Q4 2022 Bel Fuse Inc Earnings Call
Good morning, and welcome to the fourth quarter 2020.
22 earnings call.
At this time, all participants are any listen I'm emerge.
A brief question and answer session.
For more presentation.
If anyone should require operator assistance during the conference Keith <unk>.
On your telephone keypad.
As a reminder, this conference is being.
Recorded.
Now like to turn the cold <unk> teaching Mary Teen movie Young.
Please go ahead <unk>.
Thank you and good morning, everyone before we begin I'd like to remind everyone that this conference call contain certain forward looking statements regarding the company is expected operating and financial performance for future periods.
Based on the company's current expectations.
Results in future periods may differ materially from those expressed.
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.
<unk> and our filings with the Securities and Exchange Commission, including our most recent annually.
K and our subsequent quarterly reports and other filings with the S. C C from time to time.
They also discussed non-GAAP results during the skull and reconciliation of our GAAP results to non-GAAP results have been included in our press release, a press release N. R. S. D. C filings are all available at the I R section of our website.
Joining me on the call today is Dan Bernstein, President and CEO proved to X CFO and Lynn <unk>, Vice President of financial reporting an investor relations with that I'd like to turn the call over to death Dan.
Yes. Thank you Jade, we're very pleased to report a strong finish to a record breaking year at bell wherever reset where we demonstrated that even during a year with a challenging supply chain environment. Our teams dedicated hard work has paid off.
We would like to thank all our associates for allowing us to reach these milestones.
Each of the three product groups, so a double digit top line growth this year.
Without power group, leading the way with a 32 per cent increase in sales.
A year.
Excluding the 32.5 billion of raw materials surcharge in Boise injury, 20th 22 Palace sales were up 17% over 21.
Of a stroke and protection products and C. U R. E OS products products have all had record sales and twenty-two recycling double digit growth over the respective twenty-one levels.
Over the past three years the power group has been a major focus.
Through a combination of strategic acquisitions talks.
Target investments and easy and a thorough review relog at a S Q profitability.
<unk> closed 22 with sales 288 billion gross margin of 35 per cent.
Even within the 22 physical year this product groups.
Sure <unk> expansion every quarter.
27.1 quarter 128.2 recorded 232.4 a quota.
Q3, and finishing quota for at 33 per cent.
Okay activity solution groups or 13 per cent increase in sales in 22 over 21 with this segment.
Herschel aerospace wherever it is closed at $31 billion for the year up 75% over 21 highlighted by jumping aftermarket revenue.
As well as continued support a new aircraft production.
<unk> through our distribution partners rebate sure throughout 22 with Silbaugh Steadying softness noted it our military and network at markets.
Are magnetic solution group posted 11% increases thousand 22 versus 21, largely due to a hydro bad for about networking customers, particularly during the first half of the year further her signal transforming business had an increase in sales of 6.8 million.
22 primary due to price increases taken earlier this year the higher the bed from its medical industrial customers <unk>.
<unk> and dishes were also implemented at Cygnus factory in the Dominican Republic through the year of the.
The combination of these accident resulted in a 3.2 billion of EBITDA twenty-two versus what was previously breakeven business and 21.
The <unk> the <unk> the magnetic solutions group is going through a major facility consolidation project in Asia as of the last quarter.
<unk>, we're encouraged 7.1 billion and restructuring costs related to this book and anticipate an additional 3.3 to 4 billion a costa because incurred through the corridor third quarter of twenty-three.
There are currently 180, so searches.
B G extra Saturday and we expect a head count of <unk> during the first quarter of 23.
<unk> is being aided by approximately 10% of the indirect staff or white wig Big City, we agreed to work at the new security going forward, providing considerably a major factory practices of dollars.
This project is program is Plaid is scheduled to be completed by the end of Q3 23.
Even with the best financial results in our history, we will continue to strive for approval Ah largest size I recognize is more work to be done with this phone.
Or the age of our side Ah do global head of people joined the company November Suzanne focus I've been driving a continuous improvement rebellious culture compensation program.
That recognition developed.
And of course pretentious.
T for our most important asset based on the culture assessment for the late 20th what we understand there's a bear the changes that need to take place for <unk>.
One of our associates to thrive changes take time, so they progress edge steady practice at debate or this <unk> 2022.
February the Cubs throughout twenty-three <unk> fully up to speed.
22, our bedroom, it's heavy gauge it executive all sides session, where we discuss our dear lots of strategies three from interruptions of a day to day responsibilities.
It was from these discussions that we assess our global footprint invaded difficult decision related to operational restructuring conditions.
The four facility consolidation project that last corridor are all part of a <unk>.
Target if a complete <unk> later this year are exactly strategy session would continue twenty-three within a focus on further improve it the company's bottom line.
We're proud of war associated to the job, although this past year and have that collaboration efforts translates into our best results.
This is a significant progress and it should be celebrated the past few years have been focused on writing the ship straightening Delta dash it as a business. Many of these initiatives identify will be completed by the age of 23.
Without the <unk> focus rebel future hazard organization.
At this point in time, I would like to turn that.
All over the lid to update on that for the Itchiness.
Thank you Dan.
Fourth quarter sales for $169 million, an increase of 15% from the fourth quarter of 2021.
Imagine for the corner increase to 31% as compared to 26.7% a year prior.
Byproduct crib towers relations and protection sales for 82.1 million up 39% from last year's Fourthquarter.
Led by an 11.1 million dollar increase in sales of our front and power products.
4.1 million of higher sales of industrial power products.
3.8 million of growth and E Bay sales.
These increases 10.5 million related to invoicing a premium charges on materials.
Gross margin for this group was 33 per cent for the fourth quarter.
Hundred and 10 basis point improvement from Q4, 21, largely driven by a favorable shift and product next the benefits of pricing actions taken over the past year and some favorable impact from F X.
Our power solutions and protection group had it up to the ratio of one point what during the fourth quarter of 22, and a backlog of orders of $376 million, an increase of 48% from the 2021 year and.
Turning to our connectivity solutions crib sales for 47 million, an increase of 8% from last year's fourthquarter, mostly due to the continued rebound at commercial aerospace and strong sales Tara distribution channels.
Military sales continue to be challenged this past quarter, resulting in a 12 per cent euro per year and decrease in the defense and market.
Gross margin for the script came in at 23.6% for the fourth quarter of 2022 down slightly from 23.7% in the fourth quarter of 21.
Throughout the majority of 2022. This group had been impacted by inefficiencies related to a ramp up in the workforce needed to accommodate the rebounding commercial air.
The connectivity solutions group had a doctor tell ratio of 1.806 during the fourth quarter of 2022.
In a backlog of orders of 119 million at December 31st and.
An increase of 40% from the 2021 year ends.
Lastly, paramagnetic solutions group had Q for sales of 40.1 million downtown percent from last year's fourth quarter.
Gross margin for this group improved significantly to 29.5% in the fourth quarter of 2022 from 22.9% a year prior.
Margins for this group benefited from pricing actions taken over the past year, and a favorable shift and exchange rate Chinese remedy versus the U S dollar, which lowered our labor costs in China versus 2021.
The magnetic solution scribe added book to Bill ratio of 0.49 during the fourth quarter of 2022.
Finished the quarter with $91 million worth of orders and dialogue.
Down 37% from the 2021 ear and level.
