Bel Fuse [BELFA] Conference call transcript for 2023 q1
2023-04-29 14:33:03
Fiscal: 2023 q1
Operator: Good morning, and welcome to the Bel Fuse First Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Jean Marie Young of Three Part Advisors. Please go ahead, Jean.
Jean Young : Thank you, Jeff, 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 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 as 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?
Dan Bernstein : Thank you, Jean, and thank you all for joining us on the call today. We are extremely pleased to have another successful quarter of improved sales and profitability. This was our best first quarter in the history of our company and was a result of the efforts of all Bel associates. Looking at each of our product groups individually. Our Power group posted a record high in sales this quarter, representing almost half of Bel's consolidated sales. High demand for our front-end, board-mounted power products were the largest drivers. Sales of our e-mobility products remain strong and help us offset the declines seen in circuit protection sales. Our Connectivity Solutions group had a significant rebound this quarter with record sales and restored margin profile. In 2022, faced with the rapid increase by aerospace customers did result in higher inefficiencies, both in manufacturing and military costs. We are now well positioned to fully support our current and growing needs of our commercial and military customers in this segment. From our Magnetic group, 2023 is a year of transition. As announced last year, two of our major production sites in China in the process of moving into one combined site. This move impacts approximately third of our magnetic business. The move is being handled in stages with the final stage scheduled to be completed during the third quarter. The current slowdown in demand from our magnetic customers as I work through inventory on hand is good timing as allows us to more fully focus on this transition. This segment will be well positioned for production efficiency standpoint once customer demand returns. Also part of our Magnetic group is our Signal Transformer business, which was a financial turnaround story last year. We're happy to report Signal's progress that continue with sales growth of 8% and almost double their gross margin percentage as compared to Q1 '22. Overall, we are extremely pleased with our progress to date and are excited about the road ahead. I would like now to turn over the call over to Lynn to provide financial update.
Lynn Hutkin : Thank you, Dan. As Dan mentioned, Q1 was very strong with year-over-year growth seen across each of our product groups. Overall, first quarter sales were $172 million, an increase of 26% from the first quarter of 2022. Gross margin for the quarter increased to 31.1% as compared to 25% a year prior. By product group, Power Solutions and Protection sales were $83.2 million, up 41% from last year's first quarter. As Dan mentioned, this was largely driven by higher demand for our front-end, board-mount and e-mobility power products. Gross margin for this group was 35.7% for the first quarter, an 860 basis point improvement from Q1 '22, 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. Our Power Solutions and Protection group had a book-to-bill ratio of 1 during the first quarter of 2023 and a backlog of orders of $322 million. Turning to our Connectivity Solutions Group. Sales were $53.4 million, an increase of 22% from last year's first quarter, primarily due to the continued rebound of the commercial aerospace and military end markets. Gross margin for this group came in at 34.1% for the first quarter of 2023, up from 26.5% in the first quarter of 2022. Efficiency improvements implemented at the factories resulted in our ability to ship a higher volume of product during the first quarter. The margin improvement was further driven by more favorable pricing, which enabled us to realign profitability given our higher input costs and overhead needed to accommodate current demand levels. The Connectivity Solutions group had a book-to-bill ratio of 1.05 during the first quarter of 2023 and a backlog of orders of $116 million at March 31. Lastly, our Magnetic Solutions group had Q1 sales of $35.8 million, up 4.5% from last year's first quarter. Gross margin for this group improved to 22.8% in the first quarter of 2023 from 20.1% a year prior. Margins for this group benefited from the higher sales volume and also a favorable shift in exchange rate of Chinese renminbi versus the U.S. dollar, which lowered our labor cost in China versus 2022. As customers work through their inventory on hand, bookings within our Magnetics group continued to be low in Q1, resulting in a book-to-bill ratio of 0.4 during the first quarter of 2023. This group finished Q1 with a backlog of orders of $72 million. At the consolidated level, there were $18 million of orders scheduled to ship in Q1, which did not primarily due to component availability. This is down by approximately $10 million from the Q4 level as component availability has started to ease in certain areas. Regarding our overall backlog, it was $510 million as of March 31, down 12% from the 2022 year end level. It's important to note that this reduction and further reductions in backlog are expected and intentional as component availability eases and lead times begin to normalize. Our selling, general and administrative expenses were $25.3 million or 14.7% of sales up from $21 million in the first quarter last year, but down as a percentage of total sales. Within SG&A, the primary increases were related to salaries, fringe benefits in addition to $1.6 million of litigation plaintiff costs associated with our MTS matter as discussed in our recent 10-K filing. We anticipate these litigation costs to continue