Good day, and welcome to the Bel Fuse First Quarter 2022 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jean Young with Three Part Advisors. Please go ahead.

Thank you, Emma, and good morning, everyone. Before we begin, I'd like to remind everyone that this conference call contains certain forward-looking statements regarding the company's expected operating and financial performance for 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 is 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 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 thank you all for joining us on the call today. I'm pleased to report that all three business units performed exceptionally well, with all groups showing sales and margin improvement compared to the first quarter of 2021. With a record backlog of $525 million, we expect demand to remain strong for the balance of the year. The highlights this quarter were led by the Magnetic Solutions group, where gross margin rose to 20.1% in the first quarter of 2022 as compared to 13.7% in the first quarter of 2021 as a result of higher sales from our enterprise networking customers, despite the temporary government-mandated factory closures in China related to COVID. Revenue generated by our distribution partners grew by $12.9 million or 36% over the first quarter of 2021. As we mentioned last quarter, demand from our commercial aerospace, direct and aftermarket customers continues to rebound and reached $6.2 million of sales during the first quarter of 2022, up 90% from last year's quarter, including the RMS business we acquired in early 2021. This end market was extraordinarily running around $45 million per year. Our strong bookings from 2021 for power products in the EV end market generated $5.9 million of sales during the first quarter of 2022, an increase of 89% from the same quarter last year, and leaves us well positioned for incremental sales growth in the second quarter and beyond. Our circuit protection line had its strongest quarter in the history of our company, posting sales of over $8 million for the quarter, representing over 100% growth from the same quarter last year. The supply chain continues to be constrained, and raw material availability remains tight with the recent closure of Beijing in the PRC, and we see an impact on the timing around the movement of goods across the border as our freight is now rerouted and screened through freight forwarders in other regions of China. However, we are pleased to report that all our facilities globally are fully operational as of today, with the understanding that the operational environment can change rapidly. I'd like to now turn over the call to Lynn for the financial update.

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 $137 million, an increase of 24% from the first quarter of 2021. Gross margin for the quarter increased to 25% compared to 21.9% a year prior. By product group, Power Solutions and Protection sales were $58.8 million, up 35% from last year's first quarter. In addition to Dan's commentary on circuit protection and e-Mobility sales, the power group also benefited from incremental sales from the 2021 acquisition of EOS, which generated sales of $4.2 million in the first quarter of 2022. Our CUI business also remained strong for the first quarter, posting an increase of $3.8 million or 37% from Q1 2021. Gross margin for this group was 27.1% for the first quarter, a 240 basis point improvement from Q1 2021, driven by a favorable shift in product mix and the benefits of pricing actions taken earlier in the quarter. Our Power Solutions and Protection group had a book-to-bill ratio of 1.6 during the first quarter of 2022 and a backlog of orders of $277 million, an increase of 15% from the 2021 year-end. Turning to our Connectivity Solutions group, sales were $43.7 million, an increase of 15% from last year's first quarter, reflecting the continued rebound of the commercial aerospace end market, which improved by $2.9 million or 89% from last year's first quarter. Sales of connectivity products through our distribution channels remained strong in the first quarter, reflecting a 22% increase from last year's first quarter. Military sales continued to be challenged this past quarter, resulting in a 15% decrease in the defense end market. Gross margin for this group came in at 26.5% for the first quarter of 2022, up from 25.7% in the first quarter of 2021. The Connectivity Solutions group had a book-to-bill ratio of 1.2 during the first quarter of 2022 and a backlog of orders of $92 million as of March 31, an increase of 8% from December 31. Lastly, our Magnetic Solutions group had Q1 sales of $34.2 million, up 18% from last year's first quarter, led by higher demand for our integrated connector modules that are used in next-generation switching applications. Gross margin for this group increased significantly to 20.1% in the first quarter of 2022 from 13.7% a year prior. Margins for this group benefited from the higher sales volume despite higher wage rates in China and the temporary shutdown of related factories in China during part of March due to COVID outbreaks and the provinces in which our factories are located. Our Magnetic Solutions group had a book-to-bill ratio of 1.4 during the first quarter of 2022 and finished the quarter with $156 million of orders in backlog, which are largely scheduled to ship by the end of 2022. This represents a 9% increase in backlog since the 2021 year-end. Our selling, general and administrative expenses were $21 million or 15.4% of sales, the same from a dollar perspective as last year's first quarter, but down as a percentage of sales. Within SG&A, increases in sales commissions and property insurance were fully offset by a reduction in legal and professional fees as compared to the first quarter of 2021. Turning to balance sheet and cash flow items, we ended the quarter with a cash balance of $51.2 million, a reduction of $10.5 million from December 31. Our working capital increased by $7.6 million from the 2021 year-end. We saw a $6.7 million increase in our accounts receivable balance, offset by a $7.7 million reduction in our unbilled receivables balance at March 31 compared to the December 31 balances. This shift was the primary driver of our DSO increasing to 62 days at March 31, 2022, from 54 days at December 31, 2021. Inventories increased by $16.3 million from year-end as we have been purchasing a higher volume of raw materials to accommodate the increase in demand from our customers. In addition to changes in working capital, other items impacting cash flows for the quarter included capital expenditures of $2 million and dividend payments of $823,000. Cash paid during the quarter for income taxes was $1.2 million and interest payments totaled $461,000. I'll now turn the call over to Farouq for items that we see impacting us in future quarters.

