Bel Fuse Inc. (NASDAQ:BELFB) Q1 2024 Earnings Call Transcript

Bel Fuse Inc. (NASDAQ:BELFB) Q1 2024 Earnings Call Transcript April 26, 2024

Bel Fuse Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the Bel Fuse First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please go ahead, Jean.

Jean Marie Young: Thank you, and good morning, everyone. Before we begin, I’d like to remind everyone that during today’s conference call, we will make statements relating to our business that will be considered forward-looking statements under the federal securities laws, such as statements regarding the company’s expected operating and financial performance for future periods, including guidance for future periods in 2024. These statements are based on the company’s current expectations and reflect the company’s views only as of today and should not be considered representative of the company’s views as of any subsequent date. The company disclaims any obligation to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties and other factors.

These material risks are summarized in the press release that we issued after the market closed yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K for the fiscal year ended September 31st, 2023, and our quarterly reports and other documents that we have filed or may file 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; Farouq Tuweiq, CFO; and Lynn Hutkin, Vice President of Financial Reporting and Investor Relations. With that, I’d like to turn the call over to Dan. Dan?

Daniel Bernstein: Thank you, Jean. Good morning and thank you for joining our first quarter 2024 earnings call. Overall, we were pleased with our financial results for this quarter. Our sales came in at $128 million, which was within the forecast range we provided on our last quarter earnings call. It is encouraging to see our margin continue to track in the right direction as Lynn will outline further. We continue to benefit from diversity of our segments with strength in Connectivity on the sales side and impressive profitability from both our Connectivity and Power segments. These areas help offset the softness in the Magnetic segment. These outcomes were all largely within our expectations. In late February, we announced the Board approved a $25 million share repurchase program.

Shortly thereafter open market purchases of both classes of stock were initiating pursuant to programs authorization. As of March 31st, we utilized $6.3 million to repurchase a total of 109,000 shares. A 10b5-1 plan has been in place, ensuring the company’s broker has the ability on an on-going basis, including post quarter and during our regular blackout periods to make open market purchases in accordance with the company policies. As of April 24th, our program-to-date repurchase a total of $11.1 million, representing 189,000 shares. We expect to continue executing this program with the internal guidelines that we have established. In March, the company announced the upcoming retirement of John Tweedy, a long-standing Board member and Audit Committee member, whose term will end at May 2024 Annual Share Meeting.

On behalf of the Board, I want to thank John for his many contributions to Bel over these past 28 years. John has insight and counsel will be missed, and we wish him the best in his retirement. With the upcoming vacancy, the Board nominated Dave Valleta as a new director at this upcoming meeting. Dave brings 40 years of sales and growth experience within the electronic component industry with companies including Vishay Intertechnology and AVX. We’re excited about the potential of adding Dave to the Board given his tremendous wealth of knowledge in building, leading and managing sales team for global organization in our industry. If elected this will be instrumental to Bel to continue implement our growth strategy. In addition to the changes at the Board level, as noted in our last earnings calls, there will be transition on the executive team in July with the retirement of Dennis Ackerman and promotion of Steve Dawson to the Power segment.

When these transactions become fresh perspective on the executive team and the Board room, this will be welcomed as we set our future strategy for growth to years to come. And with that, I will now turn the call over to Lynn. Lynn?

Lynn Hutkin: Thank you, Dan. From a financial perspective, in summary, we saw continued margin expansion on a lower sales base from looking at Q1 ’24 versus Q1 ’23. First quarter 2024 sales came in at $128.1 million, representing a 25.7% decline from the first quarter of 2023. The majority of the sales fluctuation was driven by our Power and Magnetics segment as we will discuss further. Our gross margin increased to 37.5% in Q1 ’24 from 31.1% in Q1 ’23. And these profitability improvements were largely driven by our Power and Connectivity segment. Turning to some details at the product group level. Power Solutions and Protection sales for the first quarter of 2024 were $60.2 million, representing a 27.6% decline from Q1 last year.

