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spk05: Good morning and welcome to Belfu's fourth quarter and full year 2023 earnings call. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jean Marie Young with three-part advisors. Please go ahead, Jean.
spk03: That
spk00: will be considered
spk03: forward-looking statements under 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 outlets. Actual results for future periods may differ materially from those protected by these forward-looking statements due to a number of risks, uncertainties, and other factors. These material risks are summarized in the press release suite issued after 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 December 31, 2022, 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 Cam Bernstein, President and CEO, Khrouze Tewik, CFO, and Lynn Heskates, Vice President of Financial Reporting and Investor Relations. With that, I'd like to turn the call over to Dan.
spk09: Thank you, Jean, and good morning and thank you for joining our call for Q4 and 22-23 year end. Last month, Bell celebrated its 75th year of being in business. This is no easy feat in electronic component business and a testament to the generation of great associates, customers, and partners that we have a privilege to working with. Over the years, we have instilled the four principles of the father's stylus when we first started the company in 1949. We work closely with our customer product development teams. The benefits of this collaboration were to enable the company to stay relevant and on the cutting edge of technology. Two, establish and maintain relationship with quality suppliers. Three, provide value to our shareholders. This is always central in our priorities and made possible for building and operating successful businesses. And finally, attract and retain talented associates. Bell has successfully navigated the challenges faced over the years and has stood the test of time by relying on these four principles. 2023 on many accounts was a challenging year for our industry. Bell was able to perform better than most due to the diversity in our end markets and our unrelenting dedication to continuous improvement by our global teams. It was also a transformer year for us as we consolidated four manufacturing sites, sold on a non-core check operation, and divested our former headquarter building and focused on optimizing production and business processes. We finished 2023 with a non-GAAP adjustment on net sales, which excluded expedited fees slightly up from 2022 levels, which significantly improved profitability. It was also a year of record cash flow generation. This enabled us to explore a variety of ways to invest in the business and return capital to our shareholders. As announced in our morning release, the board of directors had authorized a new program where we purchased up to $25 million of the company's outstanding shares in the open market, privately negotiated or planned or blocked transactions otherwise in accordance with applicable laws and regulations of the SEC, including rule 10B-18 of the Change Act. Additional details regarding the stock we purchased program are contained in the 8K that was filed yesterday. Despite the many wins of 2023, we're not able to be as acquisitive as we hope, given the limited availability of viable targets. As we look to 2024, I'm excited about the road ahead. Well, as expected, the year will be off to a slow start. As consistent with the board of directors throughout our industry, we do believe the second half of the year will be promising, assuming inventory levels in the general normalize. With our previous announced facility consolidations behind us, we enter 2024 with a much more efficient cost structure, which will service well, especially with the current sales level of our magnetic business. Turning to the management team, we announced last month that Steve Dawson was taking the helm of our power group upon Dennis Ackerman's retirement in July. Steve came to develop through his acquisition of Power One Business from ABB in 2014 as an integral part of our turnaround story of the power segment in recent years. I've worked side by side with Dennis and the team for the past decade, coupled with his technical background and industry experience. Steve brings the right mix of continuity and best perspectives of all. I'm very excited to have him stepping up this summer as part of our going forward executives team. After that, I turn it over to Lynn to give us a financial update. Lynn?
