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

Good morning, everyone, and welcome to Jefferies 2023 Industrials Conference. My name is Leila Storkamp, and it is my great pleasure to introduce you to Farouq Tuweiq, CFO at Bel Fuse; and Lynn Hutkin, VP of Financial Reporting and IR at Bel Fuse.

Good morning, everyone. Thank you for taking the time today to hear our presentation. We think we have a very good story to tell, exciting times at Bel Fuse, both internally and from an industry perspective. So we're happy to be here. We have a few pages that we'll run through, a little Q&A at the end, but we're around, whether it be today or any other time, if you'd like to catch up. So a quick overview of Bel Fuse, we've been around, roughly 75 years, coming up on our 75th anniversary next year, recently relocated from Jersey City to West Orange, but nonetheless, a Jersey-native company for all of that. Trading on the NASDAQ with a rough annual sales of just shy of $690 million. At a glance, Bel Fuse is really in the -- well, our tagline's, Power, Protect and Connect. So we're really around the electronic circuits, that's where our focus or anything that relates to making a move on the powering side or protecting them from surges and all sorts of electrical currents and now data nowadays is kind of our main focus. From the Power, Protect and Connect side point, we have 3 segments that we go to market to. We'll hit on each one of these a little bit more in detail in a little bit, but Power Solutions as our biggest segment, Connectivity and Magnetic Solutions. Historically, these segments have been roughly 1/3, 1/3, 1/3. Obviously, they tend to move around a little bit. And recently, Power has really come on pretty strong, and you can see the outsized growth there. 31% gross margin on a LTM basis, 15.8% of EBITDA. We are proud of these numbers. We've done a lot of work last 2.5 years on improving these margins. We lacked a little bit from the industry perspective. So we'll kind of show you the -- where we've come from and kind of why we're excited to be at this juncture where we're at. Our business today is roughly 2/3 OEM, 1/3 distribution. Quick note on distribution, unlike other businesses where you kind of put in a distribution channel and you lose all visibility, we know where all our stuff goes. So we know the customer, the ultimate buyer, the end market, the price. It's a critical channel for us. It has grown in significance across the industry. It really is reaching those engineers early on in the design cycle. If you are not there for version 2.0, 3.0, you could miss a cycle, so it's critical to be there. With COVID, this has gained more significance now. Instead of having to call 10 various component suppliers, engineers would prefer to just go to 1 website and get all their component needs to work on new systems. So high margin, great business for us. From a geographic perspective, we're predominantly in North America and revenue, roughly 70%, with Asia and Europe splitting the other 30%. From an end market perspective, where we play today, network and cloud is our biggest end market. So this includes all the way from data generation, transmission and storage. It would include things like IoT, automation, test and measurement, AI and the like. So this is our broad, but nonetheless, we tend to think very positively of the fundamental drivers of that end market as we just think of all things data. Military and aerospace, commercial air and defense is really kind of where we play. We also, in this segment, we lumped in space. It's a small part of our business today. But we're seeing very exciting new wins as we think about satellite launches into the world and kind of commercializing space. We've been in the space game for a long time. So this is a natural extension for us. And obviously, some of the drivers here as we think about commercial air demand, whether it be from the OEM perspective, travelers, MRO-type work that's kind of where it is. And obviously, some of the issues going on around the world today, unfortunate issues with the war in the Ukraine. Ammunitions is where we tend to focus, so that's been a boom for us. On the industrial side of the business, this is a pretty broad swath of applications. It would also include other end markets like agriculture and medical as well. So we tend to be on the niche side of things. e-Mobility, as we call it, you'll hear us talk about it. We tend to focus on industrial e-Mobility game. So we're not on the consumer side. We go to very expensive price tags, $300,000, $400,000 costing items and above where there's a critical element to the performance where you get a lot of angry people if the machines are not running. So we're seeing a lot of exciting things there. It's a little bit behind the consumer side, but nonetheless, that's been a great performer for us. And then we talked about distribution. It's a pretty broad base across the globe here, but an important one for us. So we talked about the end markets. We talked about where we play, but there is kind of sectoral themes that are really driving our industry these days. You'll hear a lot of buzzwords around electrification, electronification, AI, miniaturization. And the reason I said earlier it's an exciting time is, historically, you have 1 or 2 sectoral themes driving the industry. So Bel Fuse started out in the -- selling fuses for black and white TVs. And then colored TV came and then, obviously, that creates a boom and then personal computing and so on. Where we look at it today, there's a lot of drivers kind of converging at once, which is an exciting time for us. One thing that you -- previously I should have noted is we generally avoid or really focus our consumer applications. So today, roughly 6%, 7% of our business is in the consumer side. We tend to go for a high-end consumer. So those kind of short cycle designs, we tend to avoid and same thing for the auto. Maybe putting the management slide here is a little bit unusual for us. It's a big part of our story. Dan, our CEO, he's been a CEO -- second CEO in the company's history, took over in the early 2000s