We're I'd say, we're being diligence.
And.
But obviously in all these things go.
Hope for the best and be ready for anything go sideways, but as of right now.
We started this for a few months now.
More will say.
Let's get a tactical crew of of associates, and so far we like our chances but to your point. It also offers the opportunity to potentially upgrade some equipment.
And also build some redundancy on some lines there for future expansion. So it really gives us an opportunity to.
Look at the way, we do everything and potential to lay out a more lean and efficient facility given were spread out across nine buildings.
And that will all be under one roof. So it's really an operational.
The improvement.
We'll be multi pronged quite frankly, so that's why it's really exciting for us but.
And to that it should be noted that we're very familiar with this area. We have about 200 people working in an area that understand the product line historically for we move mostly every 10 years on this product line because of the low labor because of the labor content that you always have to be.
The best way you can throw out throughout the world. So again I think the people I've been very experienced in this work very hard and we do understand the area. We're moving into very closely and we spent a lot of time and consideration as we mentioned looking at other areas like Malaysia, Indonesia, Thailand, the Philippines, and we still thought that.
China at this point it was our best bet also being as we mentioned close to our Vietnam, where we do have a strong subcontract that we work very closely with.
Okay.
Great. Thank you very much.
One more from me if I may with respect to the backlog have you seen any signs of <unk>.
Push outs or cancellations, given the changing macro environment.
Our backlog has been pretty strong around $580 million for the past nine months.
We do see occasionally push outs.
Yeah.
But again, we don't see any negative visibility of when lead times are going to come back to normal.
Again, but I think everybody is kind of walking on eggshells also.
Never experienced this period for such a long time, but again things stood from loss perspective still seem very positive from every area, we deal with and as we mentioned with the increase in commercial aerospace, that's really boding well for us so awesome.
And I think Dan said it here is fundamentally we think the demand in most of our end markets in the near mid and long term will be there. So we like the end markets we're playing in.
So even if we go through a little bit of management, if you will.
We're seeing a little on the magnetic side, we still fundamentally like the plague the areas, where we're playing within the customer door. So we feel that fundamentally.
Fundamentally we're set up nicely here.
Regardless of kind of look at what happened in the backlog.
Okay.
Great. Thanks, very much and congrats on the strong quarter.
Yes.
Yeah.
Thank you. The next question comes from Robert Marcin from Martin Asset Management. Please proceed with your question Robert.
Thank you congratulation guys.
On a.
Nice quarter.
Welcome to your peer group returns.
In both sales and profit margins than even the improved valuation.
Excellent.
I'm sure the shareholders are.
Really appreciate it.
Now that you're.
Sort of now that you're sort of growing up as a business from a profitability basis is there any chance you would consider establishing public revenue.
And profit margin targets over a multiyear period.
Or to have some sense of visibility as to where this company can.
Proceed over the next few years.
Has the structuring matures. Thank you.
Yes, so Robert Thanks for the question there.
We have.
Turtle targets and metrics that we are working towards.
In terms of putting them out there and providing guidance I think the short of it is we would like to yes, it's really a question of when.
And where we are right now with a multitude of ongoing initiatives.
Initiatives with more to come coupled with.
So a lot of call it a lot of the craziness in the world that we're operating today.
And quite frankly getting ourselves internally aligned to provide a little bit more clarity.
Pinpointing, where we want to go so it's a matter of women in our mind, but.
Not not if it's a matter of when.
Okay. Thank you well I would like to start with a bit of $1 billion sales target since youre not far from the $250 million quarterly run rate anyway.
Yes.
That was.
Yes.
Yeah.
I have to say.
<unk> came to Bell I think he's done a tremendous job to really focus on the margin more importantly, it's a nice call to have a $1 billion, but without the profit margins.
Does it make sense to us any longer and I think thats. Our key focuses that we werent really good revenue really good margins. So I mean again.
Top line growth is.
For us.
But more important is the margin side of things.
As you know Robert Playbooks kind of evolve and change and right now we're doing a lot of the margin improvement stuffs.
And then once we set out a course.
We're seeing our margins.
Going up here.
To your point.
Obviously, we're not sleeping on revenue growth, we're still focused on that were hunting for business, but it's just we have a different potential lens of our clients that today. So.
We share your aspirations of being a bigger company, we wont do it the right way and this time it is an environment where.
