Yahoo Finance Bel Fuse Inc. (NASDAQ:BELFB) Q1 2024 Earnings Call Transcript
Bel Fuse Inc. (NASDAQ:BELFB) Q1 2024 Earnings Call Transcript April 26, 2024
Bel Fuse Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to the Bel Fuse First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please go ahead, Jean.
Jean Marie Young: Thank you, and good morning, everyone. Before we begin, I'd like to remind everyone that during today's conference call, we will make statements relating to our business that will be considered forward-looking statements under the federal securities laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2024. These statements are based on the company's current expectations and reflect the company's views only as of today and should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligation to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties and other factors.
These material risks are summarized in the press release that we issued after the market closed yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K for the fiscal year ended September 31st, 2023, and our quarterly reports and other documents that we have filed or may file 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 me on the call today is Dan Bernstein, President and CEO; Farouq Tuweiq, CFO; and Lynn Hutkin, Vice President of Financial Reporting and Investor Relations. With that, I'd like to turn the call over to Dan. Dan?
Daniel Bernstein: Thank you, Jean. Good morning and thank you for joining our first quarter 2024 earnings call. Overall, we were pleased with our financial results for this quarter. Our sales came in at $128 million, which was within the forecast range we provided on our last quarter earnings call. It is encouraging to see our margin continue to track in the right direction as Lynn will outline further. We continue to benefit from diversity of our segments with strength in Connectivity on the sales side and impressive profitability from both our Connectivity and Power segments. These areas help offset the softness in the Magnetic segment. These outcomes were all largely within our expectations. In late February, we announced the Board approved a $25 million share repurchase program.
Shortly thereafter open market purchases of both classes of stock were initiating pursuant to programs authorization. As of March 31st, we utilized $6.3 million to repurchase a total of 109,000 shares. A 10b5-1 plan has been in place, ensuring the company's broker has the ability on an on-going basis, including post quarter and during our regular blackout periods to make open market purchases in accordance with the company policies. As of April 24th, our program-to-date repurchase a total of $11.1 million, representing 189,000 shares. We expect to continue executing this program with the internal guidelines that we have established. In March, the company announced the upcoming retirement of John Tweedy, a long-standing Board member and Audit Committee member, whose term will end at May 2024 Annual Share Meeting.
On behalf of the Board, I want to thank John for his many contributions to Bel over these past 28 years. John has insight and counsel will be missed, and we wish him the best in his retirement. With the upcoming vacancy, the Board nominated Dave Valleta as a new director at this upcoming meeting. Dave brings 40 years of sales and growth experience within the electronic component industry with companies including Vishay Intertechnology and AVX. We're excited about the potential of adding Dave to the Board given his tremendous wealth of knowledge in building, leading and managing sales team for global organization in our industry. If elected this will be instrumental to Bel to continue implement our growth strategy. In addition to the changes at the Board level, as noted in our last earnings calls, there will be transition on the executive team in July with the retirement of Dennis Ackerman and promotion of Steve Dawson to the Power segment.
When these transactions become fresh perspective on the executive team and the Board room, this will be welcomed as we set our future strategy for growth to years to come. And with that, I will now turn the call over to Lynn. Lynn?
Lynn Hutkin: Thank you, Dan. From a financial perspective, in summary, we saw continued margin expansion on a lower sales base from looking at Q1 '24 versus Q1 '23. First quarter 2024 sales came in at $128.1 million, representing a 25.7% decline from the first quarter of 2023. The majority of the sales fluctuation was driven by our Power and Magnetics segment as we will discuss further. Our gross margin increased to 37.5% in Q1 '24 from 31.1% in Q1 '23. And these profitability improvements were largely driven by our Power and Connectivity segment. Turning to some details at the product group level. Power Solutions and Protection sales for the first quarter of 2024 were $60.2 million, representing a 27.6% decline from Q1 last year.
