Bel Fuse [BELFA] Conference call transcript for 2023 q3
2023-10-26 00:00:00
Fiscal: 2023 q3
Operator: Good morning and welcome to the Bel Fuse Third Quarter 2023 Earnings Conference Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [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 proceed.
Jean Young: Thank you, Latanya, 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 federal securities laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2023.
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 market close 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 December 31, 2022, 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: Yes. Thank you, Jean, and thank you for joining us on our call today. We are pleased with our results for the quarter. We continue to execute on our plan for growth and strategic improvement on profitability.
As discussed over the past several quarters, the team has taken a multipronged and balanced approach to the way we do business in terms of customers we serve, products we sell and markets we support and doing it all in a most cost-efficient manner. Our third quarter sales continue to be healthy, driven by oral patterns of our customers, whereby we saw different growth profiles across our diverse product offerings. We saw growth in certain markets such as defense, aerospace, e-mobility, rail that was offset in general industrial premises wary consumer.
On the distribution side of the business, we see some pockets of growth however, the distribution channel continues to have elevated levels of inventory that affected our new audits. As we look at our top line trend, it's important to remember that we are an engineered driven company first. We've been successful in supporting demolished technology for over 70 years, and this is a testament to our ability to work closely with our customers, engineers.
In developing the future products, there's a value associated with that. A few years ago we were eager to support all customers at all cost, allowing us to engage in projects we felt a worthwhile pursuit, but which it turns to a less than great outcome for us. To be clear, our priority and focus would be along with customers who value the quality and technology of our price, and we're not solely focused on price. We no longer have a problem walking away from these sales that fell below our gross margin requirements. It allows our engineers to work on more meaningful, desired and open space in the factory 4 to support our growing end markets such as e-mobility, medical, industrial and rail.
Our internal model in 2023 is building a better Bel, and this touches all areas of our business: HR, finance, product development, business development, procurement and manufacturing. There isn't a single function or department within the organization that doesn't have improved initiative to take place. Our collective actions have resulted in improved profitability and increased cash generation.
This gives us financial flexibility to continue to explore various growth, and capital acceptation strategies, which could include a potential stock buyback subject to market conditions, evaluation of acquisitions and other strategic initiatives to support future growth of the company.
As we approach our 75th anniversary on January 11, 2024, it is exciting to see the recent market cultural shifts that have taken place internally and the level of energy and dedication put forth by our global team as we deliver better value to our customers, shareholders and associates. With that said, I'd now like to turn the call to Lynn to provide our financial update.
Lynn Hutkin: Thank you, Dan. From a financial perspective, sales were fairly stable for our Connectivity and Power segments as compared to the third quarter of 2022, with the largest impact felt within our Magnetic segment. While the magnetic segment was down from Q3 '22, we did see an almost 20% rebound from a low point in Q2 '23.
Overall, third quarter 2023 sales were $159 million, as compared to $178 million in the third quarter of 2022. Of the $19 million decline, $8.4 million was attributable to reduced expedite fee revenue in 2023 quarter versus Q3 '22.
Gross margin continued to increase on a year-over-year basis for 8 consecutive quarters and reached 35% as of the third quarter of 2023 as compared to 29% in last year's third quarter. Margin improvement continued and was led by favorable product mix and the successful execution of a variety of cost reduction and efficiency programs.
By product group, Power Solutions and Protection sales for Q3 '23 were $74.9 million, down 2.1% from last year's third quarter. Within the Power Group, an $8 million decline in expedite fee revenue was largely offset by higher demand for our front and power products serving our networking end market.
Sales of our e-mobility products also remained strong and helped offset declines in circuit protection and distribution sales.
Gross margin for our Power Group was 41.7% for the third quarter, a 930 basis point improvement from Q3 '22, primarily driven by a favorable shift in product mix, cost reduction efforts and favorable FX.