The decline in sales was mainly due to lower sales of our power products used in networking and consumer applications. However, we saw strength in sales of our rail products, which grew over 50% from Q1 ’23, reaching $10.3 million in sales in Q1 ’24. Despite the overall decline in sales, this segment posted a gross margin of 44% in the first quarter, reflecting an 830 basis point improvement from Q1 ’23. We are viewing approximately half of this improvement in Power margins as being sustainable as it was driven by more permanent factors, including cost reduction efforts, both on the procurement side and headcount side, the lower volume of low margin expedited fees and overall product mix. The balance of the basis point improvement in gross margin versus Q1 ’23 relates to items that are either nonrecurring or in the case of favorable FX temporary in nature and should not be factored into a normalized view of gross margin for this segment.

Turning to our Connectivity Solutions Group. Sales for Q1 ’24 came in at $54.3 million, up 1.7% from Q1 ’23. Q1’24 sales into commercial air applications amounted to $14.6 million, which is a level consistent with Q1 ’23. Products sold into defense applications totaled $10.7 million for Q1 ’24, up 3.2% from Q1 ’23. The year-over-year increase in sales was despite the divestiture of Connectivity’s tech business in June 2023, which previously contributed around $1.5 million per quarter to the segment. The gross margin for this group was 36.1% for the first quarter of 2024, a significant improvement from the 34.1% in the first quarter of 2023. This margin expansion was made possible due to the operational efficiencies achieved through facility consolidations that were completed in 2023, along with implementation of contract renewals on more balanced terms.

These favorable margin factors were partially offset by minimum wage increases in Mexico that went into effect in Q1 ’24 and the unfavorable impact of FX related to the peso. Lastly, our Magnetic Solutions Group posted sales of $13.6 million in Q1 ’24, representing a 62% decrease from Q1 ’23. This reduced level of sales was generally in line with expectations discussed on last quarter’s earnings call and largely related to lower shipments into a large networking customer as they work through inventory on hand. The gross margin for this group was 16% in the first quarter of 2024 as compared to 22.8% in the first quarter of 2023. This change in margin was primarily driven by the lower sales volume in Q1 ’24, partially offset by lower fixed overhead costs resulting from the facility consolidations in China, which were completed in late 2023 and favorable FX related to the Chinese renminbi versus Q1 ’23.

At the consolidated level across all product segments, our backlog of orders totaled $350 million at March 31st, 2024. Our selling, general and administrative expenses were $24.9 million or 19.5% of sales, down from $25.3 million in Q1 ’23. Within SG&A, an increase in salaries, fringe benefits and amortization expense were largely offset by lower legal fees. If you recall, we incurred $1.6 million of legal fees related to the MPS litigation in Q1 ’23, and these expenses did not recur in Q1 ’24. There were no unusual items of note contained within SG&A during Q1 ’24. Turning to balance sheet and cash flow items. We ended the quarter with $121.2 million in cash and securities, a reduction of $5.7 million from year end. We generated $6.2 million in cash flows from operating activities during the first quarter of 2024 and had capital expenditures of $2.9 million.

It should be noted that Q1 included our seasonal payments related to our annual bonus and corporate insurance premiums. From an inventory perspective, the downward trend that we experienced over the past several quarters have continued into Q1, reflecting a $5.7 million reduction from year end. The lower inventory levels were primarily in the areas of raw materials and finished goods as we continue to work through our own inventory on hand. I’ll now turn the call over to Farouq for additional commentary. Farouq?

Farouq Tuweiq: Thank you, Lynn. Good morning, everyone. As noted on our last earnings call, we anticipated the first half of 2024 to be on the slower side. Our first quarter results were in line with our expectations. The second quarter of 2024 is expected to be largely similar to the first quarter in terms of sales volume with margins expected to normalize a bit, given the impact of onetime items in Q1, as mentioned by Lynn. In summary, based on information available to us today, our outlook for Q2 sales in the range of $125 million to $135 million with gross margins in the range of 34% to 36%. There are several items to keep in mind when bridging our Q2 ’23 of $169 million to the expected range for Q2 2024 and we’ll discuss these here by segments.

