Bel Fuse Inc /Nj Q4 FY2021 Earnings Call

Good day, and welcome to the Bel Fuse Inc. Fourth Quarter and Full Year 2021 Results Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Jean Young from Three Part Advisors. Please go ahead, sir. Thank you, Emma, and good morning everyone. Before we begin, I'd like to remind everyone that this conference contains certain forward-looking statements regarding the company's expected operating and financial performance with future periods. These statements are based on the company's current expectations. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks and other factors. Additional information about factors that could potentially impact our financial results is included in yesterday's press release and just discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our subsequent quarterly reports and other filings 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 us on the call today is Dan Bernstein, President and CEO, Farouq Tuweiq, CFO, and Lynn Hutkin, Director of Financial Reporting. Now, I'd like to turn the call over to Dan.

Thank you, Jean, and all of you for joining our call today. Our team at Bel has performed extremely well. In these challenging times they have embraced our efforts to improve the company. I would like to thank every associate for their hard work and dedication to Bel for enabling us to have one of our best quarters in recent memory. We achieved our fourth quarter of strong year-over-year sales growth with new record highs in both quarterly bookings and in our backlog of orders at quarter end. This increase in demand is across each of our three product groups and the majority of our end markets. Our backlog remains at an all-time high, totaling $468 million at December 31. In 2021, we launched 1,800 new standard part numbers into the channel. This will bode well for us for our future growth. Our acquisition of RMS and EOS completed last year are fully integrated and have contributed to Bel's bottom line through combined net earnings of $1.9 million in 2021. CUI acquired in late 2019 continues to be a strong performer with sales growth of 29% from 2020 to 2021. On the cost side, we continue to navigate direct and indirect supply chain challenges, including those related to raw material, logistics, labor availability, retention, and overall inflation. Last year, we completed our four-year ERP conversion project, combining five systems into one. We have transitioned from a functional use of the system to data analytics and now have better visibility on margins by SKU. Although still in the early stages of adaptation, this data has quickly become the foundation of our day-to-day business decisions on how best to allocate our sales engineering and manufacturing resources. Overall, we invested $7 million in the ERP conversion and have recognized an annual cost savings of $2 million. With our legacy systems now fully integrated, we will utilize our internal resources to market our recent acquisitions onto the new system as well. Last quarter, we appointed Jackie Brito to our board and she has proven to be a very valuable addition. As with many companies, Bel has been challenged with associate retention and job satisfaction. With Jackie's strong background in human resource development, she's been tasked with doing a cultural assessment of the company and to identify areas for improvement. This assessment is completed and we are implementing the recommendations to enhance the associates' experience at Bel. Furthering our commitment to becoming a Bel corporate citizen, we implemented two new programs in 2022 around community engagement and charitable contributions aligned with our values. Associates will now be provided with time paid off to volunteer within the communities and Bel will be donating and matching contributions to local charitable organizations of choice. I'm very proud of the progress we made throughout the company and we will continue on our journey in 2022 to make sure Bel is the best it can be for our associates, stakeholders, and customers, and the companies in which we work. I would like now to turn the call over to Lynn for the financial update.