Thank you, Lynn. As Dan mentioned, we are encouraged to see continued year-over-year margin improvement from streamlining the organization and benefits of our updated pricing policies starting to pay off in the back half of the first quarter. We expect to see stronger contributions from our pricing actions in the second quarter onward. Our new ERP system has been instrumental in providing the visibility we need to more thoroughly assess the business. Looking at our backlog trend over the past three months, we can see meaningful improvements in the gross margin associated with our backlog balance, which is a potential indicator of further margin expansion in future quarters. Regarding upcoming management activities, we have kicked off our efforts towards a corporate and segment-wide strategy refresh. A key part of our strategy will be developing clearly defined goals and objectives along with an incentive system to reach these targets. We're pleased with the efforts of Bel associates in achieving our results in this quarter and have confidence that we'll be able to build upon this progress in future quarters. With that, I'll turn the call back over to Dan.

Thank you, Farouq. Emma, could we open up the call for any questions?

We will now take our first question from Theodore O'Neill at Litchfield Hills Research.

Congratulations on the good quarter. And my first question is on seasonality. Historically, Q2 revenue is 20% to 30% above Q1. And I realize you probably aren't giving out guidance, but can you give us your view on seasonality now that we're sort of one month into Q2?

Yes. Thanks for the question. So we do see, as we stated, our backlog and our bookings continue to be robust. We do think Q1 will be a little bit of a step back to what we think Q2 will play out. Last year, Q2 was around $139 million of sales. And we expect—obviously, we are in a little bit of a fluid world as we think about pushouts, China, and supply chain. But our best guess today based on what we're seeing is we do expect to be north of the $139 million marker from last year, and we do expect to be north of the $137 million, let's call it, of this quarter as well.

Okay. Fair enough. Farouq, do you have any view on potential double ordering due to supply chain issues?

I think we haven't really seen tangible evidence of that. That is definitely a concern of ours, especially with stretched-out lead times. We do try to assess the authenticity of orders on the front end as they're coming in, which is kind of challenging, but we haven't really seen concrete evidence of that today. Is it something that we keep in mind and will look out for? Yes. Does history say potentially there might be something in there? Possibly. But today, we just don't have any concrete evidence pointing towards that.

We will now take our next question from Hendi Susanto from Gabelli Funds.

Farouq, my first question is, would you be able to quantify the impact of COVID-19 in China in the month of April?

In April, it's a little bit too early for us to do that. But as of April, all of our factories were up and running. So we're able to make things and ship things out. As Dan noted, where the concern is, is on the shipping side of the house and logistics of it. But right now, it's a little bit too early to tell, but our expectation is for April at least—we haven't seen the numbers obviously—but I think it will be pretty minimal.

I see. And then in the context that some companies said that some customers postponed shipments due to supply constraints on other components. Any business trends that you see with that regard?

Yes, Hendi, we actually do see that in certain cases, where they don't get our parts because they're waiting for the IC. So it's not a cancellation; it's a pushback of orders, but it hasn't been anything drastic at this point in time. I think a lot of customers know that if they push back the orders, other people would use those components. So I think most customers are overly aggressive about taking in any materials they can get. And then if they have to wait for the ICs, they wait for the ICs.

And maybe, Hendi, just to kind of box that as well. For Q1, we had roughly, call it, not an insignificant amount—roughly $30 million, $40 million of orders—that did not ship because our customers effectively were rescheduling and pushing it out because they were not ready. As you know, we are a small piece of a generally bigger system. And if they didn't get all the pieces, we may get a call and say, go ahead and sit on that.

And that's something that we've been seeing, Hendi, over the past few quarters. So coming out of Q4, there was also the $25 million, $30 million that had not shipped in Q4 that likely got pushed to Q1. So we have a bit of a waterfall effect here. But it is something that we're seeing just general pushout in timing.