A reduction in backlog for our magnetics products is largely driven by level of demand from networking customers as they work through their inventory on hand.
At the consolidator level, there were $27 million of orders that rescheduled to ship in queue for which did not primarily due to component availability.
Are selling general and administrative expenses for $25.1 million or 14.8% of sales.
From $21.9 million in the fourth quarter last year, but down slightly as a percentage of total sales.
Within SG&A the primary increases were related.
The salaries fringe benefits and recognition.
Turning to balance sheet and cash flow items, we ended the quarter with a cash balance of 78.3 million an increase of $8.5 million from the 2021 year and.
Are working capital increased by $28 1 million during 2022.
We saw at $21 million increase in our accounts receivable balance.
R. D S L where 58 days at December 31st 2022, compared to 54 days at December 31st 2021.
Inventories increased by 33.1 billion from.
Last year and.
Well there was continued investment and inventory during the second half of 2022, it was to a lesser extent compared to the first half of 2022.
In addition to changes in working capital other items impacting cashless for full year of 2022 included capital expenditures of $8.8 million and our continued dividend program, where we made payments of $3.4 million.
Gas pain during 2022 for income taxes was $14.6 million in interest payments totalled 3.4 million.
I'll now turn the call over to prick for additional color and outlook on 2023 correct.
Thank you and Hello over when it's nice to speak with everybody.
Looking back at 2021, and 2022, we recognize the tremendous amount of contribution and work that has gone into getting bell to disappoint an hour journey. This has really been an all hands on deck efforts across our global team members and locations.
Dan mentioned, we're happy to close out 2022, with the wind at our backs and head into 2023 and beyond with a sharp intense a focus and direction in our pursuit.
As we looked out to 2023, we see a good amount of opportunity for both growth in certain areas in margin improvements.
While managing continued supply chain constraints in certain components inflationary pressures COVID-19 restrictions easing in China, and our previously announced facility consolidation plans, we will continue to pursue growth in certain markets lean out the cost structure imposition bell to capture the longterm positive tailwinds related to <unk>.
<unk> broadly speaking.
Pivoting to backlog for 2023.
As we enter 2023 this quarter 20th 24, we saw a sub.
One book to Bill for the first time in a while as we've been working on reducing our lead times and getting deliveries out the factory.
We're working with our customers to get this rationalize as it related to their needs today versus what they thought six to nine months ago.
While we see some softness in demand and consumer facing and markets. We believe the larger factor here is customers needing to work through their high levels of inventory on hand, and adjusting to the reduction in lead times across most of our products.
This is particularly the case for magnetics.
On the other hand, we are seeing robust demand in the areas of commercial aerospace military and Emobility.
To that end and as noted violin, we're seeing a rotation and contribution aware the bookings are coming from.
<unk> has been steady connectivities growing while magnetics of slowing a new orders that when all added together our backlog is relatively flat.
Short lead time in certain areas are coming down in other areas, increasing and bookings that are coming in our higher quality on margin.
Using backlog as a basis for assumptions 123 revenue outlook first we want to level set on the starting point.
It was alluded to earlier and some of the commentary 2022 total revenue was $654 million.
But when normalize for the raw materials surcharged invoicing revenue was closer to 6600 $22 million.
To the best of our knowledge and using the $622 million as the base, we expect top line to be flat, two plus or minus low single digits on either side of that given the number of moving pieces in either direction.
To give you a little more insight and highlight a few key areas are.
Commercial air business should be one of our leaders of growth. This year given some key positions were on coupled with overall growth.
<unk> physician of RMS in early 2021 has set us up to capture this bro cycle and a very nicely both on the top line and Martin side.
Q for direct sales into commercial air customers were 8 million up 55% from Q4, 2021, and we expect sales to grow in 2023 to be in the double digit territory.
This is a great detriment to our team in their abilities and strengths and bells position on the commercial aerospace and market.
On the defense side following a few years of low order volumes. The current global affairs in Europe had been beneficial to US we expect the top line growth in the defense segment to be in the double digit zone for full year 2023 as well.
For both commercial Aaron defense, they've spent a lotta time, improving them last year as they sit within our connectivity group as you recall, we have previously spoken about the significant ramp and head count that occurred in Q1 2022.
Virtually impacted our margins throughout last year for.
Four 2023, we expect to have a meaningful reversal here and see the teams hard work pay off.
Unnamed mobility side, we nearly doubled growth in 2022 over 2000 $21 million to $20 million, we would not be surprised if we had another double again in 2023 and have committed new capex dollars in 2022 to expand production the meat this robust demand.
We also doubled down on strategic investments into an electric where are we now have a one third minority stake.
The ability to expand our ownership of certain profitability thresholds are retained.
Electric consists of a highly skilled engineering team focused on onboard fast charging technology for the commercial vehicle use they are very similar to bill in terms of customers and market focus, which we believe is the right place to be.
Through this partnership we expect to Johnny grow and channel real revenue synergies, we want to welcome our new partners and are looking forward to an exciting road ahead.
On the networking and data center side, we remain bullish in the medium term given all the secular tailwinds and then M market, but for 2000 twenty-three we will see an overall slowdown as it digest the rampant growth since 2020.
We serve this market out of both our power and magnetic script.
The supply chain and Magnetics has smoothed out given there are fewer components in this process and this is where we are seeing the reduction of the longer term backlog <unk>.
<unk> for our Magnetics products are about currently running 20 weeks, which is half of what they were this time last year.
And the power side and given the constraints uncertain Ics demand here remains robust. So net net this market is a tale of two cities for us in 2023 strongly believe in the medium to long term prospects of this business.
This also is a testament to our product strategy diversity.
Of course, one no businesses and huge adverse economic cycles, our business is highly diversified and a line was secular trends in mega trends.
<unk> areas.
Head, we continue to seek continues strength and bell as the breadth and depth of our portfolio are deep customer collaboration cost takeout initiatives and doubling down in key areas underpinning are profitable growth.
Four Q1 2023 is off to a good start with strong January numbers. Today. We believe Q1 2023 will be up mid to high single digits over Q1, 2022, we expect a better performance on the margin side as well compared to Q1 2022.
Though down from Q4, 22, and two due to the usual seasonal impact from the Chinese new year to our business.
Four 2023, we're also focused on getting our previously announced consolidation plan to fruition, while continuing to look for areas of improvement to sum it up.
We're excited about 2023 and believe we are in a great position to perform well due to our focus on continuous improvement and diversity of product offerings and and markets, even with an uncertain macro backdrop with that I'll turn the call back over to them.
Damn.
Sorry can we open up the call for questions. Please.
Okay. Thank you, Sir we will now be conducting a question and answer session.
I would like to ask a question Keith <unk> and then one on your telephone keypad.
Confirmation code will indicate your line is in your question Q you.
You may place, Scott and Linn too if you would like to remove your question from the queue.
Full participants using speaker equipment, it may be necessary for you to pick up your handset purple, replacing the stocky.
One moment, please while we pose the question.
The first question comes from Seattle O'neill O'neill from Litchfield Hills Research. Please proceed with your questions here, though.
Thank you and congratulations on the good quarter.
Uhm question that you can pick up equipment questions about in electric.
Clear is this a customer or are you selling the product selling product to them or both.
Okay.