through the balance of the year. Restructuring costs amounted to $3.5 million in the first quarter of 2023. These costs largely related to the factory consolidation initiative in China. We expect future restructuring costs of approximately $3 million, primarily in the second quarter of 2023, with the balance to be incurred in the third quarter. Turning to balance sheet and cash flow items. We ended the quarter with a cash balance of $77.8 million, an increase of $7.6 million from December 31st. We generated $16.8 million in cash flow from operating activities during the first quarter. With capital expenditures of $3.8 million, this resulted in free cash flow generation of $13.1 million for the first quarter of 2023, an improvement of $23 million versus the first quarter of '22, when free cash flow was negative. Our inventory level decreased by $7.7 million from year-end, resulting in improved inventory turns of 2.9 times during Q1 versus 2.6 times from year-end. Inventory levels, while down some from year-end continue to be high. There is a company-wide effort related to improving our turns and bringing the overall level down. Lastly, I wanted to provide an update on our outstanding debt balance. At March 31, we had $100 million outstanding on our revolving credit facility with a blended cost of debt between our variable and fixed portions of 3.8%. Earlier this week, we paid down an additional $12.5 million, bringing our current revolver balance as of today, down to $87.5 million. Of this amount, $60 million is at a fixed rate of 2.5% under our swap agreements that are in place, with only $27.5 million remaining of variable rate debt, which is at a rate of 5.8%. I'll now turn the call over to Farouq for additional color and outlook. Farouq?
Farouq Tuweiq: Thank you, Lynn. As Dan and Lynn noted previously, the theme here is that Q1 was an expectation surpassing quarter by the team in the midst of some challenges and a true testament to the diversity of our business, products and markets and customers. Looking ahead, and as noted in our release, we're expecting another healthy quarter for Q2 with sales in the range of $162 million to $170 million. Given our Q1 actuals and expectations for Q2, we are raising our full year 2023 outlook and are now estimating sales to be on the higher end of the range communicated on our last earnings call. As previously discussed, we see strength and resiliency in certain end markets this year, including commercial air, military, e-mobility. Our magnetic customers, consumer-facing products and overall distribution channels will be working through their inventory on hand, which we estimate will take a couple of quarters. It is important to note that not every dollar of sales that Bel is equal in terms of profitability. The strong end markets I just highlighted have a greater weight in terms of profitability versus products used in networking or consumer-facing products. We anticipate that this shift in product mix will lead to a higher consolidated margin profile as we go through 2023. While fluctuations in ordering and consumption patterns aren't inconvenience to our linear financial results. The good news is the end customer demand for our magnetics products remains strong. We know this because they are the same customers who we currently can't sell enough to on the power side for the same end applications. Therefore, we view this as more of a timing item versus an overall demand indicator. The amalgamation of the above have given us the comfort in our strategy and thus raising our 2023 outlook despite some headwinds. In addition to our various operational initiatives, busy sales activities and trying to grow and manage the business, we have been active on a number of fronts. For example, as we noted in our annual proxy, we have revamped our approach to executive compensation with clear targets for each business unit, along with Dan and myself. We believe these changes are focused on better motivating the team through clarity of performance requirements, while aligning it with industry norms and our shareholders. Another example is we have kicked off our annual strategy process in off-site and building off the work that was done last year. That work last year has led to some great outcomes end of the year, and we look forward to this year's process. Overall, we are cautiously optimistic and are encouraged by what we are seeing for the rest of the year. We remain committed to finishing the initiatives that are currently underway and implementing fresh strategies that will expand our business and benefit our shareholders, as we chart the course for the next stage of Bel's journey. With that, I'll turn the call back over to Dan.
Dan Bernstein : Thank you, Farouq. Can we open up the call now for questions, please?
Operator: Yes, of course. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Our first question is from Jim Ricchiuti of Needham & Co. Please go ahead.
Operator: Thank you. The next question is from Theodore O'Neill of Litchfield Hills. Please go ahead. Sir, your line is open. Would you like to take that you're not muted. We have technical issue on that line. We're moving on to the next question from Robert [Indiscernible] of Venator Capital Management. Please go ahead.
Operator: Thank you. The next question is from John Hudson, who is a Private Investor. Please go ahead.
Operator: Thank you. Our next question is from Hendi Susanto of Gabelli Funds. Please go ahead.
Operator: There are no further questions at this time. And I would like to turn the floor back over to Dan Bernstein for some closing remarks.
Dan Bernstein : We'd like to thank you for joining our call today, and we look forward to continued success throughout the year. Thank you.
Operator: Thank you very much. That does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.
