Bel Fuse Inc. (BELFB) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, and welcome to the Bel Fuse Inc. First Quarter 2021 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dan Bernstein, President and Chief Executive Officer. Please go ahead.
Dan Bernstein: Thank you, Jennifer. Joining me on the call today is Farouq Tuweiq, our CFO; Craig Brosious, our Vice President of Finance; and Lynn Hutkin, our Director of Financial Reporting. Before begin the call, I'd like to ask Lynn to go over the safe harbor statement. Lynn?
Lynn Hutkin: Thank you, Dan. Good morning, everybody. Before we start, I'd like to read the following safe harbor statement. Except for historical information contained on this call, the matters discussed on this call, such as statements regarding the anticipated impact of the acquired EOS Power business on our results, anticipated higher sales for our Magnetic Solutions group during the second and third quarters as a result of strong bookings in the first quarter, expectations regarding our scheduled backlog as an indicator of stronger sales in the second and third quarters, expected contributions to net earnings from our rms and EOS acquisition and cost savings from restructuring efforts, and our efforts to continue to optimize our cost structure are all forward-looking statements as described under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Actual results could differ materially from Bel's projections.
Dan Bernstein: Thank you, Lynn, and thanks everybody, for joining us on the call today. I hope that you and your families continue to stay safe during these difficult times. First, I'd like to provide an update on COVID-19 and how it impact our facilities. Overall, I'm pleased to report that all manufacturing sites globally continue to be operational throughout the first quarter. Our most recent acquisition, EOS, is based in Mumbai, India where they're going through a very difficult time. The factory continues to be operational as they manufacture essential products and protective measures have been put in place to prioritize the safety of our new associates. We would like to thank these new associates who’re working each day under these difficult conditions. Before getting to our results, while Bel does not normally comment on market activity, we realized there was a substantial amount of trading in Bel's stock on Friday, and the company does not know the reason for this increased trading activity. Turning to our results. We saw 6% improvement in sales as compared to last year's first quarter. Demand in each of our market was strong with the exception of commercial aerospace. Both eMobility and Circuit Protection had exceptional quarters and demand from our distribution partners was strong, which is a good indicator of general market demand to their broad customer base. Sales within the Power Solutions and Protection group were up $7.5 million or 21% from the first quarter of 2020. CUI turned in another strong performance this quarter with $2.1 million increase in sales over last year's first quarter. Our products sold into eMobility applications were up $1.5 million, a 100% increase from 2020 first quarter and fuse sales were up $1.6 million, an increase of 60% from last year's first quarter. The areas of growth were partially offset by elimination of low margin products within the group.
Craig Brosious: Thanks, Dan. Sales by product segment for the first quarter of 2021 were as follows; Power Solutions and Protection sales were $43.6 million, up 20.6% from last year's first quarter; Connectivity Solutions sales were $38.1 million, a decline of 2.7%; and Magnetic Solutions sales were $28.9 million, largely the same as last year's first quarter. Preliminary gross margin by product segment for the first quarter of 2021 was as follows: Power Solutions and Protection had a gross margin of 24.7% in the first quarter of 2021, up slightly from 24.3% in last year's first quarter; Connectivity Solutions gross margin was 25.7%, down from 28.6% in the 2020 quarter; and Magnetic Solutions gross margin was 13.7%, down from 21.2% in last year's first quarter.
Dan Bernstein: Thank you, Craig. Jennifer, we'd like to open up the call for questions now, if possible.
Operator: And we'll go first to Theodore O'Neill with Litchfield Hills Research.
Theodore O'Neill: My first question is about the eMobility market, which is getting an awful lot of discussion this quarter. Could you give us an idea about, is it scooters, is it bikes, is it both? Do you see any regional differences in the market? And how big do you think the opportunity could be?
