Good day, and welcome to the Bel Fuse Inc. Third Quarter 2020 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dan Bernstein, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Anna. Joining me on the call today is Craig Brosious, our Vice President of Finance; Lynn Hutkin, our Director of Financial Reporting. Before we begin the call, I'd like to ask Lynn to go over the Safe Harbor statement. Lynn?

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 fourth quarter sales, anticipated cost savings from the closure of our Power R&D facility in Uster, Switzerland and our sales office in Germany, as well as from a streamlining of our North America sales organization, and the impact of potential future acquisitions, our 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. Among the factors that could cause actual results to differ materially from such statements are the market concerns facing our customers; the continuing viability of sectors that rely on our products; the impact of public health crises, such as governmental, social and economic effects of COVID-19; the effects of business and economic conditions; difficulties associated with integrating recently acquired companies; capacity and supply constraints or difficulties; product development commercialization or technological difficulties; the regulatory and trade environment; risks associated with foreign currencies; uncertainties associated with legal proceedings; the market's acceptance of the company's new products and competitive responses to those new products; the impact of changes to U.S. trade and tariff policies; and the risk factors detailed from time-to-time in the company's SEC reports. In light of the risks and uncertainties, there can be no assurance that any forward-looking statement will in fact prove to be correct. We undertake no obligation to update or revise any forward-looking statements. We also may discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our release. I would now like to turn the call back to Dan for a general business update.

Okay. Thank you for joining our call today. I hope you and your families continue to stay healthy during these times. First, I would like to provide an update on the facilities around the world as it relates to COVID. We are pleased to report that all our manufacturing sites, globally, have been operational throughout the third quarter. As always, the situation around COVID remains fluid, especially as we enter the colder months. We will ensure ongoing compliance with local regulations to manage our risk. Our production managers and manufacturing associates have shown unrelenting dedication to Bel and its customers over these past seven months, and we truly appreciate what they do for us each day during this challenging time. Now turning to our results. We are pleased that our global reduction plan over the past year has again translated into meaningful gross margin improvement during the third quarter. The inclusion of sales related to our recently acquired CR business, along with our ongoing strategy to streamline the organization while eliminating certain low-margin products has driven much of the improvement in our results. Our sales level remains consistent with the pre-COVID level of the third quarter of 2019, while Bel adjusted EBITDA, as outlined in our release, improved by 33% during this period. Excluding CUI sales in the third quarter, we were down $10.9 million from last year's third quarter. With declines seen across each of our product groups, the weakness in the commercial aerospace end market accounted for $7 million of the decline. Sales of front-end products and power products were down $3.1 million from last year's third quarter, largely due to us accepting new orders from a low-margin data center customer. This was partially offset by growth in our circuit protection sales of $1.4 million. Our integrated connected module sales were lower than the prior year by $1.3 million due to a reduction in demand from one of our networking customers. Despite lower sales, we are encouraged to see that each of our three product groups showed improvement in gross margins compared to last year's third quarter, as a result of the success in executing our global cost-reduction plan. As visibility remains limited going forward, we anticipate fourth quarter sales to be more comparable to the fourth quarter of last year. However, we do have areas of continued strength. Big sales into the military segment during the third quarter were up 33%, leading to record shipping quarters for the end markets. The growth we've seen in both the U.S. and European defense markets, in the areas of emissions military avionics and ground communication programs. The CUI group had a 40% increase in sales over the standalone sales during last year's first quarter. Our circuit protection sales also saw growth in the third quarter, with a 43% increase over last year's third quarter. These are expected to be continued areas of growth for us. There's also been meaningful activity with our e-mobility end market as we've been shipping power-related prototypes for several new products. Our e-mobility products are expected to be significant contributors to Bel's growth in the long term. As part of our global cost reduction plan, the closure of our facility in Uster, Switzerland in late August has brought our annual fixed cost down by $3 million. With Uster closing, the R&D activities have been shifted to other existing R&D groups throughout the world. Further, we recently announced the anticipated closure of our sales office in Germany and streamlining of our North American sales organizations. These actions are expected to result in an incremental $1 million of annual cost savings starting in the fourth quarter of 2020. The Bel management team remains focused on bottom-line growth while actively looking at strategic acquisitions that will better position Bel for the future. And with that, I'd like to turn the call over to Craig to run through a financial update.