Our Connectivity Solutions group had sales of $51.8 million in the third quarter of 2023, an increase of 3% from last year's third quarter, with continued strength in defense and aerospace. Gross margin for this group came in at 35.8% for the third quarter of 2023, up from 26.1% in the third quarter of 2022.
Lastly, our Magnetic Solutions group had Q3 sales of $32 million, down 37.2% from last year's third quarter. Gross margin for this group was 22% in the third quarter of 2023 as compared to 30.4% during last year's third quarter. We are happy to report that $6.9 million shipped from the new BGX site in China during the third quarter of 2023.
At a consolidated level, our backlog of orders totaled $408 million at September 30. Historically, our backlog typically represented approximately 1 quarter's worth of sales when lead times for 8 to 12 weeks. Our current backlog levels continues to represent about 2.5 quarters' worth of sales, and we view this as still being kind. We expect our level of backlog to come back further in future quarters as lead times continued to normalize.
Our consolidated book-to-bill ratio improved sequentially from 0.6% in Q2 '23 to 0.8% for Q3 '23. Our Q3 bookings within our commercial air end markets were $15.7 million, a new quarterly record high for us in this end market.
Our selling, general and administrative expenses for the third quarter of 2023 were $23.7 million or 14.9% of sales, up from $22.2 million or 12.5% of sales in the third quarter of last year. This increase was largely related to higher salaries and French benefits in the 2023 quarter partially offset by lower sales commissions.
Turning to the balance sheet and cash flow items. We ended the quarter with a cash balance of $100.2 million as compared to $70.3 million at year-end. We generated $81.4 million in cash flow from operating activities during the first 9 months of 2023. With capital expenditures of $9.7 million, this resulted in free cash flow generation of $71.7 million for the first 9 months of 2023, an improvement of $53.3 million versus the same period of '22.
Our inventory level decreased by $29.3 million from year-end, resulting in improved inventory turns of 2.9x during Q3 '23 versus 2.6x from year-end. While progress has been made on bringing inventory levels down, this remains a company-wide initiative to restore our inventory turns to better align with industry norms.
Looking at the third quarter of 2023, we generated $40.8 million in cash flow from operating activities. This translated into free cash flow of $38.2 million during the third quarter. From a debt perspective, our outstanding balance remains at $60 million and is effectively subject to a fixed interest rate of 2.5% through our swap agreements that are in place through 2026. I'll now turn the call over to Farouq for additional commentary. Farouq?
Farouq Tuweiq: Yes. Thank you, Lynn. Over the past months, I've spent quite a bit of time visiting Bel facilities in Europe and in the Dominican Republic and what a big change I've seen from just one year ago. As I look at the mindset shift that has resulted in improved productivity and cost containment at the factory level, it has been nothing short of stellar.
We continue, though, to challenge our facilities to improve globally and expect big things from there. We also have been devoting a good amount of time on our material spend to ensure we are aligned with vendors appropriately, match for our size that we believe will ultimately result in a higher level of savings.
Dan and I also attended our European sales meeting a few weeks back and believe it's in a great hand at charts its path forward to further penetrate Europe. On a side note, Europe has been a strong performer for us this year despite some of the challenges there, and we think there is more to be done in this region.
Looking out to the fourth quarter, based on currently available information, we provided sales guidance in the range of $146 million to $154 million, with gross margins roughly in line with Q3 '23 levels.
In addition to some voluntary turning on the top line, as Dan mentioned, the channel continues to be over inventory, especially with our distributor of customers. We expect this situation will continue for another 2 quarters or so before it returns to normalcy though there are certain pockets of growth in the channel, which is good to see.
From a supply chain perspective, there has been easing and availability of passive components, but we are still seeing longer lead times for others, mainly on the IC side.
In summary, it's been a busy year on all fronts, the progress made in many areas of the organization. I'll reiterate my sentiment from prior quarters and that is that we are on this journey of continuous growth and improvement. Change is rarely linear or immediate. We do know we are building a healthy organization that's more focused on pursuit of growth and demanding operational excellence. These are all things that excite all of us. With that, I'll turn the call back over to Dan.