They are a manufacturer of a product they have a complementary price of its own business week, okay equity stake in the business.
And we think we bring a complementary skills set on the operations of business side of it in terms of sales and marketing customer connectivity, a manufacturing site that with will be additive. They have a great product with a lot of nice software packaging capabilities.
But it is an ownership stake.
And for Lucas, it's a little bit more classic I'm, sorry, just a little more clarification or wouldn't get hold of a manufacturer at this time.
You see it more as a technology product portfolio. There is a process now.
Building up their sales. So they are at the initial stage, we felt very strongly that their product portfolio, along very nicely with our product portfolio going forward. So for us. It was a more of an extension of R&D. There are D capabilities and how we believe that they have the best products going forward in the E V marketplace, where.
We participated.
That makes sense and what sort of milestones are you looking for to take further investment stake in the company.
<unk>, Yeah, it's really a revenue in certain profit thresholds it will be the key guiding poster.
Okay.
And fruit you mentioned sort of leveling out the revenue for this year and talking about how there was.
Expedited costs et cetera, there was about $32 million.
Of revenue in the year.
I would've thought those would be like Super high margin part of the business.
Was it not.
No it's not.
Margin.
It's actually lower margin than are kind of.
Gross Martin so I'd say that actually brings us down on as a percentage of sales.
But.
These are not intended to be a high margin moneymaking, saying this is really a convenience expedite these trying to get products of the door partnering with our customers and paying let it upset a natural fees just given the times. We are in so so no. There are from a percentage of sales that they're actually diluted okay.
And Lynn $27 million in orders that didn't shipped to the component availability is that in some specific area.
That's it's really across the board to Ya.
Yeah, probably largely in power and magnetics.
Not not so much on the connectivity sign.
Alright, thanks very much.
Thank you.
Thank you. The next question comes from <unk> from Needham and company. Please proceed with your question Jim.
Alright. Thank you good morning, I, just was hoping to get a little bit more color.
The Q1 outlook are you assuming that there's still this relatively high level of raw materials surcharges and a quarter and then is this a case, where you see that gradually dissipating as we go through the year and eventually going away Q2 Q3.
Yes, yes.
Yeah, I would say.
We start really seem as in in a in a in a noteworthy amounts in Q2 last year.
We thought it would slow down into Q3 Q for it actually didn't.
So it's really tough to predict that but we don't think they're going to be around here. Because these are not part of the normal way of doing business S. For Q1, we are seeing stole some PPV surcharges in there.
But it's really hard to to take a guess at what that would be so we generally are not gonna try to try to guess it.
Given that we do know this is not usual.
Got it.
Given us.
Percentage growth and Emobility I I may have missed it but.
Have you been able to quantify the level of the mobility shelves in the in the quarter and yeah, what I'm trying to get through is how we're thinking about the outlook for this business, which clearly it sounds like this is one of the areas of the business that you see some pretty good growth opportunity as you as you look at that only the current corporate further it too.
23.
S M. I can take that one so <unk> sales for Q4 or $6 million and that was up from $3.2 million in last year's fourth quarter and just to to clarify we did have additional sales out of our email ability grip throughout the year.
But these numbers are just looking at products that go into actual EV and application. So.
$6 million for a Q4 versus 3.2 and last year's Q4.
On an annual basis, it was right around 20 million versus $10 million last year.
And just with respect to.
The line of sight you have in this business. It sounds like this is an area of the business you feel still has some some pretty good growth prospects.
Prospects for this year is that fair to say.
Yeah, if if we do have the grew across the first year I think it.
It would not be.
We definitely see the potential for it to double again.
This year.
We have committed Catholics starts to expand our production capacity.
And I think we just ideal and you get a little bit of help from the component shortage of side that will help us to get that stuff out the door. So it's it's.
Rapid growing line for sure.
I know that if you have any more and find out but that's gonna <unk>.
Nope.
Got it and just are are the magnetic solutions group. There. Obviously are so some puts and takes in that area and I guess, what I'm wondering is as you do you have a sense as to when some of these customers will be working through.
Ruby inventories that they have and have one quick follow up thank you.
Okay on that one.
We do a lot with a network of people and again their hands are tied with it it's really their hands are tied with basically they can't get power supplies. It from us because of the Ice's. So we have we have customers are X paying fees to us on the other hand Ah canceling magnetics from us because we can't get the I C as in properly.
We still think there's a long wait time out there, but to flush out the inventory for the magnetic side, we think you'd probably be at least six months to nine months, having six months, probably best case.
Much more worst case.
Got a as a follow up to that is just.
You're still seeing pretty good demand clearly on the power side sung from this segment of the market is here.
How do we think about the potential that as things begin to normalize achieve the level of demand in this part of the business slowing a bit.
Again, you know.
I think the sales.
Cause of the icy constraints.
I think again, our backlog I think the difference we see there is instead of a <unk> gives us four orders during the year Goodbye now gives us what are the new year. So we spent a lot more focus on the backlog where that staying compared to the bookings and for the Palestine backlogs pretty strong.
Do you think we we do have a lot of M. P. R that is going on with the with the acquiring of.
C Y that's been a real growth engine Plaza easy that's really leading the sales growth, we still think that Perez.
Opportunities going forward to the Gulf standpoint.
Thank you.
Thank you. The next question comes from Henry <unk>. Please proceed with your question handy.
Goodbye.
Can limp.
Good morning Honey.
<unk>.
[laughter].
<unk> can we go over the math for commercial aerospace market like where to cut and run rate is for the pre pandemic level and then I think is it reasonable to assume that based on past I quit T shirts.
When things go back to the baseline your new baseline should be higher than the pre pandemic level.
So on the commercial air side, we finish the year and these are direct sales into customers. So this excludes anything going into a commercial air through distribution.
Year to date sales were 31 million that was up from 18 million last year. So it's 75 per cent increase.
Increase.
If we look at the pre pandemic levels. It was around 40 $45 million in that range.
And that was for our.
<unk> business and rns combined Sylvia.
So we are not.
Back at that level, yet, we certainly hope to take.
To get past that in the next year or two I would say for it I'm not sure if you have any.
We can all surpassed into your point in Hindi I think there'll there'll be a new baseline so I think.
The number of the 45 is.
The three or four year ago baseline.
So I do think we're discovering what that baseline is.
Mmk and then similarly uhm for the defense Margaret Uhm would you be able to show what the pattern drawn grateful for supposed historical baseline.
Sure so for the military.
Markets.
So that was.
Around 30.
8 million for the year.
And that was that.
That was down slightly a is down about one and a half million dollars.
From the prior year on a on a year to year basis.
I I know that military has been running low the last few years I I don't have the the historical view at hand, you know looking back to you two.
2019 2020.
Uhm I can <unk> I can help you and if you want.
If you go the 220, a defense was $34 million 21 was $32 million.
And then I have a $30 million for 2022.
Okay.
Based on your email so I assume it's correct [laughter].
And then and then.
And then <unk> what my original question on the data Center, Margaret Uhm any expectation, how tylenol customers will digest, they're in factories.
Some companies.
Sierra expectation that maybe.
Maybe some turned around.
Return to growth in the second half of the calendar year 2023, whether you whether you have any any type of <unk>.
Could field.
Okay, maybe I can handle that one on the data center market, you know three or four years ago with a substantial market for us where we supply people like Facebook and Google. However, during the price pressures, we're showing that business. So it wasn't a portfolio that we thought made sense for us. So for now it's become more of a.