Thanks, Dan. Sales by product cycle for the third quarter of 2020 were as follows: Power Solutions and Protection sales were $47.8 million, up 18.5% from last year's third quarter. Connectivity Solutions sales were $38.5 million, a decline of 13.5% and Magnetic Solutions sales were $38.2 million, down 3.7% from last year's third quarter. On a consolidated basis, gross profit margin, excluding R&D expense, increased to 26.9% in the third quarter of 2020 as compared with 23% in the third quarter of 2019, as a result of a combination of factors. Overhead and indirect labor costs were $3 million lower during the third quarter of 2020, primarily due to restructuring measures implemented during late 2019 and a reduction in the cost structure of our Cinch Connectivity Solutions segment to align with current sales volumes within that segment. A portion of the margin improvement in the third quarter of 2020 related to lower material costs and stocks of high-cost components that had previously been built up in our supply chain have now been worked through, resulting in significantly lower material costs in the P&L as compared to the same quarter last year. Research and development costs were $5.7 million during the third quarter of 2020, a decline of $450,000 from the third quarter of 2019, primarily due to restructuring efforts implemented during the latter part of 2019. Our selling, general and administrative expenses were $18.9 million or 15.2% of sales as compared with $18.5 million or 14.9% of sales in the third quarter of 2019. Lower travel expenses of $514,000, a reduction in ERP costs of $242,000 and savings from other cost containment efforts largely offset the $1.9 million of incremental SG&A expenses associated with the recently acquired CUI business. SG&A expense also included an incremental gain on the cash surrender value of COLI policies of $408,000 in the third quarter of 2020 compared to the third quarter of 2019. On a go-forward basis, we would expect SG&A to run between $19 million and $20 million per quarter in the near-term, as we expect our T&E spend will continue to be lower than normal for the remainder of the year. These factors resulted in income from operations of $8.8 million in the third quarter of 2020, as compared to a loss from operations of $5.2 million in the third quarter of 2019. If you'll recall, the third quarter of 2019 included an $8.9 million impairment charge related to our goodwill. Other income expense net was an expense of $1.2 million for the third quarter of 2020, as compared to income of $629,000 during the third quarter of 2019. The fluctuations from last year's third quarter were largely related to a foreign exchange loss of $1 million in the third quarter of 2020, as compared to a foreign exchange gain of $600,000 in the third quarter of 2019. Interest expense was $1.2 million in the third quarter of 2020, down slightly from the same quarter last year due to the lower interest rate in effect during the 2020 quarter. We expect interest rates to be lower in the fourth quarter related to the decreases in both LIBOR and in the company's spread on its credit facility along with a reduction in our outstanding debt balance. We had a benefit from income taxes of $1.1 million in the third quarter of 2020 compared to a provision of $590,000 during last year's third quarter. Changes in federal tax law around the GILTI tax coupled with a reversal of uncertain tax positions led to a benefit from income taxes in the third quarter of 2020. The tax provision for the third quarter of 2019 was unfavorably impacted by the impairment of goodwill in our North America segment. Earnings per share for the Class A common shares was earnings of $0.57 per share in the third quarter of 2020, as compared with a loss of $0.51 per share in the third quarter of 2019. Earnings per share for the Class B common shares was earnings of $0.61 per share in the third quarter of 2020, as compared with a loss of $0.53 per share in the third quarter of 2019. On a non-GAAP basis, which excludes certain unusual and other nonrecurring items, EPS for Class A shares was earnings of $0.58 per share in the third quarter of 2020, as compared with earnings of $0.19 per share in the third quarter of 2019. On a non-GAAP basis, EPS for Class B shares was $0.62 per share in the third quarter of 2020 as compared with earnings of $0.20 per share in the third quarter of 2019. And now I'd like to go through some balance sheet and cash flow items. Our cash and cash equivalents balance at September 30, 2020 was $81.1 million, an increase of $8.8 million from December 31, 2019. Our cash balance grew by $5.8 million sequentially from the June 30 balance. During the first nine months of 2020, we generated cash flows from operations of $34.8 million. We made net payments of $18.2 million toward our outstanding debt balance and used cash for capital expenditures of $4.5 million, dividend payments of $2.4 million and interest payments of $3.4 million. Accounts receivable were $69.7 million at September 30, 2020, as compared with $76.1 million at December 31, 2019. Days sales outstanding decreased to 52 days at September 30, 2020 as compared to 60 days at December 31, 2019. The decrease in our accounts receivable balance was largely due to lower sales in Asia where payment terms tend to be longest. Inventories were $103.6 million at September 30, 2020, down $3.6 million from December 31, 2019. The decline you see in raw materials is due to the reduced material intake in anticipation of a slower fourth quarter in 2020. Accounts payable were $40.1 million at September 30, 2020, down $4 million from its level at December 31, 2019, primarily due to lower purchases of raw materials during the third quarter of 2020. Bel's total outstanding debt balance was $125.4 million, as of September 30, 2020 net of deferred financing costs, a decrease of $18.3 million since the 2019 year-end balance. This primarily reflects voluntary debt repayments of $18.2 million made during the first nine months of 2020. Book value per share, which is calculated as stockholders' equity divided by our combined A and B classes of common stock outstanding was $14.46 per share at September 30, 2020, as compared to $13.69 per share at December 31, 2019. And with that I'll turn the call back over to Dan.