but grew up in the business. I joined Bel Fuse February of 2021, as the first outside executive hire. So as you can imagine, joining a team where it's been a little bit of status quo, not challenging the status quo for some time. Today, where I sit and we look at this chart, everybody but one kind of has come on since I've come on. So we're really strengthening and upgrading the bench, and we'll see that in some of the numbers and kind of reflective of where we're going with this. Some of the journey and the change that we've been on. If you followed our stock for a while, our margins have been, let's say, struggling and lagged behind the industry. So we have gone on this journey of transformation. We're not done. We're 2 years into it. I want to think of it more of 1.5 years into it, so we launched a bunch of exciting things. So I'll just maybe kind of -- highlights here. Facility consolidations, we're doing 4 of them we announced October last year. We strengthened the bench with new Head of Sales in Europe and also some of the various personnel that you see on the slide here as we talked about. We divested our business this last Q2, roughly $5 million of sales. We walked away from $9 million of business that we chose to not bid on. We are rotating and refocusing our efforts on higher-value items and we're seeing that work. The concept, obviously, is simplifying the way we do business and serving our customers better ultimately. So how do we grow? So we talked a little bit about some of the growth and exciting sectoral tailwinds and the end markets we're playing in. So how do we grow that? Well, we're doubling down in emerging markets. So e-Mobility, we did a small acquisition January this year out of Germany, around the fast charging for industrial e-mobility, right? Big trucks don't want to be sitting around for 10 hours charging. So that next generation needs to be quicker. A lot of software, a lot firmware on those applications. We're repivoting our business to the right customers and kind of SKUs and product families. I think one of the pervasive themes to our history despite our margin, has always been strong reputation on engineering. That's where we excel. We've been around for a long time in our industry. Being 70 years as a stand-alone company is a very big deal. So we are looking to get reward on that. And then we're simplifying the way we do business as we talked about. So either from people to the operational and the kind of the revenue side of it. But ultimately, we think we are at a good stage to both grow top line and improve our cost structure a little bit more. As promised, here's our 3 segments, just to kind of peel back a little bit more here. On the connectivity side of it, this is where our predominant military, commercial aerospace business resides. And you can kind of see the end market distribution there and applications. But really, this business is a connector business, focused on harsh environments where there is a criticality element of its performance. Low cost on the front end but big cost of failure if things don't work out. So -- and obviously, you've seen our kind of performance enhancement there on the margin side of it. Shifting over to Power. This is, I said, our most diverse business in terms of end markets we touch. These are power applications, anywhere as small as something as a fuse to our e-Mobility application probably the size of this -- top side of this podium here. We also do AC-DC board mount-type applications. Our e-Mobility is serviced out of this segment, and we're on board. We don't do a whole lot off board. In terms of the margin profile, this is where a lot of work has gone in. These are really good products, servicing really good end markets, and then we struggle a little bit on the margins, and we're seeing the improvement. If you zoom back pre-2020, those were as low as low 20s on the gross profit. So we're happy with the TTM approach here. A lot of work like I said has gone into it. On the Magnetic side of the solution, this is really predominantly network cloud business, serving data centers and power transformers. So they go into various applications as people think about AI and kind of the impact that's going to have on data centers, this is where we think the benefit will come in between Power and Magnetics, maybe a little bit on connectors. This business, as maybe if you read our Q2 earnings, kind of we feel bottomed out in Q2. So there was a lot of inventory in the channel. It's kind of worked through that, and we're seeing that bounce back as of July as we spoke about. So we're excited about Magnetics. Not necessarily the greatest gross margin of the business, but it's a great, great EBITDA cash flow-generating part of our business here given the relatively thin R&D and SG&A in this business. So for our size of the business, we know there's a lot of pieces, but we're always happy to talk about them in more detail. Just some illustrations here. This is our aerospace segment that sits in connectivity. Obviously, we're talking about OEMs, MRO and the subcons as well. Obviously, we all know what happened with the grounding back in circa 2019 and the COVID issues that happened. And we feel that's rebounding nicely, and we feel for the years to come that this should be a great tailwind for us. Again, this is our -- one of our higher-margin businesses here. e-Mobility, we talked about we're on board. We've been in the e-Mobility industrial side since 2011 before it was a thing. We had a first mover's advantage. We know our products are reliable. They're not going to set things on fire. We have a lot of miles under our belt, a lot of firmware and a lot of software in these products. So we have roughly 250 relationships that we work with, the vast majority of those are single-source and designed around our application. It's a fast grower for us. 2020 was the first year we kind of started seeing a little bit of a critical mass on revenue. And then we're expecting to see this acceleration. I should note, this doesn't include numbers from the German acquisition that we were talking about earlier. And I'll hand it over to Lynn.