Daniel Bernstein: Thank you, Farouq. And at this time, we would like to open up the call to any questions you might have.
Operator: [Operator Instructions] Our first question comes from Theodore O'Neill with Litchfield Hills Research.
Theodore O'Neill: Congratulations on a good quarter. Lynn, I know you said at the Jefferies conference that your debt is as low as it's going to get. But I was wondering if you could talk about either M&A or how you're going to deploy the capital because at the time of the conference, you didn't have $100 million in cash and you do now and you're talking about bringing inventory turns down as well. So that would add to your cash balance as well.
Farouq Tuweiq: Yes. So I'll just jump in here, Theo. We did have a nice cash build this quarter. I'd also point out that we're roughly on track to double last year's CapEx spend internally here as we look at various growth avenues and investments. As Dan had pointed out too, we are obviously always on the hunt for M&A. We think that there is a little bit of a slowdown right now in the M&A market, given some of these global circumstances and kind of situations that we keep reading about. We do believe that will change.
And as we build our cash here, obviously, we're always looking for ways to invest in the future of the business for the long term. So we think that there will be a use for it. History has shown that if you look back to a bunch of years, quite frankly. So we do know that they will be used there for it. But as also Dan called out, we're always looking for ways to improve our capital allocation strategy. So I'll kind of leave it at that.
Theodore O'Neill: Okay. In the e-mobility segment, are you seeing any particular pockets of strength or growth in there? And could you comment just broadly about if you're seeing any inflation effects in the supply chain?
Farouq Tuweiq: Yes. I mean inflation is all around with under the wage level. And obviously, that doesn't just impact us, it impacts all of our suppliers as well and our customers. So I think inflation is something that everybody is wrestling with and how to contain it. So as we think about automation, as we think about streamlining, right, there's a big emphasis on ensuring efficient operations.
So it is definitely something that we are thinking about and managing as to what frankly our numbers, our facility consolidations will help us manage some of this inflation but it is a point of consideration quite frankly, through everything we do. Whether the customers we pursue, the products we pursue, our pricing, our operations. So it's definitely front and center. So we do think it is something that everybody is wrestling with, quite frankly.
Theodore O'Neill: And on the e-mobility side, any particular spots of strength there?
Farouq Tuweiq: Yes. So on the e-mobility side, generally, maybe just a general comment on industrial e-mobility. These are big-ticket items that cost more than traditional, let's say, ice buses as an example. So as a result of that, we're tilting overall industry excitement around the future of e-mobility.
I think some of the nature of our customers, we are seeing that are, call it, a little more start-up in nature as they go through funding rounds. Those are points of consideration. But the good thing about our e-mobility business, it's diverse and it covers customers from startup mode all the way into kind of mature household names.
But overall, I'd characterize it as a very good end market. But like in the other market, a little bit of challenge there at the customer level. But I think for the most part, we're bullish on that for sure.
Operator: Our next question comes from James Ricchiuti with Needham & Company.
James Ricchiuti: Maybe just to close the loop on the e-mobility side. I think you said at one point that you expected this revenue to double this year. Is that still the case? Or are you seeing some macro influencing some of the demand in that market?
Lynn Hutkin: Yes. So Jim, last year, e-Mobility sales were in the neighborhood of $20 million. For the first 9 months of this year, we're at $22 million. So probably will not be doubling this year at this rate, but we've already been seeing -- we're already exceeding last year's full year e-Mobility sales but will not double this year.
Farouq Tuweiq: And also, I think on the e-Mobility side, given some of the components, there was a little bit of challenges in getting product out of the door earlier this year. So we do expect a nice finish here in Q4, but I don't think it will be a double level.
James Ricchiuti: Got it. There's a lot of moving parts on the sales line. Just you're exiting some -- you've exited some low-margin business. You have these raw material surcharges, that impact. Is there any way to think about what the revenue growth was organically 9 months or Q3? I'm just trying to get a better fix on the top line.