The decline in sales was mainly due to lower sales of our power products used in networking and consumer applications. However, we saw strength in sales of our rail products, which grew over 50% from Q1 '23, reaching $10.3 million in sales in Q1 '24. Despite the overall decline in sales, this segment posted a gross margin of 44% in the first quarter, reflecting an 830 basis point improvement from Q1 '23. We are viewing approximately half of this improvement in Power margins as being sustainable as it was driven by more permanent factors, including cost reduction efforts, both on the procurement side and headcount side, the lower volume of low margin expedited fees and overall product mix. The balance of the basis point improvement in gross margin versus Q1 '23 relates to items that are either nonrecurring or in the case of favorable FX temporary in nature and should not be factored into a normalized view of gross margin for this segment.
Turning to our Connectivity Solutions Group. Sales for Q1 '24 came in at $54.3 million, up 1.7% from Q1 '23. Q1'24 sales into commercial air applications amounted to $14.6 million, which is a level consistent with Q1 '23. Products sold into defense applications totaled $10.7 million for Q1 '24, up 3.2% from Q1 '23. The year-over-year increase in sales was despite the divestiture of Connectivity's tech business in June 2023, which previously contributed around $1.5 million per quarter to the segment. The gross margin for this group was 36.1% for the first quarter of 2024, a significant improvement from the 34.1% in the first quarter of 2023. This margin expansion was made possible due to the operational efficiencies achieved through facility consolidations that were completed in 2023, along with implementation of contract renewals on more balanced terms.
These favorable margin factors were partially offset by minimum wage increases in Mexico that went into effect in Q1 '24 and the unfavorable impact of FX related to the peso. Lastly, our Magnetic Solutions Group posted sales of $13.6 million in Q1 '24, representing a 62% decrease from Q1 '23. This reduced level of sales was generally in line with expectations discussed on last quarter's earnings call and largely related to lower shipments into a large networking customer as they work through inventory on hand. The gross margin for this group was 16% in the first quarter of 2024 as compared to 22.8% in the first quarter of 2023. This change in margin was primarily driven by the lower sales volume in Q1 '24, partially offset by lower fixed overhead costs resulting from the facility consolidations in China, which were completed in late 2023 and favorable FX related to the Chinese renminbi versus Q1 '23.
At the consolidated level across all product segments, our backlog of orders totaled $350 million at March 31st, 2024. Our selling, general and administrative expenses were $24.9 million or 19.5% of sales, down from $25.3 million in Q1 '23. Within SG&A, an increase in salaries, fringe benefits and amortization expense were largely offset by lower legal fees. If you recall, we incurred $1.6 million of legal fees related to the MPS litigation in Q1 '23, and these expenses did not recur in Q1 '24. There were no unusual items of note contained within SG&A during Q1 '24. Turning to balance sheet and cash flow items. We ended the quarter with $121.2 million in cash and securities, a reduction of $5.7 million from year end. We generated $6.2 million in cash flows from operating activities during the first quarter of 2024 and had capital expenditures of $2.9 million.
It should be noted that Q1 included our seasonal payments related to our annual bonus and corporate insurance premiums. From an inventory perspective, the downward trend that we experienced over the past several quarters have continued into Q1, reflecting a $5.7 million reduction from year end. The lower inventory levels were primarily in the areas of raw materials and finished goods as we continue to work through our own inventory on hand. I'll now turn the call over to Farouq for additional commentary. Farouq?
Farouq Tuweiq: Thank you, Lynn. Good morning, everyone. As noted on our last earnings call, we anticipated the first half of 2024 to be on the slower side. Our first quarter results were in line with our expectations. The second quarter of 2024 is expected to be largely similar to the first quarter in terms of sales volume with margins expected to normalize a bit, given the impact of onetime items in Q1, as mentioned by Lynn. In summary, based on information available to us today, our outlook for Q2 sales in the range of $125 million to $135 million with gross margins in the range of 34% to 36%. There are several items to keep in mind when bridging our Q2 '23 of $169 million to the expected range for Q2 2024 and we'll discuss these here by segments.