On the Power side, our Q2 2023 sales included $5.7 million of expedite fee revenue that is not expected to reoccur in Q2 ’24. Second, as previously noted on our last earnings call, Q2 ’23 included estimated $10 million of catch-up sales that resulted from past due orders connected to the raw material storage from 2022. These will not recur in Q2 ’24. Third, our eMobility business is softer this year given the current interest rate environment, which has delayed capital investment projects at our customers and their customers. eMobility sales in Q2 ’23 were $8.5 million and we anticipate this will be down by roughly $3 million to $4 million in Q2 ’24. The balance of the expected decline in power relates to a continuation of lower sales into our distribution partners and consumer end markets, which, while similar to Q1 ’24 levels will represent a lower level from Q2 ’23.

On the Magnetics segment side, given the current status of shipments into our large networking and distribution customers, we’re projecting only a slight rebound in Q2 ’24 from Q1 ’24 levels, accounting for approximately $10 million of the expected decline from Q2 ’23. Within our Connectivity segment, we are estimating sales that are largely in line with Q2 ’23, potentially up a bit given recent contract renewals. Looking to the second half of 2024, we remain optimistic that some level of recovery will occur though the degree and speed of rebound will likely vary by product line and end markets. Overall, we do not anticipate a quick flip of the switch and instead expect that it will be more of a slow and steady recovery as certain customers and end markets reserve their normal level of shipments upon inventory depletion.

Shifting our view to medium-term growth drivers, two areas that we are excited about, I wanted to highlight our space and AI. Let’s first discuss the end market of space. This is an end market that is a very harsh environment. It takes years of design work to get into. Up until recently, the volume of product going into space applications for anyone was limited. Bel has successfully had its product and space since 1970s. As a result, we have already proven ourselves as a reliable supplier of connectors and components that can withstand the harsh environment and we’re better than getting from this legacy today. To that end, our Connectivity segment has been successful in securing significant design wins in multiple commercial and military satellite platforms as well as ground-based support applications for both copper and optical connectivity products.

We believe these design wins will accelerate connectivity’s growth in the space market with 50% year-over-year growth in that market expected in 2024. To provide some context, in the full year of 2023, we had sales of $4.5 million in the space applications. During the first quarter of 2024 alone, we shipped $2 million of product into this end market and are forecasting $77 million for the full year of 2024. Similar to our eMobility business, this has a longer development cycle and will take time to ramp up, but we believe we are hitting a breakout point for space applications in 2024. We also continue to invest in this key market to grow our portfolio space rated products and expand our internal capabilities, allowing us to support our customers’ most extreme connectivity requirements.

The second area of note is in the area of AI. While we do not have meaningful sales directly tied to AI today, our potential future benefit is becoming more clear. Of our three segments, we view our Power segment as the biggest possible beneficiary of the industry’s transition to AI. While we have products in each segment that support general networking applications, the systems that will support AI consume significantly more power than a traditional system. Even if the number of data centers that we currently participate in remain the same, the power supply dollar content per AI server is expected to be 2 to 8x higher. Another item of note here is that our existing products and capabilities will support this future need. There’s no need for major new product designs for us to support AI is just additional volume of our existing Power products or perhaps some minor modifications.

While still in the very early stages, we are seeing an increased level of activity and discussions happen with our existing networking customers and also with specialty customers at high performance computing. We’re just starting to see early production volume orders from many of these customers, which is exciting for us. The last item I’ll touch on is the M&A market. The volume of M&A opportunities available to us in 2022 is fairly unlimited, and we are definitely seeing a shift here in 2024. This is consistent with what we’ve been talking about. There appears to be a more robust pipeline of opportunities becoming available and we continue to assess those that may be a good fit for us. There’s nothing to report here today, but we’re actively reviewing a variety of potential targets.