Thank you, Farouq. So just going through some historical financial performance. On the upper left here, this is just a view of our historical revenue and gross margin percentage. And we do show an 8-year look-back here. For those that may not be familiar with Bel, if you're new to the story, we have gone through a bit of a transformation over the last 8 years. So looking back to 2015, that was our prior high watermark. We had done 2 large transformative acquisitions in mid-2014, which doubled the size of the business over the summer of 2024. So for years, we've been looking to get back to 2015. So we have effectively surpassed that mark in 2020. But in the years in between, as Farouq mentioned, we had lots of challenges along the way. Some of them were internal, some of them were macro. Following those 2 large acquisitions, there were some -- lots of digestion that was happening. One of the acquisitions came with it, some quality issues that we worked through and got that acquired entity back in at all of the large customers back through the factory audits, getting back on those report cards in green. In 2019, as Farouq mentioned, there was grounding. We had tariffs coming out of China, just lots of -- and then COVID. So lots of kind of noise in between. And then starting in 2021, I think, was the beginning of the journey that Farouq mentioned earlier, so we did complete a 4-year ERP implementation in mid-2021, and that was the first time that we were able to really see a visibility of SKU profitability. We certainly had it prior to that, but not in a timely fashion. So that new system allowed us to generate those numbers quickly so that we could better monitor and take proper actions. So the last couple of years, lots of focus on proper pricing for our product, in addition to cost containment measures with the facility consolidations that Farouq mentioned, so sales for the trailing 12 months are just under $700 million with a gross margin of 31%. So lots of improvement shown here over the last couple of years. And I will note, we had 2 small acquisitions at the beginning of 2021, but most of the sales increase was organic. Shifting over to the top-right, the EBITDA chart. From 2019, we're at 5.3% EBITDA. We've grown that to 15.8% in the most recent trailing 12-month period for the most recent quarter. In Q2, it was 17%. So lots of actions around the world, everyone rowing in the same direction and making nice progress here. From a balance sheet perspective, our debt balance is as low as it will be for the foreseeable future. We're down to $60 million, and that is all at a fixed rate of interest at this point. We have some interest rate swap agreements in place. So it's at 2.5%. We don't plan on paying that down any further at this point. And our cash balance has remained strong, even given the large debt paydown that we did this year. So that's at $65 million. From a CapEx perspective, it's been fairly consistent over the last several years at around the $10 million mark. We do expect that to be closer to $14 million to $15 million this year, given the facility consolidations. The next couple of slides go through some backlog visual. So this has been getting a lot of kind of airtime from us lately. So our backlog did ramp up quite significantly starting in 2021 with the supply chain constraints. People were placing orders with us for several quarters out. So backlog by definition is going to be a combination of demand for your product and lead times. So obviously, things that are scheduled to ship in the next quarter, that relates to demand. But when you start having 1, 2, 3 quarters worth of orders on your books, that is contributing to the higher backlog level and not necessarily an indicator of demand. So we are starting to see it come down because we are starting to see the lead times come down. We do expect that downward trend to continue. That's normal, that's expected. So just wanted to point that out. On this slide, just to further show that point. This is -- the lighter blue bars here are the total backlog at the end of the quarter, and the darker blue bars are the next 12-month sales. So you can see when we had that large ramp up, it did not result in this huge spike in sales. So most of that related to those longer lead times and just a little bit of it related to the increase in demand. So as we expect those light blue bars to come down, we are not expecting sales to dip off to that same degree. So we do still see a strong backlog for demand. And then the last slide is a little bit about our share structure. So we are -- we do have 2 classes of stock, Class A and Class B. Class A is our voting class, about 2 million shares outstanding. Class B is non-voting, with about 10 million shares outstanding. They do both pay dividends. Class A historically was $0.06 per share per quarter with Class B a little bit higher at $0.07. From a market cap perspective and an enterprise value, we've been right around $660 million. And that concludes our prepared remarks. We're happy to take any questions.

