Bel Fuse Inc. (BELFA) Earnings Call Transcript & Summary

Welcome. I'm Jean with Three Part Advisors, and we're delighted to introduce Farouq Tuweiq. He's the CFO of Bel Fuse and probably our largest upside in all of our clients.

Hello, everyone. Can you hear me? Am I good? All right. Good morning. I appreciate everything and some time today. I can see some familiar faces here. So it's good to see everybody. This is our second IDEAS Conference in person. So it's good to be here, I was hoping a little bit warmer weather down in Dallas, but maybe not, maybe next time. So with that, I think we'll -- I think we -- okay. All right. So I'm going to kind of run through this a little bit. There's a lot to unpack. I'll throw a lot out. Feel free to grab me in the hallway or -- always happy to catch up. But Bel Fuse at a glance. Maybe before I get in there, I should just introduce myself a little bit. My name is Farouq, I am the CFO. I joined in February 2021. I was the first executive to be hired from the outside in our 70 years. I come from the investment banking world where I spent 9 years. The last 5 of that was really focused on electronic components, spent [ 50% ] of my time. So a lot of the folks that we go up with today on a regular basis and compete on have been in their boardrooms or their CEOs and kind of see where I know their heads are at. I joined with the idea of closing the gap from a trading perspective to our peers. I spend a lot of my time on the operations side and trying to look at us hopefully with a lot of different lens. So it's been a busy 1.5 years for us. We've done a lot, and I hope we'll kind of see that as we go here. But I think the big overarching theme is we remain undervalued, which I guess everybody says, but I think there's a lot of proof points for us despite our recent success. We're not done. We're on a journey, and we continue and expect to see nice improvement points along the way. Bel at a glance today, we are -- we've been around since 1949. Our current CEO, Dan, was -- the company is founded by his father. He's our second CEO in our history. We've been a growth-focused organization. I've seen a lot of technology coming and go. Fuses was the first product of ours in the last few years, given that electrification of everything is seen the reemergence in fuses which is interesting to see, Dan, I think, gets really excited about that. We're 3 segments today: Power Solutions, Connectivity and magnetics, which we'll get into a little bit more here, but high level, power is really around anything related to power. So power inversion, conversion, fuses. Connectivity is our Connector business, harsh environment, a lot of aerospace and defense, some ag equipment. Our Magnetic solutions is what we call interconnected modules. These if you look at the back of your PC at home, you see a lot of those kind of plug-ins. But obviously, we do it for data centers, so pretty high-end stuff. A lot of technology goes in on the magnetics that sit behind it. Today, we're around $632 million of sales, 27% gross margin, 11.6% EBITDA. We used to be mid-single digits on that, which we'll talk about here in a little bit as well. The business side of it, we are 2/3 direct to OEM, 1/3 we sell to distributors. To just hit on the distribution piece a little bit. This one is, I'd say, in the last, call it, decade in our industry has really grown to keep part of growth that extends your reach. Gets you into the development cycle with engineers early on, which is exactly where you want to be. We have full visibility into all of our stuff goes. So if any of you here goes on digikey.com, we'll be able to see who bought it, which provides us an opportunity to kind of reach out and close loops, needing some help, how can we help, you need customization. The other thing on the distribution side is some of our customers choose to use a distribution as an amalgamation of the various vendors. So while we sell the distributor effectively designed with OEMs, and it's more of a conduit and sometimes on the design cycles, they get out of the distribution cycle when it goes to scale or production, they come back around. So it's a nice high-margin business for us. Geographically, North America is our biggest segment, then followed by APAC in Europe. I should just stay on the APAC, we're not really addressing the local markets. We're generally saying to western companies or they are contract manufacturers there. So we are -- we think of ourselves as a high-end manufacturer. So that's how we go about it. I know talk of the town is all things, ForEx and renminbi. Strengthening dollar is good for us. We sell in USD, and we pay our expenses in renminbi. So how do we grow? Today, we -- it's been a busy handful of years. We grew our sales nicely, great brands, a lot of M&A, 10-plus deals. We have the -- are empowered with a new ERP system that took 4 years to implement July last year was the first time we're all kind of stitched together. Since July, we've been on a journey to operationalize the system, look at profitability from where, from who, from when, help guide our sales teams a little bit more better, help invest in R&D and pursue certain things with good mega tailwinds on the end market side. So what does this all amount to? So we're really focused on quality and expansion of revenue where our company has grown -- that's been growth for focus for 70 years. I think in the time being, we do talk a lot of our own margins given a lot of the impressive work we're doing, but growth is where we live. We're doubling down