Ah niche market.
This area and we are focused on a lot of other markets, where we have better margins.
So.
But we don't again the data cloud is not what we consider networking from our standpoint.
I see and and then and then okay.
Yes, I think that's helpful information with the current ground right for the data Centre Memphis.
I.
I wouldn't I can't say I don't have that break out.
Yeah, but it's I don't think it's enough to move the needle substantially.
Yeah, great, maybe three or four key.
Two or three maybe Australia, three three or four key customers in that marketplace.
Hope I got Netflix <unk>.
The Big Boys.
Again, not Amazon Dot Microsoft.
That Google or Facebook.
I see.
<unk>.
Oh, no that working for him.
And is your question about how big our exposure to the networking Denison area no no like the state of the networking networking market I think in the magnetic networking customers are working down on their inventories.
Uhm.
So whether there's any outlook.
Like when customers will fully digest the excess inventories.
Easily on the data center market and then now in the networking market.
But I think it should be receptive I think data is the same as networking where people are looking.
Everybody says six months, so I need to.
As a province, a six months. So I think everybody is expecting to flush at David <unk> over the next six months again, the problem was that they brought into a bunch of materials, but they didn't have the I C.
To build the material.
Now as they get the <unk>.
Curiously the icy.
And the other materials will be involved with each other.
So what we are <unk>.
Oh, sorry, sorry go ahead.
Nope, that's it yeah.
<unk> from the end market perspective.
Every kind of the public things that were reading it seems to be going OK, but we supply the remark from two different sides of the house the magnetic side as you pointed out to visit more simple product that supply chain is smoothing out so we were able to get them and deliver products to them.
At a faster rate than they are able to get the power supplies that they needed so they're sitting there with.
Kind of a little over inventory on the magnetic side of us, but the demand is still there and the power. So it's a little bit of a nuanced discussion because it just depends what products coming in.
Right. So it's not a market issue as much as it's what's the product that's going into it.
I see okay. That's very helpful. Thank you, Dan Lynn and folk.
Thank you. Thank you.
Thank you. The next question comes from William Kim from Presidio Asset management. Please proceed with your question Williams.
Hey, Jeff continued to answer those margins.
I was wondering going forward could you guys provide a cash flow statement for the quarterly earnings releases.
And if you could give us an idea of what free cash flow was for the year and a quarter.
Group.
Alright, so we can we can certainly look too.
That for going forward.
Edward and let me just.
I can give you the a year.
The cash flows from provided by operations for the year plus $40.3 million.
And then.
We had $8 $8 million a capex.
So if your if your definition of free cash flow.
Cash provided by operating less capex it.
About 31 $32 million.
Alright.
Okay.
And I guess.
You know it is I'm, assuming just capital of usage theory that is going to continue to be a significant.
Significant significant use of cash as you grow and.
How can we think about free cashflow conversion I guess for me EBITDA perspective in the net earnings perspective, considering that it seems that free cash flow is significantly lower than even your net earnings numbers.
So.
A lot of work last year and to introduce gone into the P&L side of it I would say.
So trying to get our EBITDA up and just overall profit margins.
And we saw that sequentially happened three or that's come at step one.
Obviously, we saw the cash consumption and working capital investment go in there.
Pretty pretty rampant as we think about inventory and some of the issues going on there.
So I would say we have an elevated.
Working capital numbers Sir.
In a normal lifetimes, it should not be taking that that kinda cash suck if you will.
Historically, we've been around $10 million of Capex.
Which is again in regular times about right for us.
This coming year will be we will spend a little bit more given a lot of consolidation work going on.
But.
And then obviously, we ever interest rate and with cash taxes.
Which.
I promise you our banner dividends are pretty probably steady obviously repeat on our desk and interest rate environment. We will know how that's going but I'd say the biggest thing is we're trying to get our profitability upwards and margin improvement, which we have continued will continue to do more of I think we need to work on.
Swimming down a little bit our inventory position and we think that will occur as this thing is normalized Logan.
So we should have.
When you say normalized so you're talking about a normalized working capital environment or are you talking about Canada slowing growth environment.
I would say.
The easing of the supply chain and availability of materials.
We have.
As we think about weapons finished goods that were supposed to ship is Lynne was talking about the $27 million <unk> are scheduled to ship, but we couldn't because potentially had some missing pieces or our customers that and have the other parts of the bill.
So we ended up sitting on bigger amounts of inventory.
So.
As the supply chain eases up and becomes a little more predictable where you can build the buyer raw materials make it and send it out.
That will bring it down.
Obviously, we put a lotta money in our inventory last couple of years and partially because of the disruption in the supply chain.
Understood. Thank you.
Yep.
Alright.
Thank you. The next question is a follow up question from <unk> from Needham and company. Please proceed with your question Kim.
Thank you I'm wondering if you could perhaps size the impact of the dilution too gross margins of the quarter.
Some of the material surcharges that you alluded to.
So I think from a from a gross margin perspective.
It's.
It's less than.
100 basis points.
It's so it's not a.
That's from a gross margin.
Perspective, yeah.
It's 10 minutes, yes, a writer lives in a state of different.
Gross margin, we've been higher as a percentage of sales if that was out.
Right.
Right right a little bit.
Yep.
Okay, maybe we could also talk to.
The pricing environment as a baby boy.
More broadly.
I think <unk> talked about going through the product portfolio looking more closely not only a pricing, but perhaps going through this skews and seeing what makes sense and what doesn't make sense of wonder as we think about the way you're characterizing the year. So.
What extent to these pieces play into the overall outlook for the business.
<unk> do you want me to take at.
I'll do all the overall pricing.
Again.
Simple and our industry as long and lean times go out pricey tends to be firm or or.
Three times come down.
Pricing does become a little bit more competitive.
Just starting to see some of our product lines, we don't think there'd be any pricing pressure overall based on past history. If you look at our military aerospace business plus power business, we think the pricing overall should be pretty firm as strong.
On the magnetic and the search for protection group, they might face pricing pressure that they haven't seen post COVID-19 going forward and it's our major focus now is if they if we do face that a week getting our cost of mind to address it properly.
So we're doing everything we can to maintain and improve our current margin structure.
And we know that we have to do a better job.
Really streamlining the organization. So are these price pressures do come in so we can handle it a lot better.
Again, not walking away from the subject.
Cause of lower margins.
Can you add some more color to that.
No I think that that.
That covers that obviously you know.
We're focused on.
Profitable growth.
With healthy margins, we understand that it's a price and it costs game on the price we talked about it already I think a lot last year.
We're doing a lot on the cost side of it.
At least if we do get those phone calls depending on what part of the businesses in the profitability profile has been noted.
We will have.
More cleaner cost structure to make an educated decision on where do we can see where you're not.
In some cases, maybe the answer is not maybe in some cases, we are sold position.
And then that's a different discussion and maybe some of our commodity based up so because of the diversity of our portfolio. Jim I don't think it's a one size fits all but I think the guiding posters get our cost an order add value to the customer and try to resist price downs, but we know we're not gonna be successful at 100 per cent of our skews.
Got it thank you about.
Thank you at this time the no further questions and I'd like to turn the call back <unk> okay. Thank.
Thank you Sir.
