Good day, and welcome to the Bel Fuse Inc. Third Quarter 2021 Results Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Dan Bernstein, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Catherine. Joining me on the call today is Farouq Tuweiq, our CFO; and 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 expectations concerning backlog and sales, our diversification strategy, expectations concerning our long-term growth, and the impact of acquisitions, anticipated impacts of our business, and the estimated effects on our operating results of the ongoing material shortages, and worldwide logistics situation, internal initiatives to improve margins, our expectations plans and intentions for fourth quarter and beyond, and with respect to our strategic focuses, strategic plans, community investment, environmental impact, and capital allocation are forward-looking statements as described under the Private Securities Litigation Reform Act of 1995 and 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 crisis such as the 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 fluctuation in foreign currency exchange rates and interest rates, 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.

Thank you, Lynn, and thank you everybody for joining our call today. Before discussing the quarter, I would like to thank our global manufacturing associates for their ongoing dedication to Bel, and it is their efforts that have kept all our manufacturing sites up and running in the third quarter. Turning to our results. We achieved our third quarter a meaningful year-over-year sales growth, with new record highs in both quarterly bookings, and in our backlog of orders at the quarter end. The increasing demand is across all our major products and end markets. The new way is Power Group, which had substantial growth from CUI, e-mobility, and the Circuit Protection division. It is interesting to note, circuit protection our oldest product line had the best quarter in our history. Our backlog is at an all-time high, totaling $390 million at September 30. Farouq will offer more details shortly. We are pleased to announce that our acquisitions of RMS and EOS are now fully integrated into the Bel family and both were immediately accretive to our results, contributing a combined $12.4 million in sales and $1.6 million of net earnings since our respective acquisition base. On the cost side, we do see increases in labor, material, and logistics, and our recent price increases will offset these costs going forward. The global parts availability and logistics have pushed out approximately $10 million of expected sales into Q4 2021. Rolling electrical blackouts in China is something we are closely monitoring. The quarter also marked a big milestone for us as we concluded our four-year ERP conversion project, combining five systems into one. Since the inception of this project, Bel has incurred a cost of $7 million, with annual cost savings achieved at $2 million. We are excited about the data and analytics that the new system will provide in helping us better review and manage the profitability of our operations. For the fourth quarter, we will continue working on several fronts to streamline and simplify the business to improve our margins. Yesterday, we announced Jackie Brito as a new addition to our Board of Directors. Jackie is currently CEO of HR Asset Partners, a company focused on organizational culture, human capital planning, and leadership development. In addition, she has a long career at Rollins College Crummer School of Business, where she held positions as a systems lead of admissions, career development, Director of Admissions; and General Professor of Management. Our focus is on management, recruitment, selection, retention, and diversity in the workplace. We are pleased to have Jackie as a member of Bel's Board as we embark on a variety of projects in the coming quarters, which include refreshing our strategy, our growth plans, ESG, associate engagement and retention, and investing in the communities in which we live and work. I would like now to turn the call over to Farouq to run through the financial updates.

