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

Good morning, everyone, Day 3 of Citi's Global TMT Conference here. I can't believe it's Day 3 already. Asiya Merchant here. I lead the tech hardware, tech supply chain coverage here at Citi. Very pleased to have Bel Fuse. Lynn Hutkin, she's the CFO of Bel Fuse here. This is an interactive conference. So I do have some questions here. I can turn it over towards the end. If you have some questions, just please do raise your hand so we can bring the mic to you. Before we get started, though, I wanted Lynn to have -- to present Bel Fuse, provide a few prepared commentary here. Lynn, over it back to you.

Great. Thank you, and thanks so much for having us here today. We appreciate it. So before we start, this is our safe harbor statement. So since it's our first year here, we thought it would be helpful to just give an overview of Bel for those who may not be familiar with our company. We've been in business for over 75 years. We started in 1949. We design and manufacture electronic components, systems, solutions based in West Orange, New Jersey, so just right over the river from here. Our annual sales are just under $750 million on a TTM basis, and our EBITDA margin is just over 21%, which I'll get into in a future slide on the recent financial transformation that we've gone through. From an overview perspective, we do manage the business in 2 segments today. This is something new that we started in March of this year. Prior to March, we were -- we managed the business by product group. And now we are looking at the business by end market. So in March, we introduced Industrial Technology & Data Solutions, which we refer to as ITDS. That is about 45% of our business today. And then Aerospace, Defense & Rugged Solutions, which we refer to as ADRS, that's about 55% of the business. From a geographic perspective, about 2/3 of the business is North America based, about 1/4 in Europe and the balance in APAC. From a sales channel perspective, about 3/4 of the business is direct to our OEM customers with the remaining quarter going through our distribution partners. So just to delve in a little bit on the segments and what we do, where we do it, where the products go. So for ITDS, the products here are largely power supplies, fuses, our integrated connector modules, transformers. So within this group, we're really servicing the networking applications. So anything that's going into data centers, we include our AI exposure in here as well, factory and automation systems. We have rail in here. So these are the main areas within ITDS. And as you can see from the chart at the bottom here, there was a large buildup in inventory back in 2022. This happened across the whole industry, not specific to Bel. We then went through 2 years of a destocking cycle. So that's where you see the large drop off from '22 to '24, and we're starting to see that come back. So very much an industry factor there, but just wanted to outline that. Now our gross margin, you'll see we've made significant improvements. So even though sales were lower, we've done a tremendous amount of work on our margins over the years, which I'll get to on the next slide here. On the ADRS side, we also supply power supplies here, networking systems, connectors, cable assemblies. And this is going into commercial aircraft. So Boeing is a customer of ours. This is where we have all of our defense exposure. So we do a lot of business with the U.S. and Israeli primes, so Lockheed, Raytheon and then the main primes in Israel as well. And then we have space included here as well. So space is a small end market for us today, but is growing, and we think it will be meaningful for us as we move forward here. The -- looking at the chart here, we did do a large acquisition in this segment at the very end of 2024. We acquired Enercon in November of '24. So that's the large increase in sales that you see there in '25. So just looking back at the last 5 years, I think that this is an important part of our story, especially for those who aren't familiar with us who are thinking about where we've come from, where we're going next, why we're a good investment today. On the sales side, you can see there hasn't been a tremendous amount of growth. I mean, there has been some, but if you compare '21 to '24, we were pretty flat on the sales side. What we did do is there was a heavy focus on margin. So back in 2021, that's when Farouq Tuweiq joined our company. He came in as CFO with -- from the investment banking background, asking all of the right questions. We had never looked at SKU level profitability. We did not have a pay-for-performance program in place. So there were all of these things around the business that were just low-hanging fruit once you really started to look at it. And so over the course of '21 to, call it, 2025, there were a lot of initiatives in just going through our SKU level profitability, pruning back any low-margin products, we sold some businesses that just didn't fit with Bel's story going forward. We did 6 facility consolidations during that time. So we increased efficiency around the world. There were a lot of CapEx investments made to increase automation and throughput. The whole executive team was actually turned over in the last 5 years. And we really instilled a pay-for-performance mindset across the organization. With the key message being not every sales dollar is a good sales dollar, which is an important distinction. so if you look at the EBITDA side of the chart here, we've grown the business from being a mid-single-digit EBITDA business back in 2021 to being over 20% most recently. And during this journey, a lot of investors would say, well, this is great, but is this sustainable? How are you going to do in a year where sales are down? And that's why, in our minds, 2024 was a real test for us because sales did go down and our EBITDA margin continued to go up. So we were able to prove out the sustainability of the actions that we took globally. So now that the margin part of our story is largely behind us. Now to be clear, we will always be mindful of our margins and maintaining those margins, but it's just not the heavy lift of the last 5 years. So our focus is now shifting more towards top line growth. So as I showed on the prior slide, top line growth was not something that we were very successful at doing over really the last couple of decades. And so today, we are looking at these 4 kind of tiers of revenue growth. One is the core business. We have great blue-chip customers, quality products. We've been in the business for over 75 years. We've always done, I think, a good job with partnering with our customers, seeing what tomorrow's technology is, seeing how we can support them and then developing those components and systems for their applications of tomorrow. So that's just our core business, and that is doing really well right now. And then there are certain end markets that we're in that are growing at a higher clip than what it would normally be. So I think if you look at the electronic industry in general, it's a mid-single-digit grower over a period of time, just average growth. I think as we're looking at the space today, aerospace, defense, space, AI, there are a lot of exciting end markets that we're in that are growing at the above-average growth rates, I would say. So that is kind of stacked on top. And then we have our internal sales initiatives. So similar to the margin story, where there were a lot of things that we just never focused on in the past, there are things on the sales side that we never focused on in the past. And we identified those items in the last, call it, 12 to 18 months. And sales takes a longer period of time to reflect. So we are starting to see some of that come through on the bookings. So these are just additional kind of Bel-specific sales initiatives that we're working on that would layer on top. And then, of course, M&A will always be part of our story, and that will be there. So yes. Hopefully, that provides a brief background of who we are and where we are and where we're going.