Thank you, Dan. As Dan mentioned, Q4 was very strong with year-over-year growth seen across each of our product groups. Overall, fourth quarter sales were $147 million, an increase of 27% from the fourth quarter of 2020. Gross margin for the quarter increased to 26.7% as compared to 25.3% a year prior. By product group, power solutions and protection sales were $58.7 million, up 12% from last year's fourth quarter. The largest contributing factor to power sales growth during the quarter related to our 2021 acquisition of EOS, which generated sales of $4.6 million in the fourth quarter. Other notable growth came from sales of our circuit protection products, which were up $2 million or 46% from Q4 2020. Sales through our CUI business and into the e-mobility market also remained strong in the fourth quarter. These areas of growth were offset in part by a $1.5 million decline in our custom modules product line, which we continue to exit that low-margin business. Future year-over-year variances related to this exit should be minimal going forward. Gross margin for this group was 30.9% for the fourth quarter, a 320 basis point improvement from Q4 2020, driven by a favorable shift in product mix. Our power solutions and protection group finished the year with a healthy book-to-bill ratio of 1.7 and a robust backlog of orders of $240 million, an increase of 270% from the 2020 year end. Turning to our connectivity solutions group, sales were $43.6 million, an increase of 27% from last year's fourth quarter, with the continued rebound of commercial aerospace, which improved by $3 million or 140% from last year's fourth quarter. To provide some context on where we are in the ramp and commercial aerospace, sales into that end market were $30 million in 2018. They were as low as $12 million in 2020 and increased to just under $18 million in 2021. Fourth quarter bookings in commercial aerospace were $7.7 million, which was equivalent to the full year of 2020 bookings for that end market. Sales of connectivity products through our higher margin distribution channels remained strong for the fourth quarter, reflecting a 46% increase from last year's fourth quarter. Military sales continued to be challenged during this past quarter, resulting in a 24% decrease in the defense market. Gross margin for this group came in at 23.7% for the fourth quarter of 2021, up slightly from the fourth quarter of 2020. The connectivity solutions group closed out the year with a book-to-bill ratio of 1.2 and a backlog of orders of $85 million, an increase of 79% from the 2020 year end. Lastly, our magnetic solutions group had Q4 sales of $44.8 million, up 52% from last year's fourth quarter, led by higher demand for our integrated connector modules that are used in next-generation switching applications. Gross margin for this group declined to 22.9% for the fourth quarter from 23.3% a year prior. These products are primarily manufactured in China, where wage rates have increased and margins have been further impacted by the unfavorable shift in the exchange rate of the Chinese Renminbi versus the U.S. dollar. We've estimated a 50 basis point impact on fourth quarter 2021 margin related to FX alone. Our Magnetic Solutions group finished the year with a book-to-bill ratio of 1.6 and $143 million of orders, which are largely scheduled to ship in 2022. This represents a 233% increase in backlog since the 2020 year end. Our selling, general and administrative expenses were $21.9 million or 14.9% of sales, up $2.3 million from a dollar perspective from the fourth quarter but down as a percentage of sales. Of the dollar increase, $1.4 million related to the inclusion of SG&A expenses for EOS, which was acquired in March of 2021. Turning to balance sheet and cash flow items, we ended the year with a cash balance of $61.8 million, a reduction of $23.2 million from the 2020 year-end balance. Our working capital increased by $24.3 million from December 31, 2020. We saw a $13 million increase in our accounts receivable balance due to sales growth experienced during the second half of 2021 versus the same period of 2020. Our Days Sales Outstanding improved slightly from 57 days at December 31, 2020 to 54 days at December 31, 2021. Inventories increased by $34 million as we have been purchasing a higher volume of raw materials to accommodate the increase in demand from our customers. This in turn resulted in a similar increase in our accounts receivable balance since December 2020. In addition to changes in working capital, other items impacting cash flows for the year included net payments of approximately $17 million for acquisitions, capital expenditures of $9.4 million, debt payments of $4.3 million, dividend payments of $3.4 million, and interest payments of $2.1 million. We also received $7.3 million in proceeds from the sale of properties during 2021. I'll now turn the call over to Farouq for items that we see impacting us in 2022.

Thanks, Lynn. Good morning everyone. There are a few items that I wanted to touch upon as we focus and look out towards 2022. With regard to pricing, we continue to monitor the impact of supply chain concerns, raw material sourcing, and the overall cost of doing business to ensure we're responding in an appropriate and effective manner. As of today, we have implemented another round of price increases that started in late fourth quarter of 2021 and will continue through Q1 this year. Furthermore, we have implemented various pricing processes and procedures that will allow us to react to the dynamic market in a more expeditious and targeted manner. Looking at 2022, first quarter margins have historically had downward pressure due to production efficiencies related to the Chinese New Year. That said, we do expect to see a favorable impact of our initiatives as we progress throughout the year. On the supply chain side, our best estimate at this stage is that shipping logistics and procurement of raw materials will all remain a challenge throughout 2022 as it seems to be a new norm. This will remain a key area and focus for our sourcing team and various other teams around the world. We're also keeping a close eye on all things COVID at the local operating levels, given we are exposed to a number of regulations in the various countries in which we operate. As Lynn mentioned earlier, our financials are impacted each year with fluctuations in foreign exchange rates, particularly the Chinese Renminbi and Mexican peso, as those are the currencies in which a large percentage of our labor is paid. This past year, we significantly expanded our forex hedging program to mitigate financial impact related to these currencies, as well as initiating, for the first time, an interest rate swap. On the interest rate swap, we moved roughly $60 million from being variable rate to fixed. That is based on our view that interest rates will climb over the term of the revolver. And as a reminder, we put this in place in Q4, and with some of the messages coming out of the Federal Reserve, we believe this will suit us well. While these are simple programs, the idea is to really minimize operational variability and provide us with better visibility into pricing and operations and minimize the impact there as well. On the M&A side, the market has really seen aggressive valuations in recent history, and we expect that to be the same in the near term, representing a challenge for us. With that said, we are continuously on the hunt for new opportunities and as things come our way that makes sense, we will act upon it. As Dan stated, we're focused on and committed to demonstrable margin improvement across the business, and are taking a targeted approach with appropriate sequence. We're examining various aspects of our business down to the SKU level and up to our operational footprint. As we embark on these initiatives, we do expect to incur some upfront one-time investment. We will be sharing more details as things develop in the coming quarters. Please keep in mind this will be an ongoing process toward becoming a stronger company. With that, I'll turn over to Dan.