On the Power side, our Q2 2023 sales included $5.7 million of expedite fee revenue that is not expected to reoccur in Q2 '24. Second, as previously noted on our last earnings call, Q2 '23 included estimated $10 million of catch-up sales that resulted from past due orders connected to the raw material storage from 2022. These will not recur in Q2 '24. Third, our eMobility business is softer this year given the current interest rate environment, which has delayed capital investment projects at our customers and their customers. eMobility sales in Q2 '23 were $8.5 million and we anticipate this will be down by roughly $3 million to $4 million in Q2 '24. The balance of the expected decline in power relates to a continuation of lower sales into our distribution partners and consumer end markets, which, while similar to Q1 '24 levels will represent a lower level from Q2 '23.
On the Magnetics segment side, given the current status of shipments into our large networking and distribution customers, we're projecting only a slight rebound in Q2 '24 from Q1 '24 levels, accounting for approximately $10 million of the expected decline from Q2 '23. Within our Connectivity segment, we are estimating sales that are largely in line with Q2 '23, potentially up a bit given recent contract renewals. Looking to the second half of 2024, we remain optimistic that some level of recovery will occur though the degree and speed of rebound will likely vary by product line and end markets. Overall, we do not anticipate a quick flip of the switch and instead expect that it will be more of a slow and steady recovery as certain customers and end markets reserve their normal level of shipments upon inventory depletion.
Shifting our view to medium-term growth drivers, two areas that we are excited about, I wanted to highlight our space and AI. Let's first discuss the end market of space. This is an end market that is a very harsh environment. It takes years of design work to get into. Up until recently, the volume of product going into space applications for anyone was limited. Bel has successfully had its product and space since 1970s. As a result, we have already proven ourselves as a reliable supplier of connectors and components that can withstand the harsh environment and we're better than getting from this legacy today. To that end, our Connectivity segment has been successful in securing significant design wins in multiple commercial and military satellite platforms as well as ground-based support applications for both copper and optical connectivity products.
We believe these design wins will accelerate connectivity's growth in the space market with 50% year-over-year growth in that market expected in 2024. To provide some context, in the full year of 2023, we had sales of $4.5 million in the space applications. During the first quarter of 2024 alone, we shipped $2 million of product into this end market and are forecasting $77 million for the full year of 2024. Similar to our eMobility business, this has a longer development cycle and will take time to ramp up, but we believe we are hitting a breakout point for space applications in 2024. We also continue to invest in this key market to grow our portfolio space rated products and expand our internal capabilities, allowing us to support our customers' most extreme connectivity requirements.
The second area of note is in the area of AI. While we do not have meaningful sales directly tied to AI today, our potential future benefit is becoming more clear. Of our three segments, we view our Power segment as the biggest possible beneficiary of the industry's transition to AI. While we have products in each segment that support general networking applications, the systems that will support AI consume significantly more power than a traditional system. Even if the number of data centers that we currently participate in remain the same, the power supply dollar content per AI server is expected to be 2 to 8x higher. Another item of note here is that our existing products and capabilities will support this future need. There's no need for major new product designs for us to support AI is just additional volume of our existing Power products or perhaps some minor modifications.
While still in the very early stages, we are seeing an increased level of activity and discussions happen with our existing networking customers and also with specialty customers at high performance computing. We're just starting to see early production volume orders from many of these customers, which is exciting for us. The last item I'll touch on is the M&A market. The volume of M&A opportunities available to us in 2022 is fairly unlimited, and we are definitely seeing a shift here in 2024. This is consistent with what we've been talking about. There appears to be a more robust pipeline of opportunities becoming available and we continue to assess those that may be a good fit for us. There's nothing to report here today, but we're actively reviewing a variety of potential targets.
Overall, beyond the near-term uncertainties surrounding timing and scale of recovery, there are many areas that the team is energized about for the long-term. Bel has a long history of evolving over the years to support new end markets, and we believe we are at that next pivotal point of evolution. Space, AI, eMobility are viewed as the next new end markets for Bel's products. We're excited about our current position in each of these areas and the growth potential they bring to Bel's future. With that I think we can open up for questions?
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