spk04: Thank you, Dan. From a financial perspective, sales came in at $140 million for the fourth quarter and $640 million for the full year of 2023. On a non-GAAP basis, our adjusted net sales, which exclude expedite fee revenue, were down 12% in the fourth quarter of 2023 versus Q4 22, but were up 1% for the full year 2023 over 2022. Consistent with prior quarters, there were large offsetting movements within our product segment, with pockets of strength within connectivity and power helping to mitigate the significant defiance and magnetic sales throughout 2023. First margin continued to increase on a -over-year basis for the ninth consecutive quarter and reached .6% in the fourth quarter of 2023 as compared to 31% in Q4 22. Looking at the full year, first margin was up by 570 basis points in 2023 as compared to 2022. Margin improvement continued to be led by favorable product nicks and the successful execution of a variety of cost reduction and efficiency programs. Before getting into the product segment discussion, there is one item to note which impacts our fourth quarter segment margin. Historically, and including the 2023 year, we have accrued our global incentive compensation expense in the corporate segment throughout the year and pushed down the appropriate annual allocation to the product segments in the fourth quarter. Due to a shift in our incentive compensation program to a calendar year basis, there were five quarters of this expense pushed down to our segments in the fourth quarter of 2023. Aside from this, the -over-year periods disclosed in our earnings release are generally comparable. However, there is a larger disconnect if looking at segment margins on a sequential basis from Q3 23 to Q4 23. Now turning to our product groups, sales of our power solutions and protection products in Q4 23 amounted to $69 million, a 16% decline from the previous year's fourth quarter. On a full-year basis, 2023 showed an increase of 9% compared to 2022, reaching $314 million in sales. The growth for the full year was mainly driven by higher demand for friend and power products, which serve our networking and market. Sales of our e-mobility and rail products also remained strong and helped with offset defined and circuit protection and distribution sales. For a full year 2023, sales of e-mobility products amounted to $27.8 million, an increase of approximately 40% from the 2022 level. Products sold into rail applications totaled $30.1 million for full year 2023, up 33% from 2022. The gross margin for the power segment was .2% for the fourth quarter of 2023, representing a 720 basis point improvement from Q4 22. On a full-year basis, the gross margin increased by 760 basis points to .1% in 2023 as compared to .5% for 2022. These increases were primarily driven by a favorable shift in product mix, cost reduction efforts, and favorable effects from the Chinese remedy. Our connectivity solutions group achieved sales of $50.6 million in the fourth quarter of 2023, an increase of .5% compared to Q4 22. On a full-year basis, 2023 connectivity sales amounted to $211 million, an increase of almost 13% versus 2022. This improvement was due to the continued growth in the defense and aerospace industry. Partially offset by softer demand from our premise-wiring customers. For full year 2023, sales of products into the commercial aerospace end market amounted to $53.3 million, an increase of 72% from the 2022 level of $31 million. Products sold into defense applications totaled $44.7 million for full year 2023, up 25% from the $35.9 million in 2022. The gross margin for this group was .3% in the fourth quarter of 2023, up from .6% in the same quarter of 2022. On a full-year basis, the gross margin improved by 830 basis points to .2% compared to .9% in 2022. Gross margins for the 2023 period were favorably impacted by the higher overall sales volume, multi-year contract renewal, and operational efficiencies implemented during 2023. Partially offset by higher wage rates in Mexico and an unfavorable fluctuation and exchange rates between the US dollar and Mexican peso in 2023 as compared to 2022. Lastly, our magnetic solutions group sales declined by 49% from Q4-22 levels to $20.5 million in the fourth quarter of 2023. This resulted in full year 2023 sales for the magnetic segment of $115.1 million as compared to $178.8 million in 2022. This segment has a large concentration of sales in the networking end market and is largely tied to the ordering patterns and demand of certain large customers within that state. The downward trend on top line in this segment is a continuation and further deterioration of what we saw in the second and third quarters of 2023. With lead times being down and new orders being shipped in the same quarter, this segment does not have the same visibility as our other segments. The interquarter sales that were expected in November and December simply did not transpire and it's become evident that the rebound in this space will take longer than originally anticipated. The gross margin for the magnetic segment was .1% for Q4-23 as compared to .5% in Q4-22. On a full year basis, magnetic gross margin was 22% in 2023 as compared to .6% in 2022. The lower sales volume and dual cost structure in place throughout much of 2023 were the primary drivers of gross margin reduction for the magnetic segment