Yes, and we even talked about that. Right now, quite frankly, we know the orders are there; the orders are good. It's just kind of the supply chain both impacting our ability to get raw material but also impacting our customers and their ability to get other things, and therefore, we could resolve the situation. But from an outlook perspective, again, we still have the orders. They'll be going out; it's just not necessarily on time.

I see. And then post the updated pricing policy, which is beneficial for Bel Fuse, is there any guidepost on what segment margins may look like, whether or not there's still some seasonality in gross margin from one quarter to another? Or whether it will be more uniformly distributed across quarters? Any insight would be helpful.

Yes. I think seasonality will not necessarily be anything we ever get away from. The objective is to try to minimize the peaks and troughs, both on the margin side and maybe on the revenue side. The reality is seasonality just impacts not just us, but our customers, especially as we think about the Chinese New Year and overall potential weakness in Q1. So we'll always have an element of seasonality to the business. But we do try to focus on and control the things that we can control, predict, and see coming our way. So on the gross margin side, as we look at backlog and getting the data from the ERP, it has allowed us to be laser-focused on addressing some of the pain points to potentially minimize the wide range of the gross margins we've seen. But on a net-net basis, we do see an upward positive trend in our gross margin now that we're able to see it. I'll caveat that, that we've done work, we're seeing benefits, but there's more work to be done, but it's definitely something we're very excited about as we go along.

Congratulations on a very strong Q1.

Thanks, Hendi.

We will now take our next question from Chris Grenga from Needham & Company.

Just with respect to the investment in inventory, would you expect to burn that down? Or would you expect additional investment there?

Yes. So I'd say, if you look historically, generally, Q1 is a bulking-up quarter in terms of ordering raw material and as we think of planning out for the year. So really, this is kind of a historical playbook. Obviously, we're experiencing more robust demand and longer lead times, which have amplified the impact of that. I think part of it is just regular planning cycles with our customers, and now under the stretched-out lead time. So we do expect to burn it down. If we had any concerns about that, we wouldn't necessarily be putting out the orders there. The other thing I would say regarding inventory is that right now security is a little bit king of the hill. So we may not necessarily need something right now in the next month or two. But if we get a call on some of the hard-to-chase or hard-to-track-down parts, we may do some security buys to ensure that we have some of the critical components, especially as we think about ICs. Also, we are seeing a little bit of a strong inflationary environment on some key components, where the prices have doubled to extreme highs. And if the customer says, 'I'm not really too fussed about the price. Just go get it,' we are charging special pricing to the customers for us to cover the unnatural, unplanned costs. So we're seeing a little bit of that inflation in inventory. Obviously, when a customer pays for it, it's a good indicator that it will come out and translate into revenue and cash, so there's a little bit of that unusualness going on in there.

Got it. Very helpful. And with respect to Europe, are you observing any signs that demand could be impacted there or changing there, either in connection with the conflict or just broader macro issues that Europe is facing?

Again, everybody in the world today is deeply concerned with Russia and how aggressive they will get in Europe. But from a value standpoint, at this time, it's only affected about $1.5 million in possible sales, which is the amount of sales we do in Russia today. So it hasn't had a great impact on us at all.

Congrats on the great results.

Thank you.

We will now take our next question from Robert Morrison from Penn Capital.

Congratulations on a solid quarter. I'll say great and excellent and performing exceptionally well for when you guys start to generate peer profit margins, how about that 30% gross margins and 10% after tax, which is sort of what a bastion your peer group does. Anyway, let's get to...

I think Farouq paid you to say that.

Farouq has paid over and over again from our conference call. Anyway, let's start with M&A. Are you guys deleveraged enough to do some bolt-on deals this year and next year? Or are you still going to work on fixing the core business and getting those operating margins higher before you wanted to bite off some more deals?

Which we can speak to.

So Bob, I would say I don't think it's really a sequential playbook. It's in parallel. We know that we are working on all things margins on our side. And then also, we continue to be out there looking for accretive M&A where we can. Just to kind of focus, and I think we've spoken a lot about the gross margin, we have a bunch of initiatives launched. So we're kind of well on our way, and we're seeing early dividends of that and obviously more to come. It's a little bit of a journey. On the M&A front, we're not— from a kind of a liquidity perspective, we understand our position there and kind of where our tolerances are. We also appreciate that the M&A environment remains hot. Given our focus on margins, what qualifies as good M&A candidates or targets has been elevated, both from a quality of business perspective and an affordability perspective. Because of that, we're not going to, right now, be chasing 12, 13, 14x deals that, one day, could be a distraction too, as we just can't really afford that. As a result of that, we're being more selective with our spots. We're always looking. And same thing in Q1 and Q2, we poke around. Obviously, I think we have a little bit lower chance of success given the size, and we're just not going to go crazy with our new unnatural things where it doesn't make sense. So the answer is, in our minds, we're always poking around and we can kind of walk and chew gum at the same time here.