on a lot of high growth in emerging markets for us. We are playing and moving up the chain on positioning in terms of design. We're sharpening our pricing strategies and figure out where and with and when we want to be. A lot of exciting stuff. And then simplification of the way we do business as a company has been around for 7 years, grew up through M&A. COVID gave us the opportunity to kind of sit back and say, how would we draw this on a blank piece of paper. So we're investing in people, in our culture, which is a key asset of ours and also really simplifying the process and where we make our products, which we'll get in that some of a little bit. We think we're -- we have got our great position in the marketplace, in the markets we play in, the products we do. Obviously, there's a lot of challenges, but we like the hand that we have. What have we done thus far? I joined 2021, I'd say kind of late last year, well into this year, we've invested and hired a decent amount of key people, whether it be internally or externally. We took -- call out maybe a couple here. Our new Head of European sales joined us in April for Molex, which is obviously a great brand name in our space. We're very excited and we're seeing some of the things that she's doing. We also -- one of our VPs of Asia that manages some of our best factories in Asia now has got an expanded role as an operating company. It's great, and he's running point some of the integration stuff that we'll talk about in a little bit. ESG is something we're focused and committed on. So we announced that in October, more to come. We've done a lot of pricing ERP. We talked a lot, a lot about this corporate strategy. We developed it. We have a pathway. We're on the same page, coming out of our off-site in May. And then also, we're doubling down our investment. We're getting ready for growth despite us doing some housekeeping stuff. What has that led to? Some impressive results. We are excited about our results, but we know there's more to come. So -- and obviously, people always ask me about the stock price. My guess is every company you ever talk to, says they're undervalued, but I think for us, despite our stock run, I think we're not where we need to be just yet, and we'll get there. So the next stage in our Q3 earnings call, we announced that we have 4 consolidations going on right now. In terms of our footprint simplification. We're doing -- we're moving 2 factories in China into one. The U.S., we're working on -- we're exiting Arizona. We're moving some production from Florida out. And then also in Europe, we are doing -- we have 2 facilities in the U.K. that will be ultimately one. I think collectively, we'll be walking away from 170,000 square foot, I think, something like that. And then obviously, we're also filling up in the ESG side. We build these things, and we're building the Bel of tomorrow, we're trying to be more thoughtful here. The goal is clear, right, simplifying the way we do business, streamlining our costs, making sure we're maximizing our outputs from the inputs that we're putting in there. And we are mindful in taking care of our people and the communities that we live in. So more to come. This was kind of our first opening, if you will, in this -- on this front. We operate in an exciting sector. And there's a lot of dynamic changes in the sector. Obviously, our sector is always evolving. But these are some of the themes that are driving our business, and we believe we'll continue to drive our business. Electronics, everything seems to have electricity nowadays or some kind of electronification in it. Data is a big theme of the world, getting smaller, some miniaturization while handling more throughput is key in EV. So we think that in addition to kind of the good things what we're doing and we're investing money, there's a bigger sectoral play here. Maybe just to peel back the onion a little bit on the end markets, network and cloud would also lump in their IoT, 5G and automation. We do a lot there, roughly 35% of our business with some of who is who's in the space. We've been a partner of choice for multiple years. We've got some of the best engineers around. And with our size, we'll provide you the best customer service you can get. Military aerospace, 11%. This has been down with some of the challenges on the commercial air with COVID grounding, some of the other grounding activities that occurred pre-COVID, we're seeing that recover nicely, early stages. It will be a multiyear thing. We acquired our kind of key competitor in the dark days of grounding. So a lot of exciting things there. On the military side, spending was down for a number of years. And as we think about some of the geopolitical issues going on and kind of where we're spending our dollars or the U.K. government or the German government, all that is unfortunately, a benefit to our business here. Space is kind of what I call the new EV. We're doing a lot of interesting things in the space. We've been in the space for a very long time. But we haven't hit those big kind of commercial type elements, but we like our positioning there. So we think that will be something. Industrial, this is a pretty broad bucket in there. We have EV, ag, medical and a few other things on the test and measurement side of the house, for example. Our industrial, our EV business, which we'll get into in a little bit here, we tend to focus on high-end EV [Indiscernible] where we focus on are things like school buses -- sorry, city buses garbage trucks, mining equipment, ag equipment, where