compared with 2022. These factors were partially offset by favorable exchange rates with the Chinese Renminbi versus the US dollar. On positive developments in the magnetics group, we can confirm at this time that our large facility consolidation project in China that will benefit this segment is complete. The leaner, more efficient operations and elimination of the dual cost structure should aid the margins of this group going forward. At the consolidated level across all product segments, our backlog of orders totaled $373 million at December 31, 2023, a level we still consider to be high based on our history. The selling general and administrative expenses for the fourth quarter of 2023 were $24.9 million, down slightly from the $25.1 million in Q4-22. This reduction was primarily due to lower sales commissions and the reduction in professional fees. On a -to-date basis, SG&A increased by $6.7 million during 2023, mainly due to higher salaries and fringe benefits in 2023, in addition to the MTF litigation clock incurred earlier in 2023. Turning to our balance sheet and cash flow, we closed the quarter with $127 million in cash and securities, a significant increase from the $70 million we had at the end of 2022. During the fourth quarter of 2023, we generated cash flows from operating activities of $27.4 million, a 69% improvement from Q4-22. Looking at the full year of 2023, we generated cash flows from operating activities of $108.8 million, an improvement of 170% from 2022. Capital expenditures amounted to $2.5 million in the fourth quarter of 2023 and $12.1 million for the full year of 2023. We continue to make progress on reducing our inventory level and have achieved a $33.6 million reduction in inventory since the end of 2022. From a debt perspective, our outstanding balance remains at $60 million and is effectively subject to a fixed interest rate of .5% through our swap agreements that are in place through 2026. I'll now turn the call over to Farouk for additional commentary.
spk01: Farouk? Thank you, Lynn. Good morning, everyone. As Dan mentioned, 2023 was a solid year for us in terms of holding our revenue base and seeing significant improvements in profitability and cash flow generation. I wanted to take this opportunity to thank our global team for their tremendous efforts, creativity and ingenuity this past year as we pushed for continuous improvements in all areas of the business and our team answered the call and delivered above expectations. The priority of 2023 was to strengthen Bell's foundation and this was achieved. With much of the housekeeping efforts now behind us, the focus of 2024 will be threefold. First is top line growth. This includes investing in customer relationships, identifying new sales strategies, determining which end markets and geographies to double down in. And most importantly, the development of new products to support Bell's growth in the future. A quick comment on the sales team. We've done a lot of work on that in 2023. We've added some new team members across the globe. We also rolled out a brand new compensation and incentive structure that went live as of January. And the intention there is to really reward success and delivery with direct alignment and motivation to our associates. Second is further leaning out the way we do business. While we have accomplished a number of items, we still have a few projects we are working on. For example, we just kicked off a new project in the connectivity side where we're streamlining our operational operations there for our passive connector business, transitioning that manufacturing out of Pennsylvania into other existing Bell facilities. This new initiative is expected to be completed by the end of 2024 and is anticipated to yield incremental annual cost savings in 2024 to the tune of a million dollars. Third is capital deployment. It is evident, as Dan noted, that we are building up cash and now securities at a respectable pace and we want to be good stewards of this capital. As such, and as Dan noted, we launched our first stock repurchase program since 2012. And this authorization is a proud moment for the board and management team as we look to return cash to our shareholders. This was done at a time where our stock was discovering new milestones. To be clear, M&A is a top priority for us and must be aligned strategically and financially with our long-term goals. We'll also look to reinvest in the business to support organic growth. Increased capital spending is expected in 2024 as we continue to upgrade aging equipment while introducing more automation to our manufacturing processes. Again, the backdrop of rising wages globally. Now, pivoting to 2024 and looking at that, as Dan mentioned and noted in our release, we expect a slow start to the year with a potential rebound in the second half. For the first quarter of 2024, based on currently available information and taking into account various financial and economic indicators, including what we see in our backlog and what we are hearing from our customers, we expect sales to be in the range of $125 to $135 million. Aside from the anomaly we saw in Q1 last year, 2023, there is a typical step down in sales from Q4 to Q1 due to the Chinese New Year shutdowns that do occur in this quarter. And this historical trend is expected to continue this year. When