Thank you, Dan. Good morning everybody. Sales by product segment for the third quarter of 2021 were as follows. Power Solutions and Protection, sales were $60.3 million. That is up 26% from last year's third quarter. Our products that contribute to the e-mobility end market led the group, with a growth of 115%, followed by COI in fuses. As discussed previously, we continue to exit our custom modules business that was a negative contributor this quarter of weaker sales. Our Power Solutions and Protection group finished the third quarter with their robust backlog, which is up $126 million or almost 200% from year-end. Connectivity Solutions sales were $40.3 million, an increase of 5% from last year's third quarter, with the continued rebound in the commercial aerospace end market, which improved by $1.4 million or 59% from last year's third quarter. Sales distribution channels were also strong, reflecting a 23% increase from last year's third quarter. The defense sales were challenged this past quarter, resulting in a 37% decrease. The backlog of orders for our Connectivity products grew by $30 million or 64% since year-end. Magnetic Solutions were $46.3 million. That is up 20% from last year's third quarter, led by higher demand for our integrated connector modules that are used in next-generation switching applications. Our backlog of orders for our magnetic products grew by $79 million or 184% since year-end. Preliminary gross profit margins by product segment for the third quarter of 2021 were where Power Solutions and Protection had a gross margin of 26.1% in the third quarter of 2021. That is up from 24.2% in last year's third quarter. The Connectivity Solutions gross margin was 24.8%, down from 29.1% in the 2020 quarter. Magnetic Solutions gross margin was 23.1%, down from 28.3% in last year's third quarter. On a consolidated basis, gross profit margin decreased to 24.5% in the third quarter of 2021, as compared with 26.8% in the third quarter of 2020. Industry-wide increases in raw material pricing, higher labor costs, and unfavorable foreign exchange fluctuations during the third quarter of 2021 outpaced the benefits from pricing increases earlier in the year. The margin comparisons were also affected by $900,000 in the COVID-related subsidies received in last year's quarter that did not repeat. On the R&D front, costs were $5.9 million during the third quarter of 2021, an increase of $200,000 from the third quarter of 2020, largely due to unfavorable effects. SG&A expenses were $21.2 million or 14.4% of sales, up $1.8 million from a dollar perspective from the third quarter last year but represent a reduction as a percentage of sales. The majority of the increase related to salaries and fringe benefits of $700,000 as compared to the third quarter of 2020 and higher legal and professional fees of $400,000. We also started to see an uptick in travel expenses compared to the third quarter of 2020. These factors resulted in income from operations of $8.9 million in the third quarter of 2021, as compared to $8.1 million in the third quarter of 2020. On the interest expense side, there was $1.45 million in the third quarter of 2021 that is up from $1.2 million in the same quarter last year. In connection with the refinancing of our credit agreement in the third quarter of 2021, we amortized the remaining deferred financing costs associated with our prior credit agreement. This resulted in $820,000 charged to interest expense during this year's third quarter. This was partially offset by decreases in both LIBOR, the company's spread on its credit facility driven by EBITDA improvements, and the overall reduction in our outstanding debt balances versus last year's third quarter. We had a provision for income taxes of $1.5 million in the third quarter of 2021 compared to a benefit of $1.1 million during last year's third quarter. The benefit in the third quarter of 2020 primarily resulted from federal tax law changes related to GILTI and expiration of statutory implementation on certain tax reserves. Earnings per share for Class A was $0.44 per share in the third quarter of 2021 as compared with earnings of $0.57 per share in the third quarter of 2020. Earnings per share for Class B shares was earnings of $0.47 per share in the third quarter of 2021 as compared with earnings of $0.61 per share in the third quarter of 2020. On a non-GAAP basis, which excludes certain unusual and other non-recurring items, EPS for Class A shares were $0.48 per share in the third quarter of 2021 as compared with earnings of $0.58 per share in the third quarter of 2020. On a non-GAAP basis, EPS for Class B shares were earnings of $0.51 per share in the third quarter of 2021 as compared with earnings of $0.62 per share in the third quarter of 2020. Shifting over to some balance sheet items. Our cash and cash equivalents balance at September 30, 2021, was $62 million, a decrease of $23 million from December 31st, 2020. During the first nine months of 2021, we made net payments of $16.8 million in connection with the acquisition of RMS and EOS, $4.3 million of net payments towards our outstanding debt balance, and used cash for capital additions of $4.2 million, dividend payments of $2.4 million, and interest payments of $1.7 million. These items were partially offset by $7.2 million in proceeds received from the sale of various properties. Accounts receivable were $86 million as of September 30, 2021 as compared to $71.4 million at December 31st, 2020. The primary driver of the increase related to the higher sales volume in the third quarter of 2021 as compared to the fourth quarter of 2020. The 2021 acquisitions of RMS and EOS also contributed to the increase in AR from year-end accounting for $3 million to our receivables balance at September 30th. Days sales outstanding was 54 days at September 30, 2021, an improvement from 57 days at December 31, 2020. Inventories were $128.2 million at September 30, 2021, up $28 million from December 31st, 2020. The increase was seen in raw materials and work in progress and was largely due to increased raw material purchases to accommodate our higher backlog of orders, as well as the inclusion of $2.6 million from 2021 acquired companies. Accounts payable were $57.6 million at September 30, 2021. That is up $17.8 million from its level at December 31, 2020. The increase in AP was in line with the heightened purchasing volume of raw materials during the first nine months of the year. In addition, the 2021 acquired companies accounted for $3.4 million of this increase from year-end levels. Bel's total outstanding debt balance was $112.5 million as of September 30th, 2021, a decrease of $4.3 million since December 31st, 2020. We had previously announced a refinancing that was closed on September 2nd that results in overall lower interest rates and spreads while eliminating all fixed principal team. And with that, I'll turn the call back over to Dan.

Thank you, Farouq. Catherine, at this time, we'd like to open up the phone line for questions people might have.

Thank you. We'll now take the first question from Theodore O'Neill at Litchfield Hills Research. Please go ahead.

Thank you. Congratulations on the good quarter.

Thank you.

So I'm not sure I heard this correctly. Did you mention that there are $10 million in sales that have been pushed out of Q3 and will now be in Q4?