Overall, beyond the near-term uncertainties surrounding timing and scale of recovery, there are many areas that the team is energized about for the long-term. Bel has a long history of evolving over the years to support new end markets, and we believe we are at that next pivotal point of evolution. Space, AI, eMobility are viewed as the next new end markets for Bel’s products. We’re excited about our current position in each of these areas and the growth potential they bring to Bel’s future. With that I think we can open up for questions?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question comes from the line of Theodore O’Neill with Litchfield Hills Research. Please proceed with your question.

Q – Theodore O: Thank you very much. Farouq, I think you covered this a bit in your prepared remarks, but last quarter miss was primarily related to a single customer, it seems it’s a slightly broader inventory issue now. And does it concern you that GDP growth rate for Q1 is sequentially lower than it was for Q4?

Neill: Thank you very much. Farouq, I think you covered this a bit in your prepared remarks, but last quarter miss was primarily related to a single customer, it seems it’s a slightly broader inventory issue now. And does it concern you that GDP growth rate for Q1 is sequentially lower than it was for Q4?

Farouq Tuweiq: Yes, I think, thank you for the question. I think you’re referencing the Q4 numbers heading into Q2, correct, we did miss largely with one. But remember that heading into the Q1, which is seasonally a little bit weaker, distribution, which touches obviously, a number of folks is a little bit fall in inventory. So we look at it as more continuation of inventory legislation. So I would say from a Q4 to Q1 perspective, let’s say, we still see the challenges from the same set of people that we largely saw in Q4. So there hasn’t been any, call it, new struggles, if you will. In regard to the GDP side of the things, I mean, obviously, GDPs, we all are hoping for it to kind of move more so in the right direction. I think obviously it will impact a little bit of our customers.

But ultimately given we participate in more of a technology solution industry and our customers do while it’s not going to be disconnected from GDP. We do think that there is a different value proposition there.

Q – Theodore O: And following up on that comment, would you mind repeating what you said about the dollar value for the power supply transformers in the AI space. Was it 2x to 8x?

Neill: And following up on that comment, would you mind repeating what you said about the dollar value for the power supply transformers in the AI space. Was it 2x to 8x?

Farouq Tuweiq: Correct.

Q – Theodore O: Okay. Thank you.

Neill: Okay. Thank you.

Operator: Our next question comes from the line of Jim Ricchiuti with Needham & Co. Please proceed with your question.

James Ricchiuti: Hi. Good morning. Apologies if there’s any background noise, but couple of questions. Just with respect to — normally, when you come out of Q1, there’s a bit of a seasonal pickup in just related to the Chinese New Year. Is that less of a driver for you this year, just given the current environment?

Lynn Hutkin: Yes, Jim that’s historically been the case. But this year because our Magnetics business was so low in Q1. That’s normally the area where we do see the pickup in from Q1 to Q2. But it’s just Magnetics at a depressed level right now as we’re waiting for these large customers to turn around. So we’re just not seeing that same seasonal pickup from Q1 to Q2 within Magnetics, a little bit, but not the same degree.

James Ricchiuti: Got it. It’s helpful, Lynn. Thanks. Remind us again, as we think about the back half of the year, when did you see the really sharp falloff in sales and the networking sector? Because just in terms of when do the compare, I guess, what we’re trying to get through is when do the comparisons really get easier. When do you start lapping that?

Lynn Hutkin: Are you talking specific to Magnetics?

James Ricchiuti: Well, it sounds like the weakness in that market sector also touches a little bit on Power. But however you want to characterize it, we’ve seen a big falloff in that part of the business. Did that happen in Q3 of last year? Did you start to see the real sharp decline?