Thank you, Craig. At this time Anna, we please open the call up for questions?

[Operator Instructions] We'll take a question from Mike Cikos with Needham & Company.

Hey, guys. Good morning and thanks for taking your time for the questions today. First thing I wanted to ask you about was this guide for the flat year-on-year revenue, as we look to Q4. And I know that you guys are walking away from some of this low-margin business now from two customers and you have the CUI acquisition under your umbrella now as well. Can you talk to I guess some of the puts and takes for the underlying organic business? Just wanted to get a sense of how you guys see the different segments playing out in Q4 to help you get to flat revenues from a year-on-year perspective?

Again, we have certain segments within product groups, as we mentioned that CUI have had since acquiring them. They have done a tremendous job on topline growth. Our Fuse Group has done very well on topline growth. The Cinch group has really been hit hard because one of the major aerospace companies has planes that are not allowed to fly. We're hoping that they have permission by the end of this year. But when they do get permission, how many airlines are going to be buying airplanes? So we have no idea. At one point, they said they would be back in 2024. Now, the latest news is 2022. So, this presents limited visibility on the aerospace side. It's tough to determine how we move forward there with topline growth. On the other hand, we did have substantial military growth and we're really pleased with that and we think we can maintain that military growth. That'd be difficult to offset what we lost in aerospace. Again, the CUI addition has made that group substantially stronger from a topline growth perspective. Also, circuit protection, as we mentioned, has had 40% growth. We are doing a lot with e-mobility. We've probably signed about 50 NDAs a month. So, there's a lot of activity. In addition to that, we've been averaging $2 million a week in bookings. And this past week, we did about $5 million. So, I do not know if that's a good sign or not, but it's the best booking week we had in probably three years. I think the Magnetic Group has very limited growth potential at this time because of the limited customer base we have within that group. We still think we have a lot of potential again on the Cinch military side. On the power side, I think they have growth in e-mobility, circuit protection, and adapters. We are also doing a lot on basic power products we build ourselves before the acquisition.

That's helpful. Thanks for walking me through that. And I guess another item, I wanted to touch on again, these gross margins continue to grow and be a positive point for the Bel Fuse story. Just curious, if you could talk to anything that might have been one-time in Q3. I know you spoke to the material costs in Q3. Were you able to size up what the benefit was for Q3 from those material costs? And if that becomes a headwind now in Q4, as well as typical seasonality going from Q3 to Q4, I believe that those gross margins typically come down sequentially. But any input there would be beneficial.

Okay. Craig, do you want to address this, or do you want Lynn to discuss it?

No, I can address part of it. With respect to maybe some one-time items that may not continue going forward, I mean, we did receive additional subsidies from the Chinese government during the quarter to the extent of about $900,000. So, whether those continue into the new year, we don't know. There will be some impact in the fourth quarter, but not as substantial, we don't expect anyway. What we'll see going forward is kind of a continuation of the impact of streamlining our product offerings and so forth. With the sales volume expectation being comparable to last year, we think we'll see a little bit of margin degradation overall percentage-wise just because of the volume. I don't know if there are any other significant one-time items that would be rolling through here. And Lynn, do you agree with that?

Yes, I agree. Mike, just to answer the part of the question on material costs, so the lower material cost in Q3 '20 contributed 270 basis points to our gross margin for the quarter. To put that in perspective, in Q3, 2019, our material cost as a percentage of sales was 44.9% and that declined to 42.2% in Q3 '20. If you recall, we still had very high material costs running through our P&L in 2019, so we have seen that come down in the 2020 quarters, and we expect that to stay at generally around this lower level. It may tick up a little bit, but I think the 2019 level was unusually high.