Yes. That's where we think that we stated. Basically, it was material outage also logistics. And then finally, some customers pushed back orders because they didn't have all the components at the same time.

Do you have any significant customers that have closed recently due to COVID?

None throughout the world.

Okay. Now historically your fourth quarter has been down sequentially from third quarter revenue. Is this push out of the $10 million enough to make it not seasonal this year?

I'm going to let Farouq answer that question.

Yes. So I would say Q4 historically has been obviously lower sales versus Q3. Really more of what's available, holiday ordering patterns, and just kind of some of the things that are outside of our control. We certainly have the orders for it to be similar to levels to Q3, obviously assuming we get the materials and so on. So I think to sum it up, historically gets a little bit weaker. We have the orders. It just depends on how much we can actually get out assuming we get raw materials.

Okay. That makes sense. Thanks very much.

We'll now take the next question from Jim Ricchiuti from Needham & Company. Please go ahead.

Good morning. A couple of questions. You alluded to the price increases. And I just wanted to go back to some of the comments you made I think last quarter where you said that a modest amount of the price increase was realized. I think you said around 15%, but you thought the remainder would be realized Q3 and Q4. So I'm just curious how is that playing out the way you thought? Are you still seeing the bulk of the increases kind of split between Q3 and Q4?

I would say, yes, we do have maybe 10% to 15% of the customers that do have yearly contracts with us and some of those fall into next year. But I think it's our goal that all pricing should be implemented by the end of this year excluding that 10% of customers.

Maybe just to build up on what Dan said, you'll recall when we put the price increases earlier this year it takes a while for it to work through the system. And obviously the world has continued to change and evolve as you think about all things cost. So this is definitely something we're monitoring on a case-by-case basis, but we'll definitely keep a close eye on it to see if any further action is needed.

Got it. Sorry just on what Farouq said we are looking at our pricing on a quarterly basis not every six months not every year. So we really try to stay on top of it to make up the difference if the difference being the price increases that we are facing.

Got it. And I'm wondering how you're dealing with your own supply chain issues you're obviously dependent on suppliers for various components. Are you experiencing any kind of decommits from any of your suppliers that might be exacerbating your manufacturing and deliveries?

Absolutely, yes. It could be different supply situations with IC manufacturers. There are a lot of issues occurring with some of our suppliers, even though we have orders in place and have committed to deliveries. They might attempt to take our audience from us, so it’s a constant challenge we deal with every day. So far, we've managed it fairly well, but we definitely experience decommits on a weekly basis, and we strive to address these issues based on our leverage and the relationships we have with our suppliers. This is an ongoing concern for us.

Is there a potential that the magnitude of the impact that you called out for Q3 that $10 million gets replayed in Q4? Does it get any worse in this environment? It sounds like you could have a situation where you have this – this kind of impact supply chain just kind of rolling from one quarter to the next. I'm not sure how to think about this.

I would tend to think that right in but maybe using $10 million as a barometer just because we never had this type of history before, and we don't have a track record of this type of pushouts. I would initially though we'd like to probably grow another $10 million next quarter but things change so rapidly. It's just – it's a marketplace that we have seen for a long, long time. And again, and mostly with some of the decommits and then you throw in the logistics and the labor situation like who we think you can't find labor in China. These are the ones we face. But again, I think that's why most customers have been pretty aggressive laying out their orders. It needs to give us strong visibility so we can make substantial commitments that we could have made in the past.

Yes. Last question and I'll just jump back in the queue. But I'm just wondering you called out now a couple of quarters where you're seeing some recovery in commercial aerospace. And I guess it's off a low base, given how that market has fallen. But what I'm wondering is how we might think about that business in 2022. Are you anticipating that there could be a decent recovery that is more meaningful for revenues next year in commercial?

Farouq?

Yes. So I think the way we would think about it is there is a strong ramp – quite frankly a pretty steep ramp-up that we're going for right now. And as we scale our business up. Obviously, there are also challenges but I think we're pretty bullish on the build rates that are going on in the broader market. And I think to the – our commercial aerospace, I would say from a bookings perspective is up north of roughly around 700%. So it's a steep ride and – but I think we're very bullish on that.

I think – so I understand that we should get back to normal levels by the end of 2023. Is that correct?

That is our best guidance on so far correct.

And is there a way to think about what normal is in terms of – the business has changed a little bit. I'm just not sure it could be – it sounds like it could be a fairly meaningful revenue amount.

I think pre-COVID, our commercial aerospace business and this is just direct. This is not what may go through distribution. Within the ballpark of call it $5 million per quarter. And we've seen that dip down to around the $2 million mark per quarter over this past year. So there is quite a bit on the revenue side for a rebound there.