looking at Q1 2023, there are a few items to keep in mind as we bridge from the $172 million that was last year to the expected range of Q24. So I'm going to run you through a few of these items to keep in mind. First, our first quarter Q23 sales included $7 million of expedited fees revenues that is not expected to recur in Q1 2024. These sales previously benefited our power segment. Second, if you recall, we divested our connectivity business in the Czech Republic during mid 2023, which contributed around annual sales of around $5 million. Third, we announced during Q3 23 that we walked away from roughly $9 million of annual sales within the magnetic segments due to their low margin profile. Fourth, Q1 23 was one of our power segments strongest quarters as they were finally able to ship orders that had been past due with the raw material shortages of 2022 easing by early 2023. These quote, unquote catch up orders from Q1 23 and Q2 23 largely tapered off during the second half of 2023 as expected. And these heightened volumes are not expected to repeat in Q1 24. We estimate that there were approximately 10 million of these catch up sales in power in Q1 23 that will not occur. Fifth, on the differential between Q1 23 actuals and Q1 24 projections, we're estimating that magnetic sales will trend down further in Q1 in typical seasonality weakness. And while accounting for the over inventory in the channel, we expect to account for approximately $20 million decline compared to Q1 23. And lastly, due to the overall weaker demand within our industry right now, Bell's factories in China will be taking an extended Chinese New Year holiday for a few additional days. While this is being done as a cost containment measure, it does result in a few manufacturing and shipping days. And one comment to point on that is we're seeing our suppliers and also our customers and their contract manufacturers taking a longer Chinese New Year as opposed to last year. Those were kind of the bridges from Q1 last year to Q2 this year. And just a quick comment, Bell is operating in an industry currently, as we all know, that has been going through an over inventory situation throughout 2023 that we performed pretty well against that backdrop. So this industry-wide phenomena is hitting Bell a little bit more than we anticipated on the magnetic side and do see and anticipate based on the conversations we are talking about to see light at the end of the tunnel here in the second quarter. Obviously, this is a very fluid situation that we are monitoring. The other thing to note in magnetics is, as it was talked about a little bit earlier, is the concentration of certain customers and markets. One other thing is, as Dan also noted here, is we've gone through this down cycle in the past and will not be the last time. We're confident in our ability to manage through this period and we will be well positioned when the industry does rebound. Taking a big step back and looking at more macro 2024, we remain very excited and optimistic about some of our other resilient end markets such as commercial air, defense, rail, EV, niche industrial, and more recently space. We do expect a recovery in our distribution business which, as a reminder, accounts for almost 30% of our revenue with very healthy gross margins. One other comment is during these softer times of inventory in the last two years, the engineering resources at our customers and industry was really focused more on fulfillment and finding alternative sources to production. Now with the inventory situation, we are seeing our engineering resources repivot towards more MPI and more growth oriented working on next generation technology. We are excited to embrace the challenges and the opportunities of 2024 and are not deterred by this near-term bump in the road. We are on a journey and our focus continues to be on a growth and progress for the long-term betterment of Bell. With that, I'll turn the call back over to Dan. Thank you very much,
spk09: Farouk. At this time, we'd like to open up the call for questions.
spk05: Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Jim Rachudi with Neidemann Company. Please proceed.
spk08: Hi, good morning. Thanks. I just wanted to go back to that comment about possible improvement in magmatics looking out to Q2. How much of that is just a function of some of the, perhaps the extended shutdowns in coming out of Chinese New Year, picking up the business, picking up in Q2? Or is there actually some signs of improvement in demand?
spk01: Yeah, so Jim, thank you for that question. So taking again a step back here, with the over inventory, obviously demand is down. So when we look at our suppliers and also our customers, they're taking this extended or longer maybe than usual time off for Chinese New Year to kind of a situation. Obviously the hope there is to contain costs and result in some inventory digestation. Do we expect that to digest through all that inventory? I don't think so. And then also, so that's why we do expect it will be a little bit carrying through into Q2. The other side here, we've seen some of these press releases come out in the last month or so where this is pretty well documented on the inventory side. And the various public statements out there have also said roughly two quarters. We, I think, align on that here internally as well.