there's a big cost to it and a cost of failure kind of really makes people angry. The way to simply think about it is not necessarily stuff that you and I are buying. We do sell some stuff to some of those guys, but that's not kind of the EV business we think of. Distribution, we talked about that, a key part of our business. We like the business. It's a great business, and we continue to grow there and put more new product introductions on that platform. Maybe just kind of taking a little bit of kind of where we've come from and where our outlook is on distribution. It's been a strong performer for us. Our expectation is it will be a strong performer for us. In terms of getting customers, engineers early in a design cycle. Industrial has been a little bit flattish to up. We probably expect the same nice margin businesses but not necessarily the greatest of headline growers in the recent environment, especially as we hear some of the chatters going on in the world. We like our kind of new end markets here, like high emerging growth markets. So EV, we talked about space. The vast majority of our EV business is sole source. We compete with IP in that business. We have a lot of software and firmware on our units. So these are not just electrical piece of boxes. We have a unique design where a lot of the guys have designed their vehicles around our box and they build it to just slot it in. Military and aerospace, we talked about that early stages of recovery. It's been climbing, nowhere near where it was, where it needs to be. But now we expect that to start coming on board pretty nicely. In network and cloud, we tend to be bullish on a lot of the things going on in data, whether it be data generation, data transmission, data storage. So we think this will be around for a good amount of time. So we like our end markets. Maybe just peel back the onion a little bit on the segment side of it. Again, 3 segments here. Since Connectivity. This is our harsh environment Connector business here. We talked about this, it's an impressive customer list. I'd say this one, as we look at our margin changes in our business has not kind of received the benefit of that yet. Q3 this last quarter versus Q3 last year, this business was up around 24%. So we're seeing the recovery, we still need to do a little more things to get our margins up. Some of the consolidations we talked about hits this business, so the U.K., Arizona, Florida. We also have other kind of contractual things in nature that we're working through. This tends to be low mix -- sorry, high mix, low volume, a lot of handholding type business that we're big fans of. And again, I think since our margins have been down here, hit by the depression in demand in terms of commercial air defense, we hired a lot of people earlier this year to deal with demands. So there's a labor productivity issue/contract issue. So the fix is -- we're getting close and we'll get there as we've done with the other 2. The Power business and Magnetic Solutions have been our kind of leaders of our performance on a margin level and thus, resulted in our stock change. And our Power business is where we talked about our biggest segment, 40% EVs where we go through here, rail and again, distribution. Our private labeling business is a great business. It also sits in here, which is a CUI that we bought late 2019. The change from a margin profile, I'd say the biggest change has happened in this segment. And we got a little more to do here, but we like the trajectory we're in and we're, actually, going to kind of talk about that a little bit. Magnetic Solutions. This is our interconnected module. We also do some transformers here as well. And we also did some discrete components. This one is largely tied to the network and cloud side of the world. So it depends on what you think of what's going to happen in that world is probably the right way to think about it. We've been in this business for a long time. We are the premium offer in this space. So this one is one we like from a margin perspective on the gross margin side. We're doing consolidation. We have 3 plants in the segment today, 3 locations, we retain 2 of them, put them into 1. We're very excited about that one. So we'll -- I think we'll obviously see some improvement there, but this will always be the lowest gross margin business that we have. But it's a great cash flow generating business on an EBITDA level not a lot of R&D in this business or SG&A. So it's a really nice business from a bottom line perspective. Just a couple of illustrative pictures here in terms of where we're going on the plane, it's really everywhere, different kinds of sensors. We also do cabling and harnesses on it. We tend to also be sole-sourcing a lot of this stuff. So we like our positioning there. Despite this being a car in terms of what we're dissecting it, we tend to focus on the pictures on the top right. That's where we're going, kind of high cost of failure, where people kind of get a little bit unhappy with you if you don't perform. I should say this business, we've been in it for over 10 years when it wasn't really much. It was kind of a thing. We focused our efforts on [Indiscernible] where we can leave with IP software tech. So we have a lot of -- we know we're not going to blow up your trucks, right, because we have a lot of miles and a lot of experience on it. 2020 was our first year where we were always in the $2 million, $3 million sales, $4 million, $2 million, where there's a lot of sampling and self testing. 