Dan Bernstein: I think at this time, it's too early to measure the opportunity. What our niche is we're not really focused on the automotive market overall. We do do some good business from a circuit protection business. But the growth that we got from eMobility mobility, we're focusing on now, is the business that we do from our Power group and what we're looking at are niche markets. So basically, post office, school buses, sanitation, mining equipment. So very specific niche markets where they're moving to electric vehicles. Again, we think the opportunity should have substantial growth, at least in the next five to six years. And again, that's what the areas we're focusing on, specifically niche markets, also voting charging markets also.
Theodore O'Neill: It's not scooters and e-bikes?
Dan Bernstein: No, absolutely not. But Theo, if I can give you a -- we did do a business where a company called StreetScooter that was building mailbox deliveries in Europe. So more of a government specific requirement type of situation, but nothing that's mass market.
Theodore O'Neill: You've mentioned in the prepared remarks that you've seen an uptick in commercial aviation business. I mean, I guess that was probably pretty low. But how much more headroom do you have on the commercial aviation business, if we get back to something looking approaching normal?
Dan Bernstein: I mean what's normal? Again, I think if you look, again, from what we understand that you do see with Airbus receiving a big order last week from Delta, I believe. I can't mention anybody else. So we do see opportunities. But again, if you look at -- my hands are kind of tied because of agreements. So basically, it can't get much lower. So we do see consistent improvement in aerospace for the next three to four years till we get back to normal from all the research that we've read.
Theodore O'Neill: I like that answer.
Lynn Hutkin: If you want, Dan, I can certainly comment on the broader commercial aerospace end market that was…
Dan Bernstein: Go ahead, Lynn.
Lynn Hutkin: So as we see in the fourth quarter, our total commercial aerospace sales, and this is direct, this is not through distribution, was around $2.1 million. And in the first quarter, we saw that go up to $3.3 million. So definitely some recovery here. But to put it in perspective, last year's first quarter, we were at $5.1 million. So it's definitely a partial recovery at this point and we anticipate it being -- along runway, no pun intended, in getting back to that normal that we had.
Dan Bernstein: And also, you should know that we are picking up the benefit of our new acquisition, rms, which is dedicated to the aerospace industry also.
Operator: We'll go next to Jim Ricchiuti with Needham & Company.
Jim Ricchiuti: I just wanted to pursue the increase in backlog. So I think you guys reported in your K, you had a backlog at the end of February of around $180 million. So this is a big increase. And I'm just wondering if you could maybe talk a little bit about which areas, which segments? I mean, you alluded to the demand, I think, in eMobility. But I wonder if you could talk a little bit more broadly about where you're seeing the business recover so strongly and how does this compare with some other cycles?
Dan Bernstein: Every cycle is kind of unique, but this is truly broad based if we took out commercial aerospace. Each one of our product groups are seeing some good substantial increases, that is dependent on where the lead times are. Currently, our Power group has the longest lead times of any products because they do use semiconductors. So those lead times that went from 12 to 14 weeks up to 32 weeks. So we've seen that be stretched out. And so that really helped increase the backlog. Our concern at this point is, historically, is there double ordering taking place because of the long lead times and material shortages, and that's what we have to monitor. But again, if you look at our customers and the different types of products, our fuse product line is not our biggest product line by far in a way but it does have the broadest customer base because it goes into so many different markets and that's a great sign and same with our distribution business, that our distributors sales and industrial, commercial, networking, computing, you name it, security, medical. And every one of these markets, we see strength out there. Again, our only concern is that double booking occurring because of the long lead time and people can't get parts and possibly our other suppliers.
Jim Ricchiuti: Yes, I mean you're anticipating my next question. And how do you monitor, you've improved so many of these periods like this? And is there any better way to monitor it than, say, in the past, when sometimes you guys are caught off guard?
Dan Bernstein: But historically, you try to say there's noncancelable orders, say that you need payment upfront situations like that, that you look at and you try to work through depending on your contract agreements that you have with customers. So again, you just try to hit it, someone has to pay up. If you really want the parts, are you going to pay a premium for delivery and how much do you want to pay upfront to guarantee delivery? So those are the things that you can look at and also noncancelable orders and that could help also.