spk08: Okay. And just turning to the power solutions portion of the business, how would you characterize the overall demand level? I mean, it was a bit of a weaker showing. You're still seeing signs, I think, of strength in some of the major end markets, including networking. But I wonder, can you just give some color on that? And Lynn, I don't know if it's possible, if you gave it, I may have missed it. You gave some breakdown on e-mobility for the year. What was it for the quarter? Same thing on commercial air, if you would. And then I'll drop in the queue. Thank you.
spk01: So maybe I'll take the first part of that, Jim. As we look at power and overall business, when we look at 2023, Q1 last year was our strongest quarter. And you followed our stock for a long time and our company. And I'm not sure that's ever happened. And part of that, specifically on power, is there was these catch-up orders in Q1, Q2. And then obviously, we saw a little bit of a step down, but still strength and performance and impressive margins coming out of our power group. When we overall assess the power group, I would say we see pockets of strength, but also pockets of weakness. So when we look at, for example, distribution and power, that is a pocket of weakness and has been, I think, probably for the majority of last year. We also do see some weakness in that segment within our fuses business. But we also see some strength, as talked about, in terms of industrial rail and e-mobility. So stated differently is our power business has been able to perform despite not humming along on all cylinders here, which I think is a testament to the work that's being done on the operational side of that segment. And I'll turn it over to Lynn on the e-mobility.
spk04: Yeah, sure. So just to quote some fourth quarter sales numbers for some of these end markets, commercial air, Q423 sales were $11.4 million. Military, which I'll just throw out there, was $10.8 million for the fourth quarter. E-mobility was $5.7 million. And rail was $8.9 million. Those are all fourth quarter 23 numbers.
spk08: Got it. Thank you. I'll jump back in the queue.
spk05: Our next question is from Bobby Brooks with Northland Capital Markets. Please proceed.
spk02: Hey, good morning, guys. Thank you for taking my question. Obviously a positive note coming out of the quarter was this $25 million buyback announcement. And I was just curious if you could help us frame how you expect executing that going forward. Reading the AK, I know that there was no expiration date on it. So maybe just some color on how you guys are thinking of using that as an additional capital return to shareholders.
spk01: Yep. Thanks, Bobby, for the question. As noted, as a company that's been on a journey of transformation, this is the first time we'll be out in the market doing a formalized buyback since 2012, so a better part of the decade. And our approach here is, I'm sure we'll kind of see how it goes and learn a little bit, but we do need to be mindful as we execute the buyback or our average daily flow, right? So as we think about how do we do it in a fair manner is to kind of execute it in a more programmatic setting. So we will be doing that on the programmatic side. The lack of expiration date, if you will, I would kind of phrase it this way. Our intention is to elongate this thing, but we need to be able to do purchases with the parameters of the program, but we do expect that to be, I'd say, relatively in a handful of quarters to be through that, pending market conditions obviously.
spk02: Got it. And then just talking about, so I think the verbiage in your press release, and just on this call of the shift to focusing on growth, I think is interesting. You talk a little bit about identifying new sales strategies, developing new products, and figuring out geographically where you should focus on that growth. We're about two months into the first quarter. Could you maybe talk about any early results or trends that you've seen from that reemphasis on top line growth? And maybe talk about what product verticals are you really looking to focus on developing new products, and why that's the focus going forward on those new products? And maybe I would guess that it probably aligns with what you're seeing in market demand.