Okay. Thanks a lot for that, Lynn. I think it's helpful, just given this is the first time you're presenting here at Citi for that background. So if I can just start, you already talked about a few key end markets that have clearly upsided expectations. You talked about defense, you talked about space, aerospace. So -- and you talked about data solutions. Just help us understand like the durability, what gives you confidence that as you're looking ahead 6 to 12 months out, 24 months out, that there is durability here. And it's not just given that we're hearing about tightness in the supply chain across many components, this is not just some sort of like a pull forward ahead of some sort of a demand cliff that's going to erupt here?

Right. I think it goes back to the end markets that we're in. So we are largely in aerospace, defense, data solutions space. So these are things that are going through a longer-term growth cycle right now. And what's nice with aerospace and defense is it's a very long-cycle design business. So we have products in defense applications that have been there for 20 years, right? So as we get orders, it's for an extended period of time. So we have a tremendous amount of visibility on that part of the business. We specifically do not like playing in consumer or auto because those tend to be more volatile to your point. So we do feel that we have a lot of visibility in that at least for the next few years, we view defense as being strong with all of the government spending chatter, not that we've seen it come through yet, at least on the U.S. side. But -- and then commercial aerospace with new production build rates, I mean, those are published and those are increasing. So I think the end markets that we're in provide us some comfort that this is a longer term.

And then you just had growth that you posted 25% year-on-year in 2Q, you have gross margins that are almost 40% now. And then if you think about your outlook, you're still looking at margin expansion over here. There is continued strength, like you said, in defense, data solutions. So just maybe some puts and takes relative to that outlook. It seems like momentum is really strong. We heard from some of your peers on defense. Clearly, this is a technology conference where we've heard just constructive stuff on data solutions and data centers. Just what are some puts and takes to that outlook that you provided for third quarter and as you see that momentum building into fiscal '27?

Yes. When we look at our outlook for the next quarter, and we generally only guide 1 quarter out. That's just our level of visibility across the whole business. And I would say on the aerospace and defense side of the business, it's pretty solid because it's a longer-term design cycle, customers are placing orders well in advance. We have a lot of visibility there. Now even within A&D, you can still have customer requests for pull-ins or pushouts, which we have to manage. So that's some of it. But I think most of the puts and takes are on the ITDS side of the business. And that is where we have things like fuses that are sold through the distribution channel, and they tend to have a lot of intra-quarter turns. So we don't have those bookings in our backlog when we're starting the quarter. We kind of see what that demand is during the quarter. So that's something that can pivot up or down unexpectedly. And I would say also within ITDS is where we have the AI exposure, and we've talked about a customer in that space who is ramping up that depending on their ramp schedule, right? I mean, we communicate very closely with them. But depending on if it's slower than expected or quicker than expected, that could also have an impact.

Okay. All right. And then just within these end markets, not looking for guide here, but just strength that you see across these end markets like fairly evenly. I mean, I know you said commercial, defense and aerospace -- sorry, commercial aerospace and defense, a little bit longer cycle. So you feel good about the visibility. IT data solutions just -- and distribution, there tends to be a lot of turns. Just anything you can talk about on visibility there or just demand momentum as you look ahead?