That’s great. Thanks for all the color there. And then one more if I may just to squeeze it in. But question on the streamlining that you're talking about for the North American sales organization. I know that you announced that today in conjunction with the closing of the Germany facility. What is that you guys have to do on that front? Just curious from an operational standpoint in the mechanics for that $1 million in annualized cost savings to start flowing through the P&L. Thank you.

Craig, do you want to handle the cost savings and when it starts flowing through the P&L?

I do. I do. So, the aggregate cost savings for those two actions will be just over $1 million. We expect that to mostly start in 2021. It's just a small amount, maybe $50,000 or so in Q4, 2020. In Q1, 2021, we expect about $125,000. Going forward, it would be $275,000 a quarter in cost savings through the end of 2021.

All right. Thanks for all the color, guys. I’ll turn it over to anyone who has other questions. Thank you.

We'll now take a question from Theodore O'Neill with Litchfield Hills Research.

Thank you very much. In the prepared remarks last quarter, you talked about a $1.6 million award for power supplies for a cost-effective ventilator. Has that shipped yet? And is there any follow-on business from that?

I think we're in the process of shipping now, and I do believe we have other additional orders, but not to the extent we thought probably. I think the customer there was the Canadian Army.

Yes, Canadian government. We have started shipping. We did start shipping that in the third quarter.

[Operator Instructions] And we'll now take a question from Hendi Susanto with Gabelli Funds.

Good morning, Dan, Craig, and Lynn. Dan, can you share what you are seeing in China? Other companies have talked about the impact of shipment bans to Huawei, and some pulling inventories ahead of the ban. What are you seeing in your markets in China now?

Again, for us, Huawei has never been a big customer of ours in China. We do see certain minor customers that are having a difficult time dealing with American-based companies. We're starting to see some prejudice, but none of our key customers. Most of our major customers in China are the large subcontractors that go for the Cisco or HPs of the world. Companies like Hon Hai/Foxconn, Flextronics, and Jabil generally have to buy off the specs of the American customers or the European customers, and that's where a majority of our business goes in China. So there's always some concern about the political situation in China; both between America and China; Hong Kong and China; and China and India. So, there's a tremendous amount of uncertainty that we are concerned about. One of the reasons we are looking at other areas of manufacturing besides China that gives us the same low cost. Not to say that we would move out 100% of manufacturing, but we would like to get to a point that we're not still dependent on low-cost manufacturing in China.

Got it. Some companies have also talked about inventory or capacity digestion among data centers. Do you have any insight into that?

No. I don't think we have seen anything yet, sorry.

Yes. I think, we may have benefited a little bit in the first half from that, Hendi. I think going into the fourth quarter, we have seen our order book soften a little bit with respect to some of those networking data center clients. So, I think we are seeing a little bit of that.

Got it. So, Dan, when you share that the growth in the Magnetic segment is somewhat limited now, what can be the next growth drivers for the Magnetic segment?

That's a good question. Again, I think our focus would probably -- I think the Magnetic group might eventually fall into the Power group because every power supply needs a magnetic. But I think there's -- again, we make a very specific product that we're the market leader on. We control 70% of the market with the high-end customers on that product. So when you control 70% of the available market, I think it's very difficult for us to grow it. Our focus now is on how we can combine our magnetics with CUI, with signal transformers and our power supplies. We're looking at how better we can solve our customers' problems and be a one-stop solution company, especially for the second-tier, third-tier accounts. The first step to that was combining the sales force. Before, we would have a direct signal transformer guy go to New England, then we would have a CUI guy go to New England, then we would have a Bel guy go to New England. Now we have one point of contact that goes to New England and can sell all these products. We hope that by having one point of contact, it will be easier for our customers and channel partners to deal with us, and we should get greater sales at these customers.

I see. One more question for Lynn. So, Lynn, you talk about the benefit of material costs coming down from 2019. Is lower material cost behind now, or do you still have some runway? Secondly, I think in the past, you indicated that the gross margin should normalize between 23% to 25%. Should we still expect that gross margin range?

So the first part of your question on the material costs, I think we're probably at where we will land. The Q3 material costs, and Craig correct me if I'm wrong, is probably where we will land. If anything, it might go up a little bit. I know the cost of some of the precious metals has been increasing, so that might put some additional pressure on it. I think we can use Q3 as a basis for that. Regarding a normalized gross margin, the only thing in our margin this quarter, as Craig mentioned, was the $900,000 of subsidies from China that we received, which would be non-recurring. Other than that, the renminbi, we need to keep an eye on. We did have some higher labor costs in Asia in this year's third quarter, just due to the unfavorable comps in the FX versus last year. That will impact our margins going forward if that continues to trend in an unfavorable direction. If we had to put a range on it, mid-20s, maybe 24% to 26%.