spk01: Yeah, so maybe taking a step back here, Bobby, obviously we partner with our customers to develop new products. And as we talked about in the call, our customer engineers in the last, call it two to three years, because of the supply chain challenges, we're focused on finding alternate sources for products and qualifying new components on their systems to get products out door, so what we call fulfillments. As the supply chain has eased up and some inventory has been building up in the channel, we're seeing more of those engineering resources repivot and focus on generation 2.0, 3.0, and kind of the next generation of technology. So as we're seeing that repivot, we are obviously there at the forefront of these discussions with our customers. Now, despite some the guidance that we gave here, we are seeing some nice signs of when I'd say across our portfolio. So for example, if we look at the connectivity side, while there is challenges through, for example, the on-premise wiring, we're seeing robustness as we talked about commercial air and defense, but from a new market kind of perspective space, we believe is an emerging and will be an emerging growing area. We've been going after that for some time and we're seeing some nice conversions into decent, call it seven plus figure type orders. So these are great products to be in. So that's just an example of connectivity. So when we look at the power side of it, obviously we have, I said some softness, but we see some areas of nice new development, whether it be in some of the legacy industries we're in, such as rail, we are seeing some nice increased, let's say, discussions being had around AI and some of the investment going out there because we think our power business will, these are power hungry units that support that whole infrastructure. So we're seeing some nice chat or discussions ramp up. In addition, as we talked about, e-mobility and obviously we're exploring some new other areas. Within also magnetics, we do see some nice green shoots of growth as well that we're going after, but again, these are the sales cycles in a down market take a little bit longer. So I think the revenue situation of Belfuse and Q4 and the guys who gave up for Q1 here, I think does it disfavor a lot of the good stuff that we do have going on. One thing I will make though, we talked about this in our 10K, we do have a concentration of, call it, a couple of key customers within our networking side. Channel partners. So as a result of that, this is not a broader thing, it's a little more contained. Maybe I'll turn it over to Dan. I think
spk09: when you look at new opportunities, I think what we really have to try to focus over the two years, how do we address the new young engineer? And our focus was if you go back 10, 20 years ago, most engineers dealt with guys that knock on the door, either a rep company that will work off a commission or an arrow that deals salespeople. As times change, nobody has time to talk to people, they want to get on the internet and get their components as fast as possible. You know, the Amazon model. There's two leading companies that are leading the charge in this. One is called Digikey, the other company is called Mouser, which is owned by Berkshire Hathaway. Both companies are multi-billion dollar companies and their whole focus is how to get products to the engineering community a lot faster than they have done in the past. Over the past two or three years, we made a major effort in to build our relationships with those key e-commerce distributors. With that in mind, when we acquired CUI, people said to you, did you buy CUI because it was a power company? We bought CUI because of the digital marketing capabilities they had and the relationship they had with Digikey. So with the addition of CUI to our product portfolio, we're now ranked number 15 at Digikey and they have over 5,000 suppliers. And the same thing with Mouser. We made tremendous in-rows in Mouser where our salesperson was voted salesperson of the year, four years in a row at Mouser. I think there's only three people that obtained that goal. So our focus is as the world changes, as we stay, we have to change with it and we really have to retrench ourselves with these e-commerce distributors moving forward. I'll give you the best example. At Cisco, we have two direct salespeople at Cisco. We have two engineers with badges at Cisco and we also use two rep companies. So at any point in the day, we probably have 10 people calling at Cisco on Bell's behalf. However, we did receive a fuse order a while back and we called up our rep company, we called up our direct salespeople, we called up our FAs and see where it came from. And it came from Digikey. And this is what we see more and more that engineers are working through them to get components quickly. And that's what we really have spent a tremendous amount of time and what we should see a lot more success as they keep planning more and more seats.
spk02: Got it. That's really good color on the new product growth going forward. But maybe any early reads on the growth initiatives that you're looking to do in the first quarter in terms of seeing any certain geographic areas that you're going to start to focus on?
spk09: I think the area that we felt that was underdeveloped was for us was Europe. We went in and we hired a salesperson that knows the market very well. Her focus was, hey guys, we need a lot more people in the territory to be successful. She hired a whole new team of people and they all have very strong backgrounds. I think now we're representing every with a direct person, every person in Europe. However, for our products and how we sell, it takes us about six months to a year on the magnetic side and on the power side to get approvals. On the connector side, you're talking two years minimum to get products approved. So what we're using now is seeing how Europe works with a more direct sales force, more involvement and compare that to what we have throughout the world today. So again, I'm hoping by summer that we can bear some fruit. For example, we have two fuse opportunities in Europe, which is each a million dollars and one we already got approval on. So to get a million dollar fuse on, I think we get maybe one every 10 years. So we are seeing that they are opening up substantial opportunities that we haven't seen in the past. Got
spk02: it. I'll return to the queue. Thank you guys. Thank you, Brian.