Thank you. Emma, can you please open up the call for questions.

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

Thank you and congratulations on the good quarter. My first question for you concerns your operations in Slovakia. Given what's happening in Ukraine, are you seeing any impact there? And are you planning for logistics issues either in that area or in the operations nearby?

I think we do have operations in the Czech Republic and Slovakia. Throughout Eastern Europe and Central Europe, there's a tremendous concern about what’s going to happen. At this point, I think we're roughly about 350 miles from the border. It is a concern. However, we are keeping a watchful eye on it. The primary concern is for the people and their families in the area and the uncertainty that it brings to everyone.

We are seeing some companies redesigning products to use components from multiple sources. Is that impacting you at all?

I think everyone realizes that in the past, starting with SARS and now with COVID, you can't be overly dependent on one country or one source. So, I think everyone throughout our industry is trying to get a minimum of two to three sources. We’re doing the same, trying to diversify our production locations and have multiple sources from different locations. However, it has been a slower process than we would like.

Thank you. We'll now go to our next question from Hendi Susanto from Gabelli Funds.

Good morning, Dan, Farouq, and Lynn.

Good morning.

Thank you for the information on the commercial aerospace. In terms of backlog, can you provide any data point that can help us forecast our expectations for commercial aerospace sales in 2022?

When it comes to forecasting and those questions, I'm going to pass it on to Farouq or Lynn. Who would want to grab that one?

Yes. So indeed the question is specifically on how much commercial aerospace backlog we're sitting on right now?

Yes, revenue-wise and then the pace of the recovery in commercial aerospace?

Got it. To recap, in 2018 commercial aerospace had roughly $30 million of sales, which went down to $12 million in 2020, and increased to just under $18 million in 2021. So, we're still off from the $30 million mark in 2018. The other thing I would add is that this is now considered legacy Bel numbers with RMS. The equation has changed a bit. So we do expect our sales to be above that mark. However, the ramp is quite steep and is taking a lot of time from the connectivity perspective.

Yes, I don't have a backlog number. But to give you some perspective, sales into commercial aerospace were just under $18 million for 2021. From a bookings perspective, it was about $20.5 million of bookings that were received in 2021, and Q4 bookings were $7.7 million, which definitely indicates that we are on an increased path here. I do not have the bookings or what is scheduled to ship specific to that end market. But I think we continue to see growth there.

Based on the readings we've done in commercial aerospace, we think things will get back to pre-COVID levels not this year, but in 2023, it should return to pre-COVID levels of commercial aerospace building.

That's very helpful. Given the strong demonstration of gross margin improvement, how are you managing gross margin amidst supply chain constraints? Can you provide any qualitative guidance for gross margin expectations for 2023?

Yes. It is a challenge because in addition to regular business, there are a lot of geopolitical and supply chain issues, which resume as a challenge. But to Dan's earlier comment, having an ERP system allows us to identify issues down to the SKU level and part number, so we can be targeted. We’ve introduced some processes to identify issues early and address them proactively. We're also taking a strategic look at where we can gain market share and lean into some of our higher-margin business. As we look out to 2022, inflationary pressures do continue, but we are addressing these issues. Coming out of Q1, we should be ahead of last year's Q1 margin, and Q1 has historically been a little bit weaker for us.

To add more color, historically we quote a customer for 90 days. We would never change pricing on backlog orders; our quotes remain firm for 30 days. All our customers have received a letter stating that, based on current conditions, if our raw materials change quickly, we will have to adjust our pricing on backlog. Now, we can make changes for any backlog order within 30 days and for any open quote immediately, allowing us to respond much more quickly than before.

That sounds very positive, Dan. My last question is on the e-mobility market. Any particular geography and market trends?

Lynn, could you cover the backlog? Are you allowed to discuss it?

Yes, sure. Sales within our EV market did go up by over $6 million from 2020. We're starting to see some continued growth there. Although it's traditionally a relatively small dollar amount, we are beginning to see a pickup. From a bookings perspective, bookings increased by $47 million from 2020 to 2021 in this end market, mainly in North America and European e-mobility applications.

It's concentrated in North America and Europe, and the Chinese market is not a significant portion of that.

Not from the power side but from the circuit protection side.

I see. Okay, thank you. Thank you so much. Wishing all the best for 2022.

Thank you. As we have no further questions at this time, I'd like to turn the conference back to your management team for any additional or closing remarks.

I'd just like to thank everybody for joining our call today. We appreciate your time and look forward to reporting in April.

Thank you. This will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.