Farouq Tuweiq: So revenue, excluding PBV?
James Ricchiuti: Yes. I mean, Farouq, I guess -- and we could discuss this offline. It's just yes, I know that you're deemphasizing some low-margin business that's coming out. There's an impact from the raw material surcharges. But is there on an organic basis, are you seeing growth? Clearly, there's some overhang in the channel, the distribution channel, I think we all get that.
Daniel Bernstein: Jim, I think because of the long lead times that were faced over the past 24 months, our pricing that we put in place -- you really in effect that we don't lose sales because of price increases. I think going forward, that might change as lead times come down. So as I said, over the past 24 months, our new strategy, I'm looking at large and not just taking business or take business, hasn't really -- we haven't seen the effects of it at all because of the lead times. So most of it is in PBV.
James Ricchiuti: Okay. And maybe just moving to the facility consolidation. You get a little bit of color on some of the early benefits. How do we think about the balance of that rolling out over the course of '24? Is that expected early in the year? Or is it going to be spread more evenly over the course of the year?
Farouq Tuweiq: I'd say the way I think about it, Jim, is it's kind of a phased rolling approach. So we started seeing a little bit of benefits in Q2, more in Q3. We expect to see more in Q4. My guess is there -- if I were just going to hedge it a little bit, my guess is that there will still be a little bit maybe cost that dribbles into Q1 next year.
But I think largely, we expect that this will be behind us in 2023. Maybe with a little bit of overhang into next year. But I think for the most part, we've made some pretty good progress here. So yes, so I think we'll largely see the benefits of that throughout all of next year.
Lynn Hutkin: Just to circle back quickly on your question about the expedite fee revenue. We do now have in the earnings release itself in the non-GAAP tables, GAAP net sales and what the expedite fee revenue is along with the non-GAAP adjusted net sales. So for the 9-month period, the numbers are noted there. So on that basis, year-over-year for the 9-month period, it was a $22 million increase in non-GAAP adjusted net sales, which was just under 5%.
James Ricchiuti: Thanks Lynn, for pointing that out. And then just in terms of that some of the business that you've deemphasized, have you put a number to that through the 9 months?
Farouq Tuweiq: So I mean, we talked about in the last quarter, there was kind of a slug of roughly $9 million that we talked about. The way I would also tend to think about it, though, Jim, it's really at a SKU at an order level right? So when the orders come in, we kind of -- or when we grow stuff, we're going to put our price that works for Bel Fuse, right? But maybe we'd ultimately not get there. So we could walk with.
So I kind of think of that as a regular way SKU maintenance as opposed to kind of big brand deals walking away. I think we're -- I'd say we're largely probably behind some of these kind of grandiose things, and it's going to become an order-driven event. And remember, orders could be small, call it, $1,000 or smaller and up to hundreds thousands of dollars. So it's really going to be done at that kind of line level.
James Ricchiuti: No, that's clear, Farouq. And Lynn, I just want to make sure I'm clear on one other thing on commercial here. You gave a bookings number. And I just -- did you say what the commercial air revenues were in the quarter? I think my recollection is the revenues from commercial air were $15.9 million in Q2? Or was that a bookings number?
Lynn Hutkin: No, you're correct. So the commercial air sales in Q2 were $15.9 million. For Q3, they were down a bit. They were $11.3 million for the quarter.
James Ricchiuti: Okay. But generally, it sounds like you're still seeing pretty healthy demand in that market.
Lynn Hutkin: That's right. So as we mentioned earlier, we did have a record bookings quarter for that end market in Q3. So the bookings for Q3 was $15.7 million.
Farouq Tuweiq: And I think, Jim, the way I kind of think about these end markets like defense kind of just the ordering patterns, shipping patterns kind of, are a little bit maybe more lumpy. So I think that's what [indiscernible] as Lynn noted with the bookings and kind of -- and obviously, the conversations we're having with our various customers. It's kind of what gives us that sentiment of positivity on outlook.
James Ricchiuti: Got it. Congrats on the quarter, by the way.