Okay. The last round of acquisitions worked out pretty well prior to the last few. The company's history was very spotty. So I guess we would—the shareholders would prefer the next few to look like the last few rather than the prior 7 or 8 or 9 or 10 where, I think, the combined acquisition prices are still higher than today's market cap. So good work on the last round. Anyway, on the electric vehicle, the EV TAM, would you guys be able to sort of—you’re pursuing a niche strategy; you're avoiding the Teslas and GMs of the world and going for special types of vehicles. Would you be able to size that TAM? Are you just scratching the surface at this $6 million a quarter business? And over 3 to 5 years, does that have the potential to be a $50 million business, a $100 million business, a $200 million? Is there a way for us to sort of think about where that could be if you succeed exceptionally well in that business in the next 3 to 5 years?

Yes, I think from the market we're looking at, again, we're looking at a very niche marketplace. We project it to be about $350 million to $400 million market in 3 years. And we're hoping to get to that 33% level; that would be a target for us.

Excellent. Thank you very much for that specificity. Do you guys, now that you're sort of making progress on Farouq's profit margin goals, would you be comfortable setting a 3-, 4-, 5-year revenue target that would include organic and acquired growth and some longer-term range of profitability targets so that shareholders could really try to forecast where this business might be on a cash flow and sales and profit basis in 2025 or some timeframe like that? Or is it premature?

I think the answer is we would like to move in that direction. But right now, we are doing a lot of work internally down to the SKU level, to every kind of—quite frankly, level we're in, end markets. As we have alluded to earlier, we're going through our kind of strategy refresh, which will also lend us kind of where we want to go and be and look like. Down the road, we'd hope to share some of that stuff with the Street here. But for right now, there are a lot of variables and little pieces. Obviously, we're in a lot of end markets, a lot of regions, and we just want to make sure that we are thinking through all of the scenarios before we share something. From a management perspective, our goal is to be able to share something ultimately with the Street, but we're going to make sure we're going to do it methodically and appropriately before we put it out there.

You are operating in many strong areas, and unlike most companies that are achieving levels which raise questions about long-term sustainability, you are somewhat under-earning. If you achieve a period of 3 or 4 years with double-digit compound revenue growth and margin improvement, there could be significant earnings per share leverage during that time. It would be beneficial to see that as a plan or target. Regarding supply chain and raw costs, do you believe that pricing has finally aligned with the spike in these costs, or are further price increases still necessary going forward?

No, I think—I'm hoping it's leveling off, but I'm not positive. So much depends on are companies going to increase production, what's going to happen with China and Taiwan. So there's still a lot of variables out there that we're debating with the auto industry and so forth. Again, it's not as crazy as it used to be, but I don't know if we can get back to normal for at least another six months.

All right. And let me slip one in. Can you support 20%, 30%, 40% top-line growth without significant plant expansions or capacity CapEx increases?

I'd just say, Bob, we're kind of going through the excess because one of the things that we're obviously thinking through right now is—one, is our revenue line appropriate, both on the pricing side and where we're picking our spots. Once you address that, then you can kind of back into do you have the appropriate footprint and what are you making where. It's something we definitely always think around. But we do know that if we need to increase our capacity and output, we can. We can run into—obviously, there'll be some costs where there'll be additional shifts, and we've seen that in a couple of places as well. So we could. Now the question, to your point, is the—I think the 20%, 30%, I don't—we're not comfortable saying the answer to that just now.

And again, with the three product groups, each one has a different manufacturing footprint of what's necessary to increase production. If you look at certain product groups, it's highly automated, while some other product groups are labor-intensive. So it just depends on what product group and what time we can do certain things. I think, again, knowing that Farouq—just so you know, with Farouq, top-line growth is not a high priority; we're more focused on margin improvement.

Right. But there's no product lines that are literally bursting at the seams that require significant capital expenditures to grow, so you could pick and choose how you want to grow?

I don't think there's any real constraints right now or anything that we're—keeping us up at night. Obviously, we're always looking to be more efficient and to operate better, sure. We're looking at our footprint, but nothing that we're really nervous about in terms of we're busting at the seams.

Thank you. There are currently no further questions in the queue at this time. I will turn the call back to your host.

Thank you very much for joining the call today, and we appreciate everybody. Looking forward to speaking to you next quarter.

Ladies and gentlemen, that will conclude today's conference. You may now all disconnect.