No, I think that's right. It's all dependent on the mix of revenue we have. When the commercial aerospace recovers, that will influence margins, and how successful we are with some of our other cost actions will influence margins. I think the 24% to 26% range is a reasonable range for projection purposes.

Got it. Thank you. Thank you, Dan, Lynn, and Craig.

Thank you. Have a good weekend.

Thanks, Hendi.

We'll now take a question from John Hudson, who is a private investor.

Good morning.

Hi, Dan.

Yes. Hi, John.

Look, relative to operations in China and I recognize the issues between the Chinese government and the U.S. government. I don't need any further comment on that. But I'm interested. It appears to me that the relationship between the company and the Chinese government has been basically very good over the COVID period, part of that as indicated by the subsidies that the Chinese government has provided. I just wonder, is that your opinion? And how do you see, specifically, the relationship between the Chinese government and the company today?

Generally when we talk to the government, we generally deal with the local officials because we're not that big of an employer in China. So we generally deal with the local government. We have been there substantially longer than a lot of other companies. In the communities we work in, we are a large employer. We have a very good relationship with the local community and the town government. I think that's why we've been able to work so well. Our concern again is the political unrest and the tariffs and how the U.S. government views things going forward. We do have a good portion of our activity done in China; I spent time before COVID touring the Philippines, Vietnam, and Malaysia looking for another facility. We hope to make an announcement shortly on one of the things we looked at. From our standpoint, I think if we had to set up a Greenfield operation from scratch, we would be more in favor of acquiring a company that has manufacturing in one of those low-cost areas so we could get up and running very quickly and not worry about the political landscape. At this point, knock on wood, things are okay. We do have 50 people in Hong Kong working for us, and what they're going through now in China is very upsetting. The relationship between the Hong Kong people and the Chinese government is not a good situation, so it's something that we keep a watchful eye on.

Sounds good. Thank you.

We'll now take a follow-up from Mike Cikos with Needham & Company.

Hi guys. Just one more, if I could. Thinking about the CUI acquisition, it seems to be going at least better than what we had initially thought. So curious on what your assessment is of that acquisition. The follow-up to that would be; if you're looking for different opportunities on the M&A front, what kind of technologies would be of interest to you? Is it focused on a specific segment, or maybe it caters to diversifying the manufacturing footprint that we were just talking about? I'm going to leave it at that. Thanks, guys.

Yeah. Okay. Let's just discuss CUI for a minute. First, it took us three to four years to finally acquire CUI. What we find very interesting about them is it's a different model than historically Bel has. Bel has always built everything we've sold. CUI doesn't manufacture anything, they private-label. They have a tremendous diversified customer base. What they've done better than any other company out there is move towards marketing and new product introduction. When I started in the business, everybody wanted to see a sales guy. Now, nobody wants to see a sales guy; they want to go on the Internet and get their parts as quickly as possible and get them designed in. CUI really shines in that. They work with the largest e-commerce catalog houses, like Digi-Key and Mouser, to get their product out to a diversified customer base of about 4,000 to 5,000 customers, with no one customer accounting for more than 5%, and that's why they tend to be very profitable. That's the same model that Signal Transformer has. We're tremendously pleased with the sales growth and the bookings they had since we acquired them. What we need to do now is capitalize on their marketing and new product introduction and bring it to the other Bel products. We need to market ourselves as one company to solve customers' problems and think from that side, there’s a tremendous upside that we can penetrate, especially with our existing customers. There hasn't been as much cross-selling opportunities as I would like between our product groups, but that will change quickly. As for products, again, we like to fill out our portfolio in connectors and power. Our goal is simple: if a customer calls us, we want to provide them all the products they want. As more engineers are moving away from dealing one-on-one with salespeople in person, we believe that companies that can support us will be valuable for us. We hope to strengthen in this area so that when the world changes, we're better positioned than we were a year ago. Any company that aligns with our vision is what we're looking at.

That's great. Thank you, guys. Best of luck.

And we have no further questions. And now we'll terminate this conference call. Thank you for participating.

Okay. Thank you everybody for joining….

Thank you everyone.