Lynn Hutkin: Yeah, so if we’re just talking about Magnetics, first, we started seeing a decline in Q2 of ’23, is defined further in Q4. I think the most recent drop-off occurred in November of ’23. So there were basically, call it, two months of that drop-off in Q4. We felt it in full in Q1, and this is what we’re projecting here for Q2 to still be in a similar environment. On the Power side.

James Ricchiuti: Got it. Last question. Go ahead, please.

Lynn Hutkin: Yeah, so on the Power side, that was very strong on the networking side in Q1 and Q2 last year. We didn’t see as large of a drop-off, but it did start going down a bit in Q3.

James Ricchiuti: Okay. That’s helpful. And maybe if we just this last question just relates to the whole environment in terms of destocking. And maybe if we try to break out the Magnetics piece, put that aside for a second. How would you characterize what you’re seeing in terms of distributor inventories and the whole destocking and the rest of the business? Has that improved much or do we still have a couple of quarters where we might have to see that?

Daniel Bernstein: This is Dan Bernstein. It’s always pushed back six months. But I was in Europe, I was visiting some of our key distributors and the feeling is that we hit rock bottom in February. I mean things should start to improve. But they’re all saying today it might change that by the end of the fourth quarter, all the inventory should be flushed at and they go back to normal ordering processes.

Farouq Tuweiq: And I think, Jim, we also just hit on that as well, right? It’s not like a flip of a switch. So it will be kind of a rolling type pickup mix. So, to Dan’s point, some may come earlier, some may come later. But you know just want to be mindful, it’s not we are going to, it all clears out on day one.

James Ricchiuti: No. I think we understand that. Thanks, Dan. Appreciate it, guys. Thank you.

Farouq Tuweiq: Thanks, Jim.

Operator: Our next question comes from the line of Hendi Susanto with Gabelli Funds. Please proceed with your question.

Hendi Susanto: Good morning, Dan, Farouq, Lynn.

Farouq Tuweiq: Hello, Hendi.

Lynn Hutkin: Good morning.

Hendi Susanto: So, yes, I would like to get more insight on how to think about your gross margin. I think given the lower scales, Bel Fuse has demonstrated resilient gross margin. So how should we be thinking of gross margin when, let’s say, market recovery has taken place and then the sales has gained meaningful recovery? Like how much gross margin expansion can we expect? Or should we expect that the sensitivity on the scale of revenue is somewhat not meaningfully enough?

Farouq Tuweiq: So, Hendi, I would say a couple of things to that like mix really plays a part, right. So if we start seeing and when we start seeing recovery in, let’s say, Magnetics, right, that’s a lower gross margin business. So by definition, it will compress your gross margin, right. But obviously, when our Magnetics business is running healthy, it has really nice operating profit and EBITDA, right. So while the gross margin may not be the best out there, it’s a real nice contributor on the profit line. So one, this mix will play a factor, right. Two is within each of our product groups like Power and Connectivity, there is also some mix that we need to be mindful. So the way we tend to think about it is we guided to 34% to 36%, right, at our current levels.

If there is increased revenue, that’s going to be operational leverage, right, and we expect that, that would be additive, right. So the fact the way we’re going to think about it, guiding to 34, 36 at the current levels and able to deliver on our EPS. We look at that as a great move that shows the durability of what we are doing here. And anything more above and beyond that should be positive to the upside.

Hendi Susanto: That’s very helpful.

Farouq Tuweiq: And we called out a little bit of the fluctuations here as Lynn covered in her commentary.

Hendi Susanto: Yeah, okay. Yeah, that’s very helpful, Farouq. And then would you be able to give more color and insights about the exciting growth opportunities in space and AI like specifically, could you talk about with application, which end products, let’s say, for space? Like should we pay attention to like LEO satellites or should it be like satellite in general? And then for AI like do you have more presence in networking versus computing or like I think any insights will be helpful.