Jim Ricchiuti: Are you guys seeing any signs that the component constraints are potentially a risk factor just for some of your customers because of their own supply chain challenges, which might to some disruption?
Dan Bernstein: No, we see some slightness of that where we’re taking our parts if we're not getting all the parts in to build a finished product. So trying to push us off. But the problem you have with that situation is then is because there's such a demand from our other customers, if a customer tries to push back our product that we achieve, we can send it to another customer and they use it. We're not going to accept push outs if we have other customers for those products. So basically, if you're a aggressive customer, you're going to take the parts in and wait the extra four to six weeks till the other parts come in or you might lose all your parts. Does that make sense?
Jim Ricchiuti: And I'll jump back in the -- yes, it does. It does. And one more, if I can, I'll jump back in the queue. The SG&A was a bit higher than I think you guys were indicating back in the last call, I think you said around $19 million to $20 million. So is this a level that we think you're going to see going forward and probably trends up with the growth in sales that you're expecting?
Dan Bernstein: Craig, can you answer that?
Craig Brosious: Yes, I think you're right, Jim. I think it will trend up a little bit just because of maybe the increased activity related to travel and stuff like that in the future quarters. We'll also have some incremental expense coming from EOS that basically joined Bel right at the end of the quarter. So we'll have a little bit of an uptick there.
Operator: We'll go next to Hendi Susanto with Gabelli Funds.
Hendi Gabelli: First question, Dan, I saw you talk about price increase that will take place in Q2 and Q3. Would you be able to pass like 100% of the price increase, or is there some like sharing component into your discussion with your customers?
Dan Bernstein: There's always sharing with our customers. But I think our goal -- and I think it's industry wide, it's not us. So I think we do look at each customer. We do look at what our competitors are doing. But across the board, I think we're trying to implement 5% to 12% price increase depending on where the product sits on the fence. Again, it's a new product that's just been introduced. We probably only look for 5% increase, but a mature product that's been beaten up over many years. We have to increase it probably closer to 8% to 10% to improve the margins. And as you know, we have walked away in the past year on products that do have low margins where the customers do not accept a price increases.
Hendi Gabelli: And then in terms of gross margin expectation for this year. Last year, you did improve gross margin quite significantly. And with raw material cost increase and price increase, what are the puts and takes on your gross margin for 2021?
Dan Bernstein: Craig, I think that's a good question for Farouq. What do you say, Craig?
Craig Brosious: Yes, I approve, to address that one.
Farouq Tuweiq: So from a gross margin perspective, obviously, we saw the dip, but as it was alluded to in the open commentary, last year's gross margin was aided by a little bit of kind of one off government subsidies adjustments. So I think when we look it at an organic or adjusted basis, the delta is not as wide. With that being said, I think the overarching theme, that's a number we're laser focused on. And to Dan's -- also, the comments that he made, we are seeing some of this -- we're doing price increases, raw material increases. So we are monitoring that situation closely. Obviously, we're trying to prevent that from dropping to the gross margin line in addition to our other, call it, organic focus on it. Does that answer your question, Hendi?
Hendi Gabelli: And then, Dan, last question. Do you have any insight into IT hardware? Many companies talk about substantial recovery in the second half of 2021. And then I'm wondering what your takes and insight into data center or IT hardware markets?
Dan Bernstein: Again, the hardware, we still haven't seen much -- I mean, that's the only area that we -- our backlog is very strong on those products. But we haven't seen the Ciscos, the Siemens, some of these companies out there, we really haven't seen much bullish behavior from them. Data has been strong for us and I don't think the data farms have cut back at all. So we do have opportunities that we are addressing in certain countries. Again, looking at niche markets, not the Facebooks, the Amazons and Microsofts of the world, but the second tier type of customers, where we feel that we can offer a benefit with our technology and our service.
Operator: And at this time, we have no further questions, and that will terminate this conference call. Thank you for participating.
Dan Bernstein: Thank you for joining us today.