We're kind of doing that certainly one other thing I would offer up is if you look at our profit that has gained in the last four quarters, Let's say, let's say for example, EBITDA.
If we had to go out there and buy this EBITDA cost us a lot more here, we're able to get internally for relatively low spend so we still think there's more to be got here on the cheap if you will.
But ultimately yes.
Yes, we were focused on growth and the long term for sure.
Okay.
Regarding R&D it seems as though you can afford to.
And a little more now that there is a.
Can we be more profitability in the business to further innovation and new product introduction.
Last year, you guys talked about having a very high year and new product introductions.
This year looking and are you comfortable with the amount of productivity and innovation you're getting.
From the business as far as.
New product introductions and trying to maintain some Tom.
Producing power with with semi proprietary features and technology. So again I think again from an R&D standpoint, increasing R&D I don't think we have to I think each department of our three product groups have strong R&D I think we are committed to NPI.
Our goal is almost too.
Increased MPI almost 50% byproduct group over the next three years, we're doing a lot besides evolving product ourselves, we're looking at working with partners throughout the world.
Start with a private label agreement, we realize that we don't have to invent everything we sell we have tremendous distribution channels that we can put product through the best example of that is iOS. We felt that <unk> had a great product that fit our niche very well rounded out our power supply market.
We had a we were selling their products under our name for about three years when they decided they wanted to sell they came to us and in shopping around and we were able to pick up that business, we feel for a very reasonable price based on our long term relationship. So again it's.
As much as we're doing products.
Helping ourselves we are committed to grow through private labeling and increase our sales every way possible.
Okay. Thank you.
Then one last question as the company starts to.
Is this growth spurt, perhaps starts.
Starts to fade a bit to more normal levels and the call on that.
Our balance sheet.
Working capital is reduced and the company frees up cash.
As the management team have any expectations of <unk>.
And reentering, the acquisition business and which areas of the market would you like to acquire if so inclined.
We never left the acquisition market, we've constantly looked at acquisitions today, we have four acquisitions of NDA as we have side.
We do believe that acquisitions are a key part of <unk> growth going forward.
And we would not prejudiced I think all three of our product groups look at areas, where they can strengthen themselves and we will continue to look in those areas and who can give the best benefit to the company.
Alright, Thank you very much congratulations again on a good quarter.
Thank you.
Yes.
Thank you ladies and gentlemen, just another reminder, if you'd like to ask a question. Please press Star then one if you'd like to ask a question. Please press Star and then the next question comes from Hendi <unk> from Gabelli funds. Please proceed with your question Hendi.
Dan for Oak and Lynn and then congrats on strong results.
Thank you.
First question is from Farooq, a farmer can you characterize how much price optimization have been completed and how much.
How much.
How much more to go.
Good questions.
Our revenue potentially changes, but Florida coast throw a shot in the dark here to I don't know if you agree. It's I'd say, we still got another 30% to go maybe.
Or call it call it 25%, 30% would be an educated guess, but we do know it is still meaningful to go and it is not reflected yet in our results. So these are discussions are happening in the background have happened at <unk>.
Contracts are coming up so I would say, it's not an insignificant amount that we still need to price optimize.
And then final question sounds like 25% to 30% is that based on the SKU or is that based on a couple of sales volume.
Bel fuse has outstanding.
Our backlog and then record sales performance.
On the other hand, I think we kept hearing.
Turns about inventory correction.
At customers and distributors and then.
While they may not be the same markets.
I think there's.
Okay.
There is a growing concern about.
Weaknesses like broadening in some areas. So how should we compare and contrast with.
Are those concerns and.
That sounds like outlook for Bel fuse.
Based on all the data we have today and we hear those concerns in the marketplace, but we don't see them based on our backlog based on our customer relationships based on the lead times, we have a majority of our semiconductor companies.
We haven't seen anything to make us panic, but the cliff is coming or ethnic cliff is going to come so at this point.
We are very bullish on the company and what we see in the future.
And again as we mentioned that.
Military and aerospace, which were laggards over the past three years, we only hear very positive strong things from the from the orders and from the salespeople.
So again, that's why I think 10 now we are at.
Bullish at this stage.
I'd say, a buildup of Dan said think about it more simply.
Magnetics power has been leading the way and connectivity business, we have a ways to go.
And we will get there because it has happened in our power Magnetics group. So our results despite the records.