Daniel Bernstein: For space, I think, for space we’re working very closely with Amazon. We do have product on the Amazon satellites now and we’re looking to build a relationship with SpaceX.

Farouq Tuweiq: So I’d characterize our relationships is given our legacy there is it’s a broad based and all kind of the household names that you hear both on the commercial and on the military side is where we participate, on the orbit. So we have things obviously going up in space as evident by our revenue growth. These are long design cycles. This business we’ve been chasing for years, but generally on the satellite, like I said, both commercial and military. So some things we can talk about, some things we’re not able to talk about. But as we think about spaces and end market and more is going up there, we know that there’s going to be more overall fundamental drivers that will be beneficial to us. On the AI side, when we look at AI, we do know that there is the fundamental requirement side of things, right?

So there’s a need for higher power, need for more power density and also just more kind of custom management. So where we succeed is developing these exact products. We’ve been doing that for years. We have very high, if not highest power density on some of the shelves. We also have really good relationships with the wafer scale chip manufacturers and also that’s kind of where we play. But when we look at where we find it specifically, there’s kind of the big cloud giants, kind of the big four that we everybody kind of hears about. That will be not necessarily our focus given the heavy commoditization there. So where we will be more suited better is on the networking players. So where we have existing relationships and we have been developing for time.

There’s also on the compute side, there’s some new and emerging players there that have better quite frankly bigger and more powerful chips than maybe some of the headline type folks out there. So it will come for us, we look at it as two pronged approach. There’s the new players on the compute side and then our existing customers, maybe a little bit of new ones as well on the networking side. And the contents of these systems obviously have really kind of shifted and kind of expanded. So we expect exciting things from there. And similar to space, we’ll be able to talk maybe more about that a little bit as time goes on here. But it is nice to see. The one thing I would also say about AI is, we cannot talk about identifiable AI and unidentifiable AI.

What I mean by that is because of the general purpose nature of our power products, we know, right, or, you know, we send it to our customer. We may or may not know it’s going to AI because of the general purpose nature of it. But then there are other applications that we know we can identify that this is specifically to AI. So we do know that there is a good amount of unidentifiable AI, but we will generally limit our conversation to things that we can speak to with clarity. The other thing I would say on the AI is there is a whole ecosystem that supports a lot of the direct players through various testing equipment. So we’ll have a secondary impact over it because we do supply a lot of stuff into the test equipment that’s required by the AI.

So we touch it from a few different angles, Hendi.

Hendi Susanto: Yeah, and then Farouq, given the rapid speed on AI, development and investment, I think speed is their number one priority now. How should we be thinking about the AI opportunity will be toward like second half of 2024 or will it be beyond like 2024?

Farouq Tuweiq: Yes, so I just want to be careful with this Hendi, right. So nobody’s saying we’re going to make $100 million of revenue in the next three, four quarters. I just want to be a little bit careful here. We started seeing from these call it what we talked about the compute guys, we started seeing some nice orders in Q1 and more coming into Q2 and also some of the networking guys. So we expect it to be, let’s call it, a steady climb. I think as the year goes on, we would probably expect to have more meaningful percentage jumps from 25 over 24 and 26 over 25 and so on. So I think we just wanted to kind of reveal a little bit more, but we will talk more about AI once we start feeling more comfortable with that.

Hendi Susanto: Yeah, and then one more question. Given the weaknesses in EV, any update on your milestone and expectation on the electric investment?

Farouq Tuweiq: Yeah, so I would say the electric is largely kind of seeing the same things as our EV business with our electric investment, obviously, I would say, from a milestone perspective, it’s largely on track. When we did this investment early last year, we knew it was not a 23, 24 thing. And the reason there is some of the development that’s going on. So there’s some interesting products that are being worked on and developed. So as we think about those in terms of coming out in an ideal world, we kind of get through this bumpiness of 2024 out in the market and we expect their products to be ready for market in 2025. So we look at it as on track and not, but we do see some of the same challenges within their customer base.