Thank you for your service.
Clarification I misspoke when the question was asked of the impact of the.
<unk> charges.
Said 10 bps on gross margin, but it was really a closer it was it was a little bit under 100 bps.
So gross my throat a bit higher if it was removed splinter clarification or sorry go ahead.
No problem.
Thank you for joining our call today. So we're looking forward to report a results April whichever.
Wish everybody a good day and have a nice weekend. Thank you.
Thank you very much.
To implement this does conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation.
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Good morning, and welcome to the Bel fuse fourth quarter 2022 earnings call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press Star then zero on your telephone keypad.
As a reminder, this conference is being recorded.
I'd now like to turn the call over to Jean Marie Teen movie Yang.
Please go ahead Jean.
Yes.
Thank you 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 in 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 me on the call today is Dan Bernstein, President and CEO , CFO , and Lynn Hudson, Vice President of financial reporting and Investor relations with that I'd like to turn the call over to Dan Dan.
Yes. Thank you Jade we are very pleased to report a strong finish to a record breaking year at Bell wherever you sit where we demonstrated that even during a year with a challenging supply chain environment, our team's dedication and hard work has paid off we would like to thank all our associates for allowing us to reach these milestones.
Each of the three product groups show a double digit topline growth this year.
With our power group, leading the way with a 32% increase in sales year over year.
Excluding the $32 $5 million in raw materials surcharge invoicing during 2020 to power sales were up 17% over 21 sales of our circuit protection products.
<unk> power products have all had record sales in 'twenty, two reflecting double digit growth over their respective 21 levels.
Over the past three years the power group has been a major focus.
So a combination of strategic acquisitions talks.
Targeted investments in EV and a thorough review of <unk> SKU profitability. This group closed 22 with sales up $288 million and a gross margin of 35%.
Even within the 'twenty two physical year. This product groups saw substantial margin expansion every quarter John .
At 27.1 quarter $128 two quarter to three to four quarter.
Q3, finishing quarter four at 33%.
Our connectivity solutions group saw a 13% increase in sales in 'twenty to over 21 with this segment.
Aerospace revenue closed at $31 billion for the year up 75% over 21 highlighted by the jump in the aftermarket revenue.
As well as continued support of new aircraft production shipments through our distribution partners remained strong throughout 2002 with sub offsetting softness noted in our military network ad market.
Our magnetic solutions group posted 11% increase in SaaS <unk> 22 versus 21, largely due to a higher demand from our networking customers, particularly during the first half of the year further our signal transformer business had an increase in sales of $6 8 billion.
22 primary due to price increases taken earlier this year at a higher demand from its medical and industrial customers.
Lean initiatives were also implemented at signals factory in the Dominican Republic during the year.
The combination of these actions resulted in a $3 2 billion of EBITDA and 22 versus what was previously breakeven business in 'twenty one.
The balance of the magnetic solutions group is going through a vacant facility consolidation project in Asia as of the last quarter.
Through the year, we incurred $7 $1 billion in restructuring costs related to this move and anticipate an additional $3.3 million to $4 million a cost because incurred through the quarter third quarter of 'twenty three.
There are currently 180, <unk> associates argue BG extra Saturday and we expect that head count doubled during the first quarter of 'twenty three.
The transition has been is being aided by approximately 10% of the indirect staff wig Migs Jody we agreed to work at the new security going forward, providing continually manufacturing practices adoptions.
This project is program as planned and scheduled to be completed by the end of Q3 2003.
Even with the best financial results in our history, we will continue to strive for improvement over larger Si and recognize there's more work to be done to this firm.
On the HR side, a new global head of people joined the company in November Suzanne focus have been driving our continuous improvement around bells culture compensation program at talent recognition development head.
And of course retention.
People are our most important asset based on the cultural assessment for the late 'twenty, what we understand there is a barrier to changes that need to take place with Ed Bell.
Now for our associates to thrive changes take time as they progress and steady progress at debate on this front throughout 2022.
But more to come throughout 'twenty, three which shows are fully up to speed.
22, our management team engaged executive all sides session, where we discussed our near and long term strategies free from interruptions of our day to day responsibilities.
It was from these discussions that we assessed our global appropriate and made a difficult decision related to operational restructuring conditions.
For our facility consolidation project that out last quarter.
All right.
<unk> targeted for completion later this year.
Our executive strategy session will continue 23 within our focus on further improving the company's bottom line.
We're proud of all of our associates for the job well done this past year and how that collaboration efforts translate into our best results. This is a significant progress and it should be celebrated.
The past few years have been focused on righting the ship straightening belt as a business. Many of these initiatives identified will be completed by the end of 'twenty three such that we know the business should be more fully focus on <unk> future.
As an organization.
This point in time I would now like to turn the call over to led to update on the financials led thank you Dan overall fourth quarter sales were $169 million, an increase of 15% from the fourth quarter of 2021.
Margin for the quarter increased to 31% as compared to 26, 7% a year prior.
By product group power solutions and protection sales were $82 1 million up 39% from last year's fourth quarter, primarily led by an $11 1 million dollar increase in sales of our front end power products.
$4 1 million of higher sales of industrial power products.
And $2 8 million of growth in EV sales.
These increases $10 5 million related to invoicing of premium charges on materials.
Margin for this group was 33% for the fourth quarter of 210 basis point improvement from Q4, 'twenty, one largely driven by a favorable shift in product mix the benefits of pricing actions taken over the past year and some favorable impact from FX.
Power solutions and protection group had a book to Bill ratio of one point during the fourth quarter of 'twenty tail and a backlog of orders of $356 million, an increase of 48% from the 2021 year end.
Turning to our connectivity solutions group sales were $47 million, an increase of 8% from last year's fourth quarter, mostly due to the continued rebound in commercial aerospace and strong sales through our distribution channels.
Military sales continued to be challenged this past quarter, resulting in a 12% year over year decrease in the defense end market.
Gross margin for this group came in at 23, 6% for the fourth quarter of 2020 tail down slightly from 23, 7% in the fourth quarter of 'twenty one.
Throughout the majority of 2020 tail. This group has been impacted by inefficiencies related to a ramp up in the workforce needed to accommodate the rebound in commercial air.
The connectivity solutions group had a book to Bill ratio of 1.6 during the fourth quarter of 2022.
And the backlog of orders of $119 million at December 31.
An increase of 40% from the 2021 year end.
Lastly, our magnetic solutions group had Q4 sales of $40 1 million down 10% from last year's fourth quarter.
Gross margin for this group improved significantly to 29, 5% in the fourth quarter of 2022 from 22, 9% a year prior.
Margins for this group benefited from pricing actions taken over the past year and a favorable shift in exchange rate of the Chinese renminbi versus the us dollar.
Lowered our labor costs in China versus 2021.
Our magnetic solutions group had a book to Bill ratio of 0.49 during the fourth quarter of 2022 and.
And finished the quarter with $91 million worth of orders and backlog.
Down 37% from the 2021 year end level.
The reduction in backlog for our magnetics products is largely driven by lower demand from networking customers as they work through their inventory on hand.
At the consolidated level, there were $27 million of orders that were scheduled to ship in Q4, which did not primarily due to component availability.
Our selling general and administrative expenses were $25 $1 million or 14, 8% of sales.
Up from $21 9 million in the fourth quarter last year, but down slightly as a percentage of total sales.