Yes. I would say for demand momentum, I would say that the top is probably defense. We are seeing certain regions move faster than others. So I would say that Israel is quicker to move and quicker to provide funding for programs than the U.S. We've also seen in the news, there have been European countries who are engaging the Israeli primes to put in their own infrastructure, their defense infrastructure for their particular country. So we're seeing a lot more of country-specific initiatives. And that will help the Enercon business. So our Israel business will benefit from that. I think on the AI side, it's interesting. I mean we're kind of in a wait-and-see mode. We are working very closely with our customers there. They are still small. They -- we have been talking about a ramp coming. We'll provide more color on that when we see the orders. But we are taking actions today in terms of CapEx additions and making sure that we're able to meet that ramp capacity.

Okay. All right. So one of the questions that I get is, how does Bel Fuse differentiate themselves against your peers, right? Where is your moat? And maybe we can dig into each of these end markets because I'm sure it's very different, the moat that you have across each of these end markets, maybe depends on the products that you're supplying to these end markets. But you do have some very large players as well that you compete against, 2 of them that were here last -- yes, just yesterday, also talking about strength in military and defense. So if you can just -- and IT data solutions. So just if you can take it a level down and say, okay, where does Bel Fuse really differentiate yourself when you are competing in some of these end markets against some of these very, very large players with global footprints.

Right. And we get that question a lot from investors. I think the answer there is we are the right blend of being a big enough supplier for -- in defense, the primes, where we have longevity. We have quality products. We have top-notch engineers. We've been developing these products for decades. I mean we've been supplying the defense contractors for decades. And so we have global reach. We're near their engineers. So we kind of check all of the boxes for being the benefits of a large company. At the same time, we are obviously much smaller than some of our peers. And I think that brings a level of customer intimacy where we will -- we just don't have the layers within Bel that I think some of our larger competitors have. So if we have a $1 million account for us, it's meaningful. We -- if that customer wants to have a call with Farouq, that's possible. We have just a very lean structure internally. So there's a lot of customer handholding. And I'm sure our competitors have a similar, but I think our smaller size, we're just more -- we're more nimble. We're agile. We just -- we don't have the same like levels for customers to go through for things to get escalated as needed.

Okay. All right. And then just on the defense side, just because that's been a topic that we've seen some of your other peers also talk about very -- and it obviously grew also like high 20s year-on-year for you guys as well. I think you talked about bookings, new program wins as well there. Just -- where are you seeing the greatest opportunity in defense? Is it very broad-based? Or is Bel Fuse like particularly concentrated in whether it's airborne, it's missiles, it's ground systems, it's naval applications. There's such a variety in that end market. Can you double-click a little bit into sort of where you are seeing the strength and -- or where you differentiate or where you think that you have sort of top leading positions?

So it's really across the board. So we are on over 1,000 different platforms within defense. So it's land, sea, launchers, missiles, anything that flies. We do communication and encryption applications. We have components that are worn on the soldiers. So it's really across the board. I would say that there's no one program that is more than 5% of our defense exposure. So it's really broad-based, which I think is good because whenever you have a program concentration, if something loses funding, then all of a sudden, there's exposure there. But -- so I would say it's very broad-based. And then geographically, I would say right now, we're seeing obvious strength in Israel. There's strength in the U.S., although we expect that to increase as the years go on here. We have not seen yet on the U.S. side, a major funding kind of trickle down, right? I mean we need government funding to go to the primes to then come to us. So we have not yet seen that yet. And then the other thing that I'll note on the defense side is we are trying to further penetrate in Europe.

Yes. That was my next question. So European defense, I think you received certification for that, and you talked a lot about some wins that you've seen there, especially during Q2. What -- can you just help us size that European opportunity? Like how should we think about that relative to what's going on in Israel, for example, for you guys? And how big can that be for Bel Fuse?

It's interesting. So we started the process of getting our Slovakia entity certified as a defense manufacturer about a year ago. And in tandem with that, we were working on the sales, right? So going to the European defense contractors and letting them know that we were going to be having manufacturing capability in Europe. And I think it happened much quicker than anticipated, where we actually had project wins before that facility was even certified. So I think that is definitely a testament to the demand that's out there in Europe. So of the programs that we've received to date, it's definitely multimillion dollar programs. They tend to start small and then scale over time. So they'll be small to start, but we do think it's a larger opportunity for us. And I'll also say that we are heavily investing in our sales team in Europe to further penetrate that European defense market.