2020 was the first year where this business started to have a step change. We did $9 million of sales. 2021, we did $15 million of sales with $50 million of bookings, 50. And then year-to-date, we're around $19 million. So we're starting to see some of the step change. We have a lot of NDAs, like I said, and we tend to be a sole source on this one. Magnetics business, this is a server rack Cisco, all those ports is what we make. It looks like what we see at home in our PCs, but there's a lot of secret sauce that goes in behind the curve and behind the kind of what meets eye from the magnetic side. Lot of know-how on this one. Cisco and some of the guys who provided -- the premium guys, we tend to focus on the premium guys. We have the premium offering here as well. So a lot more than meets the eye on that one, but that's what we do there on magnetics. Financials. These are our financials. 2014, we doubled our company through 2 acquisitions. It was the first time we took public debt. There's a lot of work to be done in terms of some of the quality issues when we got these assets. And we had to miss some of the design cycles, it took us a little bit to kind of get going here on especially on the power side of the business. And then obviously, as we headed into kind of 2018 and some of the tariff stuff going on impacted us. 2019, a lot of the grounding. 2020, COVID. And so it's been a busy few years for us. But a fundamental reality is we've got really good products, really good brands, great engineering, great customer service, but we need to kind of really focus a little bit on the margin side of it. So we see our margins there. And then on the EBITDA side of it, this -- you've heard us say kind of all-time high. It is. It's coming from, again, all different parts of the business from a product perspective, components contribution perspective. Lot to like about here. Our debt cash, post quarter, we paid down another $10 million. So we're down $100 million and roughly same amount of cash. It's all revolver structure, $60 million of that we fixed in December, which is great, especially in this kind of rising environment. For every increase in interest rate, obviously, we don't feel the full brunt of it. We feel less than half of what is actually being advertised. CapEx, we've historically been around $10 million. We'll see that step up a little bit with some of the consolidation activities that we got going on, but that's kind of where we have historically been. No, we thought just going to peel back the onion, given a lot of the work that we've been doing. I don't think LTM numbers really gives us enough credit so we kind of laid out the quarters here back to 2019. Maybe just to provide context, usually our weakest quarters Q1 with Chinese New Year and the migration patterns that comes from them. Q2 or 3 are usually our 2 strongest quarters and then Q4 is somewhere in the middle between 1 and 2 and 3. As we looked at a lot of the work that was done in Q1, we started seeing the benefits of that in March. So we saw the improvement, both in the gross margin EBITDA. Q2, Q3 was where we start seeing more of these benefits and again, we have more work to do. And like I said, this is really on the heels of 2 of our 3 segments. So we like that we can get to the ultimate end result a little bit more. We have different ways to get to it. And on top of that, that's not reflected, obviously, and this is any of the operations stuff where we will be taking out around $5 million of cost really from the COGS line mainly. So we'll see where Q4 shakes out, and we guided towards -- it will be up high single digits over Q4 last year, but with gross margins closer in line with Q3. Backlog. This is, I think, gets a lot of the discussion point historically as a company and as a sector, you're really in 8 to 12 weeks worth of backlog, call it, a quarter's worth. Today, the sector is kind of in that 4-quarter land worth of backlog that is really a function of putting a lot of orders earlier on, a lot of the issues with the supply chain. Also, we're seeing growth again from our growthy businesses. We saw magnetics kind of level off a little bit here in the quarter, and we saw a pickup in both Connectivity and Power. If you believe in historical reverts, the means, I think it's 1/4 of the history. Do we stay at 4 quarters? I think it's probably a little bit of a stretch but maybe. Do you go back to one, my guess is no, not in the near term, right? Just given there's still some challenges. There's a lot of challenges in the supply chain. But at some point, I think we'll level off. It's not necessarily a reflection of demand. It's just there's no need to have these books -- these orders on the books. But that's kind of our expectation of healthy backlog, more importantly, healthy demand. This is our -- just kind of our kind of high-level stats here, roughly 12.5 million float split between our As and Bs, $420 million market cap, we're a little bit more north of that now. I think our stock price on the Bs is closer to 35, maybe 36, I haven't really checked in a couple of days. We paid dividends a little more on the Bs than we do on the As and along with some of our stats. So we have this chart there. And I think one of the biggest questions we get is your stock ran up. And the reality is this $450 million would still remain not even onetime sales. So I think there's a big opportunity still ahead of us to go. We're heads down working on that. We like the road ahead. And that's all I had. Should we open up for questions? Jean? How do we -- what do we do?