Daniel Bernstein: Thank you.
Operator: [Operator Instructions] Our next question comes from Hendi Susanto with Gabelli Funds.
Hendi Susanto: So Dan, I would like to hear your insight into inventory at customer and distribution across various businesses. Like we have heard like some -- many companies reported weak -- broadening weaknesses in industrials. And I'm wondering like how much we should factor that in going forward. And then if you look at Magnetic, can we assume that inventory correction or digestion is at the bottom of its market? And then I'm also wondering like when we may see a growth recovery in Power Solutions and Protection.
Daniel Bernstein: Okay. I think we talk more Power Solution and Protection. A lot of it, again, is coming from the circuit protection area, and that's a very heavily distribution period business where most customers buy circuits, users through distribution because of the low price. From everything we understand to people like Dow and Avnet, DigiKey and Mouser that they still have to work through their inventory, they bought a way too much inventory and at the highest level.
We hope and believe most of it should be flushed out by the first or the middle of the second quarter, and we should get back to normal ordering at that point in time. So I would say middle of second quarter next year, everybody is predicting that like from an order process will go back. Your next question?
Farouq Tuweiq: And then -- sorry, what was the next question?
I think that answered your claims about return to growth, right, Hendi?
Hendi Susanto: Yes. Yes.
Farouq Tuweiq: Yes. And maybe just to also kind of supplement to -- Dan kind of triggered my memory here. So as a reminder, generally Q2 and Q3 are our strongest quarters. Q1 historically is our weakest quarter. And then Q4 is somewhere in the middle. So the way we kind of look at just kind of the guidance we gave out is kind of the normal cadence of Q4 with some of the holiday patterns and goal that we can in Asia and so on. So wanted to kind of throw that out there.
Hendi Susanto: Yes. And then Farouq, how sustainable is the gross margin at 35% level now?
Farouq Tuweiq: Yes. I mean -- so I mean if you look at it, right, we see -- we do know that there is more cost improvements to be done within the business. Magnetics, while sequentially up on sales, it is still down on low margins, so we do expect improvements in the magnetics side of the house. And so as I think about those 2 things, coupled with weakness that we do see a little bit of power, as Dan mentioned, and also a little bit of connectivity.
So we've yet to hit on all cylinders, right? So our expectation is if we can kind of do this in some pockets of weakness, our expectation is between cost and a little bit of recovery across the business, we do think it's sustainable.
And now does it mean that we may be impacted here and there. Sure. But at the end of the day, I think our expectation is at the gross margin level, we're -- at a consolidated level, we're kind of in the zip code of where we should be. But at the same time, we are working through a lot of things internally and externally here.
Hendi Susanto: And then the press release also called out rail application. Would you refresh our memory, like where the opportunity and then where your products are in rail applications?
Farouq Tuweiq: So maybe just on the rail business. The rail business is really a quality business. But as we know, rail -- I kind of think of it as a step removed from kind of defense in the sense of ordering patterns. The complexity and demanding nature of rail is a business that we've been in for, I think, over 40 years. So this is a great business for us.
We've seen more investment coming just quite frankly, globally, but predominantly out of Europe and Asia, I would say as they invest in their rail applications. So we're seeing increased orders there. Also some of the new kind of products and quite frankly, we reassigned some more resources to focus on that market. So we're seeing the benefits of that here.
I think we started doing that in 2021 or perhaps early '22 to kind of really focus on that side. In terms of applications, we tend to be on the passenger rail side of the business. And we have various applications throughout the car anywhere from, I think, the lighting, applications, signaling and kind of other products. So it's a pretty diverse business product for us. In terms of size of that business?
Lynn Hutkin: Yes. So our rail sales in Q3 were $6.4 million. So it represented about 9% of the Power segment.
Operator: Thank you. At this time, I will turn the call back over to management for closing comments.
Daniel Bernstein: Thank you for joining us today, and we're looking forward to speaking to you next year, and have a good day. Thank you.
Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