Within SG&A the primary increases were related to.
The salaries fringe benefits and Rep Commission.
Turning to the balance sheet and cash flow items, we ended the quarter with a cash balance of $70 3 million an increase of $8 5 million from the 2021 year end.
Our working capital increased by $28 1 million during 2022.
We saw a $20 1 million increase in our accounts receivable balance.
Our DSO were 58 days at December 31, 2022, compared to 54 days at December 31 2021.
Inventories increased by $33 1 million from.
Last year and.
While there was continued investment in inventory during the second half of 2022, it was to a lesser extent compared to the first half of 2022.
In addition to changes in working capital other items impacting cash flows for full year of 2022 included capital expenditures of $8 $8 million.
And our continued dividend program, where we made payments of $3 4 million.
Cash paid during 2022 for income taxes was $14 6 million in interest payments totaled $3 4 million.
I'll now turn the call over to Rick for additional color and outlook on 2023 farooq. Thank.
Thank you Lynn Hello, everyone nice to speak with everybody.
Looking back at 2021, and 2022, we recognized the tremendous amount of contribution in work that has gone into getting belt at this point in our journey.
This has really been an all hands on deck efforts across our global team members and locations as Dan mentioned, we're happy to close out 2022 with the wind at our backs and head into 2023 and beyond with a sharpened focus and direction in our pursuit.
As we look out to 2023, we see a good amount of opportunity for both growth in certain areas and margin improvements.
<unk> managing continued supply chain constraints in certain components inflationary pressures COVID-19 restrictions easing in China, and our previously announced facility consolidation plans, we will continue to pursue growth in certain end markets lean out the cost structure and position <unk> to capture the long term positive tailwind related to our products.
Broadly speaking.
Pivoting to backlog for 2023 as.
As we enter 2023 this quarter and 2020.
Q4, we saw a sub.
One book to Bill for the first time in a while as we have been working on reducing our lead times and getting deliveries out the factory.
We're working with our customers to get this rationalize as it related to their needs today and versus what they thought six to nine months ago.
While we see some softness in demand and consumer facing end markets. We believe the larger factor here as customers needing to work through their high levels of inventory on hand, and adjusting to the reduction in lead times across most of our products.
This is particularly the case for magnetics on the other hand, we are seeing robust demand in the areas of commercial aerospace military and E mobility.
To that end as noted by when we're seeing a rotation and contribution of where the bookings are coming from power has been steady connectivity is growing while magnetics are slowing on new orders that when all added together our backlog is relatively flat in.
In short lead times in certain areas are coming down and other areas, increasing and bookings that are coming in are higher quality on margin.
Using backlog as a basis for our assumption on 2023 revenue outlook first we want to level set on the starting point.
As it was alluded to earlier and some of the commentary 2022 total revenue was $654 million.
But when normalized for the raw materials surcharge invoicing revenue was closer to 6600 $22 million.
To the best of our knowledge and using the $622 million as the base, we expect top line to be flat to plus or minus low single digits on either side of that given the number of moving pieces in either direction.
To give you a little more insight and highlight a few key areas.
Our commercial air business should be one of our leaders of growth. This year given some of key positions. We are on coupled with overall growth.
Our key acquisition of RMS in early 2021 has set us up to capture this growth cycle in a very nicely both on the topline and margin side.
Q4 direct sales into commercial customers were $8 million up 55% from Q4, 2021, and we expect sales to grow in 2023 to be in the double digit territory.
This is a great testament to our team and their abilities and strengthen <unk> position on the commercial aerospace end market.
On the defense side following a few years of low order volumes. The current global affairs in Europe have been beneficial to US we expect topline growth in the defense segment to be in the double digits zone for full year 2023 as well.
For both commercial air and defense, we've spent a lot of time improving them last year as they sit within our connectivity group as you recall, we have previously spoken about the significant ramp in head count that occurred in Q1, 2022 that adversely impacted our margins throughout last year.
For 2023, we expect to have a meaningful reversal here and see the team's hard work pay off.
On the mobility side, we nearly doubled the growth in 2022 over 2000 $21 million to $20 million, we would not be surprised if we had another double again in 2023 and have committed new capex dollars in 2022 to expand production and meet this robust demand.
We also doubled down on strategic investments into an electric where we now have a one third minority stake.
With the ability to expand our ownership of certain profitability thresholds are retained.
<unk> electric consist of a highly skilled engineering team focused on onboard fast charging technology for the commercial vehicle use they're very similar to bill in terms of customers and market focus, which we believe is directly to be through this partnership we expect to jointly grow and channel real revenue synergies we wanted.
To welcome our new partners and are looking forward to an exciting road ahead.
On the networking and data center side, we remain bullish in the medium term given all the secular tailwind in that end market.
But for 2023, we will see an overall slowdown as it digests the rapid growth since 2020.
We serve this market out of both our power and Magnetics group.
The supply chain and Magnetics has smoothed out given there are fewer components in this product set and this is where we are seeing the reduction of the longer term backlog.
Lead times for our Magnetics products are about currently running 20 weeks, which is half of what they were this time last year.
On the power side and given the constraints on certain Ics demand here remains robust. So net net this market is a tale of two cities for us in 2023 strongly believe in the medium to long term prospects of this business.
This also is a testament to our product strategy diversity.
Of course, while no business is immune to adverse economic cycles, our business is highly diversified and align with secular trends in mega trends in certain areas. Looking ahead. We continue to see continued strength in bell as the breadth and depth of our portfolio, our deep customer collaborations cost takeout initiatives and double.
Down in key areas underpinning our profitable growth.
For Q1 2023, it's off to a good start with strong January numbers. Today. We believe Q1 2023 will be up mid to high single digits over Q1, 2022, we expect better performance on the margin side as well compared to Q1 2022.
Though down from Q4 2022 due to the usual seasonal impact from the Chinese new year to our business.
For 2023, we're also focused on getting our previously announced consolidation plans to fruition, while continuing to look for areas of improvement to sum it up.
We're excited about 2023 and believe we are in a great position and performed well due to our focus on continuous improvement and diversity of product offerings and end markets, even with an uncertain macro backdrop with that I'll turn the call back over to Dan Dan.
Jim.
Claudia can we open up the call for questions. Please.
Okay. Thank you, Sir we will now be conducting a question and answer session. If you would.
Like to ask a question Keith quick start and then one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue you.
You May place Scott and then two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary for you to pick up your handset.
The stock Keith.
One moment, please while we poll for questions.
The first question comes from Theodore O'neill O'neill from Litchfield Hills Research. Please proceed with your question Pietro.
Thank you and congratulations on the good quarter.
Question that you can pick up equivalent questions about electric.
Clear is this a customer or are you selling the product selling product to them or both.
Okay.
They are a manufacturer of a product they have a complementary product set its own business.
Okay equity stake in the business.
And we think we bring a complementary skill set on the operations of business side of it in terms of sales and marketing customer connectivity and manufacturing site.
<unk>.
<unk> additive they are a great product set with a lot of nice software and packaging capabilities.
It is an ownership stake.
Farooq, you see a little bit more classic.
Sorry, just a little more clarification.
Manufacturer at this time, we see it more as a technology product portfolio. There is a process now of building up their sales. So they are at the initial stage. We felt very strongly that that product portfolio will align very nicely with our product portfolio going forward. So for us it was a more.