Got it. Thanks. And congratulations on the quarter.

We'll now take the next question from Hendi Susanto from Gabelli Funds. Please go ahead.

Good morning, Dan, Farouq, and Lynn. Dan, I'm wondering whether we can characterize Bel Fuse that it is benefiting from like customers scrambling to get their parts including like Bel Fuse products?

No. I think again I think everybody is scrambling for products from toilet paper to everything. So I think anybody that's supplying anything that people are adding larger visibility and creating substantial demand. What makes us exciting with the new post-COVID world with people working from home more and the type of communication they needed to do properly plus the EV market, we really are playing some strong markets that are generating a lot of growth.

On the press release, there is a mention that Bel Fuse will revisit its growth and operational strategies. Can you provide more details on that statement?

No. I think, again, yes, within a 70-year-old family-run company. The Board has been taking a very aggressive stance on how we want to advance the company. With Farouq, the new CFO coming on board with a lot of innovative ideas and energy, the Board is looking to him to reinvigorate the company and carefully evaluate every aspect of Bel to identify areas for improvement. Once again, I believe it's an exciting time to discuss our future direction, and Farouq is poised to be a significant catalyst in making that happen.

And then, how do you envision the path toward supply chain normalizing in the later part of 2022? I assume that inventory in the channel is also lower than normal. So it will take a while, but I'm wondering whether you can share some insight into what kind of guidepost that we should be watching?

I believe the current perspective is that while we typically don't have much visibility, everyone we've spoken to in the industry is indicating that supply chains will improve, with lead times expected to reduce from 45 weeks to around 22 weeks by the end of the second quarter. There's a general expectation of a return to more normalized conditions. Although I'm not sure if the lead time will decrease to 12 weeks or settle at 22 weeks, there is confidence that by the end of the second quarter of next year, we should see a drop in lead times.

And I think maybe just to build up on that Hendi as well. That's a little bit of a nuanced question. And the reason being is, we obviously see in various end markets and some are going through a fundamental transformation, right? So, EV being one of them. And other electrification, for example. So, to Dan's commentary, there'll be some that will ramp-up more kind of like the commercial air would be talked about as well. And maybe some we see a little bit of loosening up. So I think that mix and diversity that we have embedded should position us well for when that day comes.

Got it. And then Farouq, are we at the point where Bel can share the magnitude of sell to e-mobility?

Let me think about that. The reason is that we're looking for more clarity from a tracking perspective. We acknowledge your request and intend to share that information at some point. However, at this moment, we are still processing the details and want to ensure that we provide an accurate number. We'll get back to you on that, unless Dan has an immediate answer, but we need to examine it a bit more.

I think that's definitely a Farouq project.

Farouq, I do have recurring sales on e-mobility if there would be?

Yes. Okay. And we will caution that we may have built on that later. There's a couple of more things that we've got to trade through it, but this is kind of just the clear ones if you will.

Okay, great. So in the third quarter of 2021, e-mobility sales were $3.9 million and that compared to $1.8 million in last year's third quarter.

And then, Lynn or Farouq, do you have year-over-year organic sales growth including that like $12.4 million sales contribution from RMS and EOS?

Year-over-year organic sales growth. So that was in.

You just drop out RMS and EOS, that would be the number, right?

Okay.

$12.4 million.

That's it. Thank you. And then a great performance in Q3, all the best for Q4.

Thank you, so much.

Thank you. We'll now take the next question from Mike Hughes at SGF Capital. Please go ahead.

Good morning. Thanks for taking my questions. First I wanted to follow up on the pricing discussion. Your gross margins were pressured by 230 basis points year-over-year in the just-reported quarter. So assuming that the cost side stays the same from where it is right today, do you recover that margin degradation by 1Q 2022, or is it further out than that?

Farouq?

That's a good question. As Dan mentioned, some customers provide 30-day notifications, some 60, and others have annual contracts. Setting that aside, as we look to Q4, unless there are any significant currency fluctuations, we should be on a similar path to Q3 this year. It's important to note that Q3 last year had some disturbances due to COVID subsidies and related factors. The backlog we are managing in Q4 is already priced in. Therefore, when we consider pricing, it will be somewhat forward-looking. Given our current actions and reactions, we expect to see some of this impact reflected in the first quarter.

Okay.

I’m sorry. Just to back it up, the number one goal I sell and the major focus of everybody in the organization since Farouq came aboard is really look at our margins and see every area we can do to improve our margins going forward. And it's a commitment throughout the whole organization to reevaluate how we do everything and our cost decisions going forth to improve to where we have to get to.