Any questions? Okay. Well, we appreciate everyone's time. Go ahead.

Can you talk about the content [indiscernible]

Yes. I mean we don't do regular ICE vehicles, right? So -- as I think in this market and a lot of the chatter, we're not really a heavy consumer-facing business or automotive, which generally are I think the ones that may be a little bit of concern. Also maybe that's a little disingenuous because we do sell some stuff like Teslas of the world and Raytheon. But we tend to think of those guys a little more EV. A lot more content. I mean, effectively, I mean, it's funny. These are not really cars. These are computer parts with wheels on them. So as we think about [indiscernible], I can't remember just even from a fuse content perspective, it's multiples more than what you get on an EV than in a car. So that is a boom, obviously, for everybody. But as we think about where we play with buses and garbage trucks, right? I mean we are around the power management side. So we're doing the power inversion and conversion. We have a unit that kind of does both of those, which is pretty cool to see. But I can't remember right now how much the general conversion just because it's not necessarily overly relevant for us, but it's multitudes more content than an ICE engine for sure.

With respect to your source of raw materials and security, et cetera, et cetera...

Yes, yes. So our -- I mean, I think the obvious question there is China, right? So we do source a lot of our products from China. I think as an industry-wide, you're doing it. Our Connectivity business, we manufacture all predominantly in North America, so Mexico, U.S. and a little bit U.K. So I'd say a little bit less China impacting there. Our Power and Magnetics business, yes, you're sourcing a fair amount of stuff from there, especially our Magnetics business as well. Our customers and their CMs, contrary manufacturers are in China. So we're there. We -- I'm not sure we're any more concerned about it than anybody else in the broader industry. I mean it is a big topic, but not sure there's tons of alternatives where you go down that path. So it's definitely a topic of the industry that we're trying to work through. But China is -- will have an effect, right?

Are you seeing pushes from your customers to get less [indiscernible]

Yes. It's interesting, you think it get a little bit more. But I think right now and maybe it's just a function of time. I think people are drowning in terms of securing product and getting product out the door. We had low 30s of millions that we're supposed to ship in Q3, we couldn't. It's still a pretty tough supply chain in terms of procured material. But we're getting a thing, more of those questions but I think people in the industry realize how connected you are to it. I think more questions, more thoughts, not a whole lot of alternatives right now, but people are trying. And we hear things like some of the guys out there trying to move maybe to India, but you've still got to source. We have a factory in India. China is a big part of it. And remember, things like our EV module, for example, has 200 components in it. You're not going to source 200 components out of China, right? So even if you were to get it down to 190 outside, you're probably still going to do some 10 or something like that. So that's the challenge, right? As we think about geopolitical tensions, and we -- that is something we've talked about. Geopolitical tensions in China, zero-COVID lockdown is a point of concern for us. We've luckily, I think, did a pretty good job skip by our last kind of shutdown we had was in March. And I think it was like 3, 4 days, we made it up over the weekend, but you don't know, right? Okay. Well, I appreciate everyone's time. Thanks for hearing us out today.