spk05: Our next question is from Theodore O'Neill with Litchfield Hill Research. Please proceed.
spk07: Thank you. I want to follow up on the e-mobility side of the business. You can't miss the bad press that's coming out on the EV side with Rivian and Lucid reporting recently. Are you positioned sort of better in that space because you've got a greater focus on charging infrastructure and commercial vehicles? I just wonder if you could give us some... I don't
spk09: think, again, we've tried to keep away from the Teslas on the power side. Anything that's high volume, we're concerned about. So again, when we look at Rivian and Lucid or Tesla, we're more in the circuit protection side of that business where we feel that it's more feasible and you're not going to get killed if there's a down market. However, our focus is more in niche markets. For example, school buses, heavy duty equipment, marine equipment. So we're not really looking at high volume of our EV business. Exactly.
spk01: I think we're... Maybe taking a step back, these products that we are doing are going into these niche applications, have a lot of software and firmware on them, and there's a lot of, let's call it demand requirements on what we do. So not high volume commodity passenger vehicles. That's one. Two is when we look at the customer base in that it ranges from, call it startup, new companies trying to do some things that are very interesting and forward to regular way household names. So I think we're covering a pretty broad gamut of those players. These price points are very expensive, let's say, from to the end user. So as a result of that, there is an investment. And also generally, the users, our customers, if you will, have a big vision around either incentives or mandates along with views of being more green. So it drives those decision purposes a little bit more. Now, we ended up the year a little bit less than where we thought we would end up, because as we've seen some of the more startup folks that are reliant on capital raises be a little bit challenged. So walking over the 40% increase year over year is great. A little bit behind expectations for us, but nonetheless, we think this is here to stay and we think this is a temporary kind of thing in the market right
spk07: now. Okay, thanks very much.
spk05: Our next question is from Hendy Cicento with Gabelli Funds. Please proceed.
spk06: Good morning, Dan, Farouk, and Lynn. Good morning. My first question is about the possible rebound in the second half. Do you have any anticipation which areas will rebound earlier versus later?
spk09: We haven't heard anything in the marketplace stating that at all. I think everybody is saying the second half of this year. So no, I don't think we're ready to jump that gun yet.
spk06: I see. And then Dan, what is the likelihood that the rebound will take place in Q4 instead of Q3? If
spk09: I knew that,
spk01: I wouldn't be where I am now. Maybe Hendy is taking a step back, right? We look at, and Dan can correct me on this, but historically when we've gone through periods of softness, I'd say one to three quarters is probably the norm, maybe four quarters worth. When we look at the industry, it started going through its softness roughly around Q4 22. So if that is true, and Q4 22 was the date, we are roughly five quarters in, right? And now we're heading into the sixth quarter. So probably a little bit extended from a historical perspective. So as we talk to our customers, both distributors and OEMs, various industry literature, when we look at the point of sale data, the distributors we're seeing demand come through, just the shelf not getting replenished, all of that kind of leads to amalgamation of us coming up with the best assessment of second half growth, first half digestation. And then we also look at some of these other public companies out there on the hardware side that serve some of the end markets we serve, it kind of reaffirms our belief. But at the same time, is that bulletproof answer to that? Unfortunately, I don't think so. But we are optimistic that we came into this softness after the industry maybe, and hopefully we exit out, or could have around the same time as they do assuming our everybody's guess is aligned on that.
spk06: And Farouk, the backlog order, I believe is the 373 million. You indicated that it's still considered to be relatively high based on history. What backlog order level should we think when you will feel it's somewhat closer to normal compared to history?
spk09: Maybe I can take this one. Sorry, jump in. I think post COVID, I don't know if it's normal ever again for us. So before COVID, we used to get quarterly quotes. We have to bid on products every quarter. And the average purchasing person would give us four different purchase orders per part number. Since COVID, that stretched to we were getting an order every 24 months. Now that's coming back a little bit. So we don't know where it's going to end up. If I'm ahead of a purchasing department, why do I want to order four times a year? When I can order once a year, I can cancel the product down the road. So I think that's still filtering out of where it's going to be. But I don't think we're going to get back to 150 million level,
spk01: which was a pre-COVID level. Correct. I think about it to kind of Dan's point is historically it's been roughly a quarter. And during the extended times, it was roughly called four-ish quarters, a little bit less. So if the bookend is one in four, do we go all the way back to one? We don't think so. We think there's some new order of behavior and new ways of doing things. And also people obviously are coming through some rough times with some scarring tissue here. But to Dan's point is we don't know where it kind of settles down. So that's why we continue to say for right now it's elevated. And also when you got to really kind of peel it back a little bit, we'd probably look at magnetics as probably normalized. And then we'd probably say power is a little bit elevated and connectivity is maybe somewhere in the middle to elevate it.
spk06: Okay. Yeah. And then any insight into pricing environment in 2024?
spk09: Historically, again, coming back historically, as lead terms come down, we do see more price pressure. But at this point in time, we haven't faced an abundance of price pressure. And again, I don't know if things are going to change or not, but historically as lead times do come down, you do face a little bit more price pressure. But we have not seen that yet to date. And the
spk01: flip
spk09: side
spk01: of that equation, could be from Ron here, Dan, is when lead times come down, it means we're back into the regular way normal ordering pattern. So therefore volumes normalize, right? So the idea here is generally there is usually kind of a concession to a little price to get a little more volume type thing, right? So I think when that normal cycle, we have not, you know, we're not there yet, I would say.
spk06: I see. And then last question, do you have updates on Belfast investment in electric in terms of what activities in 2024, whether there are some updates on Belfast in 2024?
spk09: You know, I think again, we took a minority position in it. We're running, I think at this point a year,
spk01: how late? I would say, you know, we had, I think our bullish case was maybe we see something transact end of 2024. But, you know, now we're thinking probably more on our base case, which is a 2025 event. There's a lot of development going on on the call it second generation products. And also in their kind of first generation product. Some of their, I think some of the customer challenges that we talked about our mobility business, they're seeing a little bit of that. So when we kind of put the second generation products with some of the challenges they're having the first generation in terms of their customers challenges, we don't foresee any kind of milestones in terms of any kind of triggers on calls or anything like that 2024. And we think, you know, 2025 is probably kind of our base case at some point.
spk09: But we are working with them very closely, our sales team, our purchasing team, how we manufacture. So we are truly aligned that, you know, if they hit the targets they are supposed to hit, when we do, you know, merge that we're very two organizations that are very working close together. So I'm pleased by the relationship we have today.
spk06: Thank you, Dan Farouk and Lynn. Yep, thanks, Jenny.
spk05: Our next question is a follow up from Jim Rashidi with Neenum and Company. Please proceed.
spk08: Thanks. You know, going back over the past year and continuing now, you guys have done quite a bit of work in terms of restructuring and it's been evident in the gross margins. So I'm wondering, given the kind of guidance we're looking at for Q1, how should we be thinking about gross margins in terms of the puts and takes with that? And these are obviously lower levels of revenue, but you've also been restructuring the business.
spk04: So Jim, you know, I think for Q1, you know, what we had mentioned in the earnings release was that from a margin perspective, we expect to hold with the full year 23 margins. You know, so it is a step down from Q4 margin level. And a lot of that has to do with the lower sales volume that we're seeing. In addition to just Chinese New Year, it's typically a lower margin quarter for us. You know, looking beyond Q1, we would expect, you know, those margins to normalize a bit, you know, back to where the 2023 later quarters had been running. But we do see a step down there in Q1.
spk08: Great. And that's helpful, Lynn, because that's also where I was going with that as we start potentially seeing some improvement in Q2 and hopefully in the back half of the year. You're actually starting off with a higher level of margins than, we've seen historically with these kind of levels. Okay. Thank you.
spk05: We have reached the end of our question and answer session. I would like to turn the conference back over to Dan Bernstein for closing remarks.
spk09: You know, once again, we appreciate everybody joining the call today. Thank you very much. And looking forward to improved results as we move along in the year. Thank you.
spk05: Thank you. This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.
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