The extension of our R&D in their R&D capabilities and how we believe that they have the best products going forward in the EV marketplace, where we participate in.
Okay that makes sense and what sort of milestones are you looking for to take further investment stake in the company.
Yes, I'd say, its really a revenue and certain profit thresholds it will be the key guiding post there.
Okay.
Farooq, you mentioned sort of leveling out the revenue for this year and talking about how there was.
Expedited costs et cetera, there was about $32 million of revenue in the year.
I would've thought those would be like Super high margin part of the business.
Was it not.
No it's not.
Margin.
Actually a lower margin than our kind of.
Kind of gross margin. So I would say, it's actually brings us down as a percentage of sales.
But.
These are not intended to be a high margin moneymaking thing. This is really a convenience expedite fees trying to get product out the door of partnering with our customers and paying let's say unnatural fees just given the times. We are in so so no. There are from a percentage of sales that theyre actually dilutive okay.
And Lynn the $27 million in orders that Didnt ship due to component availability is that in some specific area.
That's it's really across the board.
Yes Laurie.
Actually in empower and magnetics.
Not so much on the connectivity side.
Alright, thanks very much.
Thank you.
Thank you. The next question comes from Jim Ricchiuti from Needham <unk> Company. Please proceed with your question Jim.
Hi, Thank you good morning.
Was hoping to get a little bit more color on the.
The Q1 outlook are you assuming that there is still this relatively high level of raw material surcharges in the quarter and then is this a case, where you see that gradually dissipating as we go through the year and eventually going away Q2 Q3.
Yes, yes.
Yes, I would say.
We started really seeing this in an a and a noteworthy amount in Q2 last year.
We thought it would slow down into Q3 Q4.
It actually didn't.
So it's really tough to predict that but we don't think theyre going to be around here. Because these are not part of the normal way of doing business as for Q1, we are seeing still some PPV surcharges in there.
But it's really hard to take a guess at what that would be so we generally are not going to try to try to guess it.
Given that we do know this is not usual.
Got it.
Given us.
So percentage growth in E mobility, I may have missed it but.
Have you been able did you quantify the level of the mobility sales in the quarter.
What I'm trying to get to is how we're thinking about the outlook for this business, which clearly it sounds like this is one of the areas of the business that you see some pretty good growth opportunities as you look at not only the current quarter, but further into 'twenty three.
Yes, so Jim I can take that one.
<unk> sales for Q4 were $6 million and that was up from $3 2 million in last year's fourth quarter and.
Just to clarify we did have additional sales out of our E mobility group throughout the year.
But these numbers are just looking at products that go into actual EV and application. So.
$6 million for Q4 versus three two in last year's Q4.
On an annual basis, it was right around $20 million versus $10 million last year.
And just with respect to.
Your line of sight you have in this business.
It sounds like this is an area of the business you feel still.
Still Hudson some pretty good growth.
Prospects for this year is that fair to say.
Yes, I think we do have to grow across the first year I think it would not be.
We definitely see the potential for it to double again.
This year we.
Have committed capex dollars to expand our production capacity.
And I think ideally, we'd get a little bit of help from the component shortages side that will help us to get that stuff out the door. So.
It's a very rapid growing line for sure.
I know Dan if you have any more inside that but thats kind of my answer.
No.
Got it and just.
Magnetic solutions group. There obviously are some puts and takes in that area and I guess, what I'm wondering is as you do you have a sense.
As to when some of these customers will be.
Working through the inventories that they have.
And.
One quick follow up thank you.
Okay on that one I think we do a lot with the debt we're working people and again their hands are tied with it its really their hands are tied with basically they can't get power supplies. It from us because of the Ics. So we have we have customers that are expediting fees to us on the other hand, our candidly Meg.
Net acres from us because we can't get the Ics and properly.
We still think there's a long lead time out there, but to flush out the inventory.
For the magnetic side, we think it would probably be at least six months to nine months six months, probably best case.
Nine months worst case.
Got it and as a follow up to that is just.
You're still seeing pretty good demand clearly on the power side from from this segment of the market is here.
How do we think about the potential that as things begin to normalize you see the level of demand in this part of the business slowing a bit.
Again.
I think the sales because of the IC constraints.
I think again, our backlog I think the difference we see now.
Instead of a buyer gives us four orders during the year. The buyer now gives us one or two a year. So we spent a lot of time more focus on the backlog where that staying compared to the bookings from the power side of the backlog is pretty strong.
We do think we do have a lot of MTR that is going on with the ETR will be acquiring them.
That's been a real growth engine plus easy that's really leading the sales growth, we still think that our power grid.
Great opportunities going forward from a growth standpoint.
Thank you.
Okay.
Thank you. The next question comes from Hendi <unk> from Gabelli funds. Please proceed with your question Hendi.
Good morning, good morning.
And Liam.
Good morning, good morning.
Okay.
Can we go for the <unk>.
For commercial aerospace markets.
The current run rate is versus the pre pandemic level and then I think is it reasonable to assume that.
Based on past acquisitions.
When things go back to the baseline your new baseline should be higher than the pre pandemic level.
So on the the commercial air side.
Finished the year and these are direct sales.
Into customers. So this excludes anything going into commercial air through distribution.
Year to date sales were $31 million.
That was up from $18 million.
Last year, so a 75%.
Increase.
If we look at the pre pandemic levels. It was around 40 $45 million in that range.
And that was for our cinch business and rns combined.
We are not.
Back at that level, yet, we certainly hope to take.
To get past that in the next year or two I would say farooq I'm not sure if you have any.
Terry will surpass and to your point in Hindi I think there'll be a new baseline so I think.
That number the 45 is kind of the three or four year ago baseline.
So I do think we're discovering what that baseline is.
Okay, and then similarly for the defense market.
Would you be able to share what the current run rate versus historical baseline.
Sure so for the military.
The markets.
Okay.
So that was.
Around 30.
$8 million for the year.
And that was.
That was down slightly it was down about one 5 million.
From the prior year on a year to year basis.
I know that military has been running below the last few years.
I don't have the historical view at hand looking back to <unk>.
2019 2020.
All right.
I can't I think.
I can help you alluded to what.
If you go to 'twenty defense was $34 million 21 was 32 million.
And then I have $30 million for 2022.
Okay.
Based on your email so I assume it's correct.
Yes.
And then and then.
And then.
And just one additional question on the data center market.
And the expectation how how long customers will digest that inventory is there is some countries.
<unk>.
What's your expectation on that.
There may be some turnaround or return to growth in the second half of calendar year 2023, whether you whether you have any any type of debt.
A few.
Maybe I can handle that one on the data center market.
Three or four years ago with a substantial market for us where we supply people like Facebook and Google. However, during the price pressures, we saw in that business and it wasn't a portfolio that we thought made sense for us. So for now it's become more of a niche market.
This area and we are focused on a lot of other markets, where we have better margins.
So, but again the debt and the cloud is not what we consider a networking from our standpoint.
Yeah.
And then Dan.
Okay.
Yes, I think that's helpful. Any information from the current run rate for the data center market.
I wouldn't I can't say I don't have.
That breakout.
But its I don't think its enough to move the needle substantially.
Okay, great, maybe a three or four key.
Two or three maybe I'm, sorry, it's three or four key customers in that marketplace.