These have been delivered with with call. It two of our three segments, leading the way it so even if we see a little bit of weakness to Dan's point on those two.
<unk> businesses in the early stages of waking up.
And then as we look at beyond kind of the connectivity business, both on the revenue and margin side.
We know what needs to be done there and then as we look at things like power Theres some very.
Growing things in there as we think of E mobility, and a real start to see some nice things as well our distribution business.
Back to one of the comments always becomes mindset diversity of contribution and we're doing this not with everybody running hot so I think that should give folks.
Comfort that that we're touching all three segments work's being done all three segments.
And we like our hand.
Nation to that if you look at our looking at the reports that we're reviewing and our industry most people falling within its 6% to 10% sales increase and we're hanging at 20%. So we think that we are doing many things right and that our MPI strategies right. How our refocus is right. So we are getting a though I would say.
Hockey, maybe not cocky, but confidence that we haven't had in the past.
Based on a lot of the data that we're reviewing at this moment.
And if I can just add Andy to your question on backlog, while we are starting to see particularly in magnetics.
That to come down a bit it's important to note it's really be.
It's really a shortening of the length of the backlog that we're seeing.
So for example, if someone had four quarters worth of orders on the books with US maybe they only want to have three quarters on the books for that so it's that fourth quarter out.
That's that's getting canceled at this point because they don't want to have that level of purchase commitments to open that far out. So it's more of a shortening of the backlog that we're seeing right now.
And not an indication of the overall demand.
Dan do you have any insight into the data center market, including networking and it infrastructure.
Just from our opinion, that's one of the areas have been a very difficult area to be.
To have the proper margins, we want going forward. So for example, if you look at data centers.
<unk> four or five years ago was a key customer of ours, and we decided to drop out of that business. So again.
We here so from a data center standpoint.
We're a lot more exclusive and the customers. We look at from networking, we do deal with a lot of major networking companies and we do feel that go ahead, Ed market is still very stable for us the only problem that we have with the networking companies like most industries. The problem is they can't get to semiconductors and on time and based on that.
They're putting up some shipments on hold until they can get to semiconductors. It.
And their inventories so they have to rightsize their inventory.
Make up for the lost semiconductors, what they thought they would be bringing yet.
I see yes.
And then one more question so.
So in terms of manufacturing footprint location real estate assets and operational efficiency would you be able to show what kind of metrics.
Do you usually look into.
Metrics for kind of where decided to consolidate our <unk> factory.
Yeah.
Yes, so I mean, it's really nothing too significant as Dan said, we are going to China for a very long time.
General labor availability wages.
Real estate rent right. So what's your cost to operate the other thing in China, that's very critical is.
As you know our Q1 generally tend to be a little bit weaker due to Chinese new year, where a lot of people come home and it's kind of a change in disruption of the migration patterns. We saw during COVID-19. So one of the nice things about kind of this new facility is it hits on a lot of those metrics and one of the bonuses tends to be more of a local workforce. So we think it will minimize our turnover and.
As we onboard people people there also to the a lot of them I think live in that area, where we will be.
So we think a lot of that's going to be positive for us.
And then also as Dan said in this situation we have.
Not a insignificant contract partner in Vietnam.
We're getting closer to their other side of the border could potentially open up interesting opportunities.
So.
Also the big overarching theme from my perspective is getting under one roof designing a facility that's meant to be a little bit more moderate versus spread out across our facilities is definitely no nothing to sleep on.
And also obviously, we're still close to a lot of <unk> that our customers transact to work with so we'll look at some of the same things as you know.
We are pretty textbook and then obviously you get into things like.
Square footage and whats my needs for today and Tomorrow is there opportunity for expansion. We also look at employee head counts, we look at potential automation upgrades that we've been doing here. So it really is a blank slate for us to draw a great facility and that's something that we haven't been for years, because we've been in a current location.
<unk> for 25 years 30 years, so the world's changed a little bit of work proving a brand new building so.
There's a lot of the things that you would think about why you would miss.
Yes.
I squeeze one more question.
So with regard to the China.
Zero tolerance policy I assume there was some impact in the last couple of months on Bellevue sales. So what are puts and takes that we should thinking about let's say when we are in.
In the first half of first nine months of next year, so that we know.
How we should take into account that there was some impact of China locked down.
In 2022.
I don't think there was any significant lockdown that affected the revenue.