Okay. And are you on FIFO or LIFO accounting?

So we utilize standard costs or our inventories accounted.

Okay. And then what is your long-term operating margin goal? Have you put one out there?

We don't have guidance on that since we generally do not provide forward guidance. However, we aim to exceed our current position.

Okay, okay. And then you made a comment and I know this isn't unique to your company, but you made a comment about tracking rolling electrical blackouts in China. So can you just speak to if that impacted your production or your suppliers' productions in the third quarter and when the impact started to occur and if you're still seeing it?

It hasn't affected our suppliers or us. Some of us have generators, as allowed by the government, but we've managed by adjusting our schedule. We shut down on Monday and Tuesday, and our workers will make up for it on Saturday and Sunday. Our suppliers have been accommodating so far. There's a growing concern among our investors about the blackouts, and they frequently ask for updates. Typically, we see this around summer or before the Olympics when laws in China are adjusted. The government does change its policies regarding resource management. At this point, we've observed these issues, but they haven't significantly impacted our growth.

Okay, okay. And then just last question. SG&A and R&D costs, can we take the third quarter and just extrapolate that into the future and barring a big ramp in revenues? Is that fair or not?

Yes, it is. That's fair.

I think with a question here is we're seemingly everything is just more on an inflationary environment and everything is costing more. But I think just on average, it should be a little more step to go.

Okay. Thank you very much.

We'll now take the next question from Edward Schular, a private investor. Please go ahead.

Yes. Thank you. A couple of questions. Dan, could you address your utilization and capacity for our company in your plans, what is the total capacity what percentage of utilization are you at now?

I believe most of our factories are operating at full capacity and are consistently scheduling to maximize output while adhering to local labor laws. I don’t think many of our factories are operating at only 60% or 70%. Overall, we are working quite efficiently at this time. We predominantly manufacture for our magnetic product group, and we are planning to establish a new facility in China to streamline our operations and provide additional space. Currently, our approach primarily involves utilizing overtime as a means of capital investment.

Like the RMS transaction in January where you moved your equipment into your Minnesota facility. If that business increases, would you have to increase the space in Venezuela?

Yes, we have additional space as we added between 5,000 to 10,000 square feet to our building when our leases came up about six months ago. While we have the space, our production process is highly automated, involving expensive stamping and molding equipment. To achieve high output, these operations need to run continuously, seven days a week, in 24-hour shifts. This is how the company we acquired was operating. Therefore, we were able to integrate much of this and only needed to add minimal space.

Another question. Go ahead.

Again, let me just speak to the idea, so when we bought the company they were at a current run rate of about 20% of what they did in the peak. So again, we have a lot of utilization of equipment there as that ramp up comes up over the next two or three years.

In your Magnetics business, do you have any concern about the supply for rare earth minerals, or what is your need for rare earth minerals?

Well, that said much, we do have copper on wire. But generally, it's a water level water and plastics. But we don't really have in terms of our rare earth and on the magnetic side we do use parts and so forth. But it has not been a problem yet. I mean, I think if you look overall I think our number one problem from a material standpoint is the other way we are the large IC companies and getting ICs on a timely manner.

Last question and a follow-up on Mike's question, on the R&D, the R&D has gone from $5 million to $5.5 million then $5.9 million. Is that a good thing? Is that could indicate new products are coming for next year and the year beyond?

I think it might be challenging to grasp the question, but if it's about our confidence in how we are allocating our resources for good new product introduction and achieving a solid return, then the answer is yes. We are concentrating on margins as we plan the direction of the business. It's more about refocusing and realigning our research and development efforts. At this point, we feel positive about our current position. We will strategically bring on the necessary people. However, we are slightly adjusting our focus to be more concentrated.

I think the question is it looks like you had a substantial increase in R&D is after new product. But I think a lot of the increase came from the FX.

That's right. Yeah. So a lot of our R&D staff if the engineers are in China and in Europe and with the strengthening of the renminbi and euro over the past year, especially since Q3 last year, just those same local costs translate into much higher USD.

So it wasn't adding more people. I think the major question you were asking.

Yeah. Similar to that yes, that's fine. Thank you very much. I'll go back to the queue.

That concludes today's question-and-answer session. I'd now like to turn the call back to management.

Hi Catherine, you just want to confirm if anybody has any more questions one more time.

There are no further questions, Dan. I'd like to turn the call back to you.

Thank you, Catherine. And thank you everybody for taking time out of your busy schedule to speak to us today. We appreciate your time. And we appreciate you investing in Bel. I hope you all have a nice weekend.

That concludes today's call. Thank you for your participation. You may now disconnect.