Go ahead.

How do you think about -- obviously, you're in a very different situation, balance sheet-wise, than you were 8 years ago. How do you think about returning -- return of capital or future investments, et cetera, given your $10 million run rate CapEx. Where do you look to deploy cash in the future?

Yes. So right now, as we've talked about a little bit. We have 4 facility consolidations. So we're seeing a little bit of ramp-up in spend on the investments. So some good ROI there. I think we're newly in the case of having more cash than debt. So I would say we don't have -- maybe if I can just expand a little bit on your question, I think it's around buybacks. We don't have one in place today. We did one, I think, 2011 or '12, something like that. The reason we have the debt chart up there -- the first time we took on public debt was 2014, '15, we doubled our size. And now we're finally back to the point where we have more cash than debt. So as of today, we don't have one. We think there's a lot of good returning internal investment to be done. Also, we've done some really nice M&A in the last 2, 3 -- whether we've done, including consolidating our position on key OEM platforms on the commercial aerospace side. So we think there's some also attractive M&A out there to be done.

The German acquisition you made, was that Compleo?

Sorry, is that a what?

The German acquisition you made, you said an EV-related. Was that a company called Compleo?

No, it's called innolectric.

innolectric, I got it. And then second question, I guess, on the Power segment. Still, first time seeing you, so I don't know your business quite so well. But how -- what do you actually provide for transformers? Do you provide components for transformers? And how big of a percentage of sales? Because we're hearing transformers are a key bottleneck in the industry, there's a lot of demand. Obviously, grids need to be developed substantially over the next 10 years, both in North America and in Europe. It seems like a great growth area. Just trying to understand...

Yes. I think it's one of our many growth areas, quite frankly. We also see bottlenecks in other places. So believe it or not, we see bottlenecks in things as simple as steel because people will use very specific kind of steel that comes from one place in the world. But we also see it on kind of the higher-end chips like NXP. And I would say our power business, just on average speaking, it's probably the one with more bottlenecks given the diversity of its product set. So I know that's -- I feel like we've all kind of went past the -- any bottlenecks, but there are still issues. But specifically to your point, transformers, yes, I mean, we think there's a lot of need. It's interesting. Some of our products, like if you look at fuse, we've been selling it, right, since 1949 and obviously it's developed over time. But as we think about new cars or toothbrushes or to show -- illustrate simplicity, all of a sudden, it's all the rage, right? So we're seeing both new products and old products, if you will, seeing a whole new life driven by a lot of the sectoral themes we talked about. So I agree with your comments.

[indiscernible]

Yes, it's small, it's about 5%.

Can you talk about the share class structure? Obviously, [indiscernible].

Yes. So the question is around our Class A, Class B structure. I would say initially that I think the assumption is that it's here. I think we have not talked about any kind of time line or anything like that publicly. So -- but I would say that I think the assumption should be that it's here. I think the -- we do have a set of investors, which I would say, are fans of it because it allows you to kind of invest in the company and take a little bit of a longer term like some of the journey stuff that we're doing on right now. But I think the assumption should be is that it's part of the package.

[indiscernible]

I would say also Bs, quite frankly, as well. Obviously, it's not everybody, right? We have a very diverse shareholder base in the Bs and the As. But as of right now, it's there. Okay. We're getting the signal, but happy to answer any questions, and I'd like to hand it back. Thanks, everyone.

Thank you.