And we do have a lockdown when it did happen in the past the year because it was only a minor lock that we can make up the labor over the weekend are working you know one of the days.
After the Lockdown and open up so we've been very fortunate.
Not to be hit at all.
From a revenue standpoint going forward. They are very careful and theyre very watchful and they move much more aggressive in China than any other country in the world. If someone does come down with Covid. They do react very quickly. So we can't predict the future, but we do have all of the Covid protocols, we put in place all remaining.
Hong Kong to make it as has.
Clean as possible a place to work and I think there's less of that we had was a mark to market. So they were locked down for just a handful of things like three or four days in March so no impact can be in Q3.
Yes. Thank you so much and then great works and then congratulation again, thank you.
Thank you.
Oh.
Thank you. The next question comes from Robert Brooks from brick by brick capital. Please proceed with your question Robert.
Hey, guys. Thanks for taking my question just wanted to congratulate you guys first.
Quarter.
Thank you.
First question for Dan.
You guys you mentioned at the top of the call that the EBITDA margins are similar to what you see what you guys were seeing in the mid two thousands I was wondering could you maybe give me could you maybe give us a little more color on what is what are the differences between the business now versus then.
And obviously there is the.
Strategies that you guys have been implemented over the past two years in terms of making the business more efficient, but maybe it was at a different product mix back then.
I think the key.
Key thing, we have to give I hate to say it but I have to give farooq a lot credit when he came aboard two years ago to really refocus the company, where we have to be to be successful and it was my fault I think we were too driven to be the $1 billion company from a revenue top line point of position and maybe we took business.
And that we should have taken in so I think with substantial helpful. Farooq and the teams have everybody to refocus where we want to go in at a strong that we saw initially we really had to evaluate every part of the business and mostly from a margin standpoint that we were selling a we had customers that really didn't fit where we had to be than we had skus.
It didn't fit so we spent a great deal of getting first working.
Working on the data for each group of each division manager can look very specifically at each part number to see was in the Red Green Orange levels and refocus our energy.
And then we all work with the long lead times.
Pricing did not become a factor.
Most of our customers today are really focused on delivering our pricing so that gave us the leeway to.
Implement where we do have fair pricing.
Customers are.
We're paying a fair amount for what what we gave them.
And I think that's been the major change.
And I think from a product and we got it right from wrong is back in the mid two thousands there was largely magnetics heavy concentration in one product group.
Yeah sure. So so back in the mid two thousands we would've been about 80%.
Magnetics.
We are focused on the networking space.
Heavily in China, largely China manufacturing at that point.
Over the past 20 years.
We've done a C.
Series of acquisitions diversified our operational footprint, our product groups were kind of borne over that timeframe.
So just lots of moving parts and to Dan's point the revenue.
It had been the primary focus over the years to build scale.
And and margins, we're just not a focus for a period of time.
<unk> joined <unk>.
Focus has definitely turned back onto onto margins and that's what we're seeing today.
That answers it perfectly thanks, guys Thats all I have for today.
Yeah.
Okay.
Thank you. The next question is a follow up question from Robert Murphy from Murphy asset management. Please proceed with your question Robert.
Thanks for the follow up Dan.
Few quarters ago, we talked about the upside to the EV business and while it's small in rapidly growing it does seem to have potential to grow into a nice sized business in the next three to five years.
Since about a years passed do you have any more.
Insight into that business and how it might progress to the $50 $60 $70 million revenue level over the next few years. Thank you I think.
We're putting money into that business, it's a key area, but also for us from an acquisition standpoint.
We do believe that it should become a 70.
Million dollar business and we would hope in five years, possibly a 100 million dollar business. So again I think we're doing all the right things. Initially we were using for North America, we are using our Rep network.
There are many different customers, but for this particular product because of the unique.
Design ins and so forth, we hired a direct person for North American a worldwide global manager. So yes, we do think it's probably one of our major growth areas in the company.
Thank you.
Robert does that conclude your question.
Yes.
Thank you so much.
At this time, we have no further questions I'd now like to turn the conference back to Dan Bernstein for closing remarks. Thank you Sir.
Once again, thank you for joining us today and we're looking forward to continue this momentum.
Hopefully this is just the beginning as to reflex to say have a good day.
Thank you. The conference has now concluded. Thank you very much for attending today's presentation and you may now disconnect your lines.
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