Okay, and then how about that.
But none of that.
The Big Boys.
Again, not Amazon Dot Microsoft.
Not Google or Facebook.
I see and then.
On the <unk>.
<unk> sorry.
And as your question about how bigger exposure to the networking data center is not.
The state of the networking networking market I think in the magnetic networking customers working down their inventories.
So whether there's any outlook.
When customers will fully digest the excess inventories.
Previously on the data center market and then now in the networking market.
But I think it should be reflective I think data is the same as networking where people are looking.
Or are you just seeing everybody says six months.
So anytime there is a probably say six months. So I think everybody is expecting to flush out their inventories over the next over the next six months again the problem was that they brought into much of materials, but they didn't have the Ics.
To build a material so.
So now as they get the Ics in networking.
The other but curiously.
And the other materials will be involved with each other.
And then just go.
Go ahead.
Alright, sorry go ahead.
Nope that's it yes. This is Andy so just to maybe to thread the needle here from an end market perspective every kind of the public things that we're reading it seems to be going okay, but we supply that and mark from two different sides of the house. The magnetic side as you pointed out it is a more simple products that supply chain is smoothing out so we were able to get them.
Them and deliver products to them.
At a faster rate than they're able to get the power supplies that they need it. So they are sitting there with.
Kind of a little over inventory on the magnetic side of us, but the demand is still there on the power. So it's a little bit of a nuance discussion because it just depends what products coming in.
Right. So it's not a market issue as much as it's worth a product that's going into it.
I see okay. That's very helpful. Thank you, Dan lean and Farooq.
Thank you.
Thank you. The next question comes from William Kim from Presidio Asset management. Please proceed with your question William.
Okay.
Hey, Jeff can seem to improve those margins.
I was wondering going forward could you guys provide a cash flow statement.
The quarterly earnings releases.
And if you could give us an idea.
Free cash flow was for the year in the quarter.
Group.
Alright, yes. So we can we can certainly look to do that for going forward.
Baird.
Let me just.
So I can give you the.
The year.
Cash flows from provided by operations for the year plus $43 million.
Okay.
And then the other thing.
We had $8 8 million of Capex.
So if there if your definition of free cash flow.
Cash provided by operating less capex at about.
About 31 $32 million.
Okay.
Okay.
And I guess.
Is I'm, assuming there is the lowest capital usage, there is that going to continue to be.
Significant use of cash as you grow in.
How can we think about free cash flow conversion I guess from an EBITDA perspective, and a net earnings perspective.
During that it seems that free cash flow is significantly lower than even your net earnings numbers.
So.
A lot of work last year and to introduce gone into the P&L side of it I would say.
So trying to get our EBITDA up and just overall profit margins.
And we saw that sequentially happened three years Thats step one.
Obviously, we saw the cash consumption in working capital investment going there.
Pretty pretty rampant as we think about inventory and some other issues going on there.
So I would say we have an elevated.
Working capital number so.
Normalized times, it should not be taking that that kind of cash suck if you will.
Historically, we've been around $10 million of Capex.
Which is again in regular times about right for us.
This coming year will be we will spend a little bit more given a lot of consolidation work going on.
But.
And then obviously, we have our interest rate and we have our cash taxes.
Which.
I'd promise here are ran our dividends are pretty probably steady obviously, we pay down our debt and interest rate environment. We all know how that's going but I would say the biggest thing is we're trying to get our profitability up and margin improvement, which we have been and are continuing and will continue to do more of I think we need to work on.
Slimming down a little bit our inventory position and we think that will occur as things normalize a little bit.
So it should be.
When you say normalized so you're talking about a normalized working capital environment or are you talking about kind of a slowing growth environment.
I would say.
The easing of the supply chain and availability of materials.
We have as we.
Think about with finished.
Finished goods that were supposed to ship as Linda was talking about at $27 million of orders are scheduled to ship, but we couldnt because potentially had some missing pieces for our customers that have the other parts of the bill.
So we end up sitting on bigger amounts of inventory.
So as.
As the supply chain eases up and becomes a little more predictable where you can build the buyer raw materials make it and send it out.
That will bring it down.
Obviously, we put a lot of money in our inventory last couple of years and partially because of the disruption in the supply chain.
Understood. Thank you.
Yes.
Alright.
Thank you. The next question is a follow up question from Jim Ricchiuti from Needham <unk> Company. Please proceed with your question Jim.
Thank you I'm wondering if you could perhaps size the impact.
The dilution to gross margins of the quarter.
Some of the materials surcharges that you alluded to.
So I think from a from a gross margin perspective.
Yes.
It's less than.
100 basis points.
So it's not a.
That's from a gross margin.
Perspective.
Helpful 10 bps yesterday rates in bps.
Different gross margin would've been higher as a percentage of sales if that was out.
Got it.
Right right a little bit.
Sure.
Maybe you could also talk to them.
The pricing environment.
Maybe.
More broadly.
I think bill has talked about going through the product portfolio looking more closely not only pricing, but perhaps going through the skus and seeing what makes sense and what doesn't make sense I wonder as we think about the way you're characterizing the year too.
What extent to these pieces play into the overall outlook for the business.
Farooq you want me to take that.
Although the overall pricing.
Again, very simple in our industry as longer lead times go out pricing tends to be firmer idea.
As lead times come down.
Pricing does become a little bit more competitive.
Just starting to see some of our product lines, we don't think there'd be any pricing pressure overall.
Based on past history, if you look at our military aerospace business plus our power business, we think the pricing overall should be pretty firm is strong.
On the Magnetics and the circuit protection group, they might face pricing pressure that they haven't seen.
Post COVID-19 going forward and Thats, our major focus now is if we do face that.
Getting our costs aligned to address it properly.
So we're doing everything we can to maintain and improve our current margin structure.
And we know that we have to do a better job.
Streamlining the organization. So when these price pressures do come in than we could handle it a lot better.
Again, not walk away from something.
Because of lower margins.
Can you add some more color to that.
No I think that covers it obviously.
We're focused on.
Profitable growth with healthy margins, we understand that it's a price and a cost game on the price we talked about it already I think a lot last year, we're doing a lot on the cost side of it.
At least if we do get those phone calls depending on what part of the businesses and the profitability profile as Dan noted.
We will have.
A more cleaner cost structure to make an educated decision on where do we can see where you're not.
In some cases, maybe the answer is not maybe in some cases, we are sole position.
And then that's a different discussion than maybe some of our commodity based stuff. So because of the diversity of our portfolio. Jim I don't think it's a one size fits all but I think the guiding post is get our cost in order add value to the customer and try to resist price downs, but we know we're not going be successful at 100% of our skus.
Got it thank you Bob.
Okay.
Thank you at this time <unk> no further questions I'd now like to turn the call back to Mr. Dan Bernstein for closing remarks, Thank you Sir.
Thank you Claudia.
Excellent clarification I misspoke when the question was asked of the impact of the <unk>.
Surcharges I had said 10 bps on gross margin, but it was really a closer.
A little bit under 100 bps.
So our gross margin a little bit higher.
Remove search point of clarification or sorry, Jeff go ahead.
No problem.
Thank you for joining our call today. So we're looking forward to report our results April wish everybody a good day.
This weekend thank you.
Thank you very much ladies and gentlemen. This does conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation.