Bel Fuse Inc.

Good morning and welcome to Belpheuse Third Quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Jean Marie Young with third part advisors. Please go ahead, Ms. Jean.

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 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 market closed yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause the actual results to differ materially from our expectations is discussed in our filing to the Securities and Exchange Commission, including our most recent annual report on Form Ted K where the fiscal year ended December 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 the website. Joining me today on the call is Dan Bernstein, President and CEO, Drew Twicks, CFO, and Lynn Hutkin, Vice President of Financial Reporting and Industry Relations. With that, I'd like to turn the call over to Dan. Dan?

Yes, thank you, Gene, and we appreciate everyone joining our call this morning. We are pleased that our third quarter sales and growth margins each landed above the midpoint of our guidance, has anticipated our connectivity segment at strong quarter driven by robust sales into aerospace defense and space applications. And our magnetic segment experienced incremental growth on a sequential basis from Q224, which is good to see. The power segment sales were within our expectations for the quarter, given the previously discussed seasonality in Europe and during August, and the impact from trade restrictions on one of our former suppliers in China. The only new factor, which impacted revenue of our connectivity segment, was the strike at one of our aerospace customers, which slowed the value of shipments late in the third quarter. During the third quarter, we have made two key additions to the corporate team. That's what we continue to add, high impact individuals. In the new creative role, Uma Pegrao has joined as global head of sales and marketing, and Anna Buff Coffee has joined as global head of corporate contracts. Uma was most recently the president of global sales at Farnell, a premier distributor in the electronic industry. Throughout his long term tenure career, Uma has pulled a track record of growing sales through a variety of avenues, including the turnaround of unperforming regions, entering new geographic markets, pursuing a tailored approach to product technology, and identifying and executing core selling opportunities. Uma will be responsible for creating and executing strategies that drive growth beyond the current trends, identifying areas for improvement, challenging existing processes, and implementing innovative solutions to optimize sales performance. Anna Buff is a seasoned proven supply chain and a performing agent with a heavy history of securing efficiencies and cost saving outcomes for multi-billion dollar companies, including Comscope, Motorola Mobility, and Google. He's been tasked with developing and implementing a performance strategy, co-voting robust vendor relations, negotiating contracts, and championing cost effective sustainable improvement factors on a global basis. We are very much looking forward to the contribution that each Uma and Anna Buff will bring to develop future positions in the company for long term success. Now I'd like to turn it over to Lynn.

Thank you Dan. From a financial perspective, in summary, we saw continued margin expansion on a lower sales base when looking at Q3-24 versus Q3-23. Third quarter of 2024 sales came in at 123.6 million, representing a .1% decline from the third quarter of 2023. The sales fluctuation was driven by our power and magnetic segments, as we will discuss further, partially offset by growth and connectivity sales versus Q3 last year. Our growth margin increased to .1% in Q3-24 from 35% in Q3-23, and these profitability improvements were largely driven by our magnetics and connectivity segments. Turning to some details at the product group level, power solutions and protection sales for the quarter were 48.7 million, representing a 35% decline from Q3 last year. The decline in sales was mainly due to lower sales of our power products used in networking and consumer applications. On a positive note, we saw continued strength in sales of our rail products, which grew over 40% from Q3-23, accounting for a $2.6 million increase in sales from Q3-23. This segment posted a growth margin of .4% in the third quarter of 2024, as compared to .7% in the third quarter of 2023. Turning to our connectivity solutions group, sales for Q3-24 came in at 55.7 million, up .6% from Q3-23. The main growth driver within connectivity was within the distribution channel, where sales were up 1.2 million, as compared to Q3-23. Sales into commercial air applications totaled 12.5 million for Q3-24, an increase of 1.2 million, or .3% from Q3-23. Military sales amounted to 11.6 million for the quarter, a level consistent with Q3-23. The gross margin for this group was .6% for the third quarter of 2024, which represents continued improvement from the .8% gross margin in the third quarter of 2023. This margin expansion was made possible due to the operational efficiencies achieved through facility consolidation that were completed in 2023, along with implementation of contract renewals on more balanced terms, and a favorable impact of FX related to the peso versus Q3-23. These favorable margin factors were partially offset by minimum wage increases in Mexico that went into effect in Q1-24. Lastly, our magnetic solutions group posted sales of 19.2 million in Q3-24, representing a 40% decrease from Q3-23. This reduced sales level 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 continue to work through inventory on hand. The gross margin for this group was .3% in the third quarter of 2024, as compared to 22% in the third quarter of 2023. This improvement in margin was primarily driven by lower fixed overhead costs, resulting from the facility consolidations in China completed in late 2023, partially offset by unfavorable FX related to the Chinese remuneration versus Q3-23. R&D expenses were 5.4 million in Q3-24, a level consistent with Q3-23. We expect future quarters to be generally in line with Q3-24 expense. Our selling general and administrative expenses were 26.7 million, as compared to 23.8 million in Q3-23. Excluding the 4.2 million of legal and other costs related to the intercom acquisition, our SG&A expenses were lower by 1.3 million as compared to Q3-23, primarily due to lower variable expenses, such as commissions and incentive compensation. Our effective tax rate for the third quarter of 2024 was 27.8%, up significantly from the .2% of Q3-23. There was a one-time item contained in the third quarter tax provision in the amount of 1.3 million. Excluding this item, the company's effective tax rate would have been .7% in the third quarter of 2024. Turning to balance sheet and cash flow items, we ended the quarter with 163.8 million in cash and securities, an increase of 36.9 million from year-end. We generated 65.7 million in cash flows from operating activities during the first nine months of 2024 and had capital expenditures of 7.9 million. From an inventory perspective, the downward trend that we experienced over the past several quarters has continued into Q3, reflecting a $12.3 million reduction from year-end. The lower inventory levels were primarily seen in the areas of raw materials and finished goods as we continued to work through our own inventory on hand. I'll now turn the call over to Farouk for additional commentary.

Thank you, Lynn. As we are rounding the corner here on inventory and the channel and starting to see some green shoots of recovery, the team has been laser-focused on executing on operational improvements as we have been doing for the last few years. During the third quarter, we initiated a consolidation of our fused manufacturing operations. Currently, our fuses are manufactured at a separate site in China and will be transitioned to other existing sites as a means of further reducing our operational footprint and adding efficiencies to our overhead costs. The Fuse Initiative is expected to result in a restructuring cost of approximately 4.2 million. Of which 200,000 was incurred in the third quarter. 2.1 million is expected to be recorded in the fourth quarter of 2024 with the balance of 1.9 million expected to be incurred in 2025. This project is scheduled for completion by the end of Q125 and is expected to result in annualized cost savings of 1.5 million once complete. The previously announced restructuring project at our Glen Rock, Pennsylvania facility is progressing as planned with scheduled completion by the end of 2024. With cumulative expected annualized cost savings of 2.5 million. We've been benefiting from approximately 1.5 million of the Glen Rock cost savings throughout 2024 and expect one million to be incremental in 2025. Turning to M&A and as announced in mid-September, Bell has agreed to acquire 80% of Enercon technologies with a path to acquire the remaining 20% by early 2027. With 100% of their sales within aerospace and defense in markets, the addition of Enercon accelerates our strategy of moving further to critical applications with nice sole source positions. This creates more cohesion across our product segments and introduces exciting cross-selling opportunities. We've been working very closely with the Enercon management team since signing and are very much looking forward to collaborating with them to define our new -to-market strategies for our combined businesses supporting the aerospace and defense and markets across the regions in which we collectively serve. The transaction is expected to close during the fourth quarter of this year and we look forward to sharing additional details as we work through our post-closed integration process. Looking ahead to the fourth quarter, we're anticipating base Bell to be largely in line Q3-24 levels as there are some offsetting factors at play. The range noted in our earnings release of 117 to 125 is inclusive of some rebound in rail sales and flight recovery, networking, and distribution across the business. This is offset by our normal seasonal slowdown in Q4 each year given the Golden Week holiday in China in October and other holiday closures in the US and Europe later in the quarter. We were pleased that we did start to see an uptick in bookings during the third quarter. To provide some context around what we saw, within our power segment, Q3-24 bookings were double what they were in Q2-24, representing their highest booking level since Q3-23. Within our magnetic segment, Q3-24 was their highest bookings quarter since Q4 of 2022. Given our standard lead times, this increase in bookings will largely translate into higher sales going into 2025. Looking at 2025, we've kicked off our planning for the coming year and are looking forward to that. We're early in this process against the backdrop of Q moving pieces. The overall message for next year is expectation of year over year growth across all three segments. Our power segment is forecasting growth to be driven by our development networking, e-mobility and distribution, and growth within AI specific applications. Our connectivity segment is projecting growth to largely be driven by the same factors as 2024, including defense application and a growing space and market along with distribution and networking. We think magnetics will have the largest percentage of growth based on current forecasted demand from our network and distribution customers. There are a number of factors and variables within each segment that can change these projections. But this is what we see today. It is this new view of 2025 upon which we'll be assessing our SG&A spend and making needed adjustments to align our fixed cost with these anticipated sales level. As a reminder, this commentary is only related to Bell's base business and does not include incremental sales related to the Enercon acquisition, which is expected as noted to close in the fourth quarter this year. Shifting over to capital allocation, and as previously discussed, we'll be taking on new debt of 240 million in connection with the acquisition of Enercon. And the interest on that debt will be approximately 6.5%. This will bring our total outstanding debt to 300 million with a blended interest rate of approximately 5.7%. And in addition to our regular weight dividends and continued investment in business through CapEx, our next immediate priority from a capital allocation in the near term will be on debt pay down to deliverage and avoid interest expense. We'll continue to assess our capital priorities as we have done on an ongoing basis. Overall, we are pleased with the progress we have made in strengthening Bell's base business over the past four years. And we're excited about the road ahead with Enercon and the new members of our corporate team. We feel this is a pivotal moment for Bell as it marks the transition from our self-help phase to a new growth phase of Bell's journey. And I could not be more excited to embark on this next chapter. And with that, I'll turn the call back over to Dan.

Thank you, Farouk. At this point, we'd like to open up the call for questions.

Thank you. We will now be conducting a question and answer session. 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 questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handsets before pressing the star keys. One moment, please, while we poll for questions. The first question comes from the line of Bobby Brooks with Northland Capital Markets. Please go ahead.

Hey, guys, good morning. Thank you for taking my question. So with the power and protection, obviously there's a pretty notable step down sequentially and you guys touched on it a little bit. I know you had the supplier that you lost because the recently enacted trade restrictions, but that was only for three to four million of business per quarter and we were down more like 10 million. So could you just discuss a little bit more what drove that sequential step down and maybe compare that with what the factors you're seeing as why you see year over year growth in 2025?

Of course, so, Bobby, are you looking at it sequentially from Q2 to Q3?

Yeah, yeah.

So the other impact, so in addition to the supplier on the trade restrictions, the largest thing impacting power from Q2 to Q3 is actually the seasonality that we have every year in Europe in Q3. So things like rail and e-mobility, those are all based out of our Europe segment and those are just naturally lower in the third quarter because there are some closures at our Slovakia site for a few weeks in August each year. So that was the largest dip in addition to the CUI business that we previously discussed.

And then is it just the bookings that you guys saw in September and October is giving you guys that confidence that you're just gonna see year over year growth return in the power and protection segment?

Yeah, we think that is the case, Bobby. Obviously, you know, a fair amount of moving pieces here, but I think as we noted, we do expect that return to growth here as we just, across the business, including power, looking at inventory levels, looking at the conversations that are going on with our customers, the MPI, especially as we're coming into kind of the year end, right, more discussion. So I'd say we're feeling better and a return to growth. Again, commentary across the business, including power.

That's terrific to hear. And then maybe just an update on finding that new supplier to replace that business that was lost because of the trade restriction.

Yeah, so we are in the process of identifying replacements. As we talked about, and as you know, we are in a longer design cycle business. So step one is identifying, which we have identified some replacement parts. It's gonna take a little bit of time to go and have the customers re-qualify their design to substitute the parts from the old vendor to the new vendor. So that's gonna take some time. And when considering the inventory channel, I would say that sense of urgency might not entirely be there off the bat here as folks are burning down inventory. So probably the best bet for recoverability there would be something along the lines of redesigns or demand pickup within their own segments on a customer side. So that's why we think we'll cover some of that as we go through 25, but we're kind of seeing where that shakes out. But it's not gonna be a quick flip switch just because we identify as something alternative.

Okay, that's awesome. And then last one for me, just trying to dig a little bit more into the strong bookings. I know back in the first core call, we talked and discussed about the really interesting AI opportunities especially within the power and protection. So I was just curious if any of those bookings that you guys saw in September and October have been related to any AI orders or AI end products or maybe any other the kind of emerging growth opportunities for you whether that's e-mobility space or rail?

Yeah, I think the answer in short is yes. So some of the bookings have come from AI customers and as we also, so we have to kind of follow hard orders bookings that we got. Also, as we just look at the conversations being had and the forecast with other guides that are about to or haven't yet put bookings on the books, we expect that to kind of come in short order as well. So I think the answer to your question is correct. The other one that we saw in the bookings that had a nice growth is our Fuses business. And Fuses generally, it's considered one of the earlier recovery items in our industry so it is a good leader indicator. So Fuses was up pretty materially for us in Q3. And I think when it was about to the 30, 35%, I think it was up, right? So it was nice to see the Fuses up, coupled with the bookings, these are good solid indicators.

I would completely agree with that. Thank you for the call, guys, and I'll return to the queue and hats off on the next quarter.

Thank you. The next question comes from the line of Jim Ricciotti with Needham & Co. Please go ahead.

Thank you, good morning. You may have provided this detail, I apologize if you did, but I'm wondering, do you quantify the impact from the strike at Boehm in the quarter and follow up to that is just whether the guidance for Q4 has taken into account the potential for a longer strike, which I guess now appears to be the case. Thanks.

So we haven't quantified that, Jim. We definitely had an impact on us in terms of our amount of, let's say, couldn't ship, but I would say it was nothing, it wasn't overly material for this quarter. So I think the team did a nice job reacting to that, kind of working on other things and other products heading into Q4. Our guidance is reflective of, call it, of an impact of the strike. I think they, and that's kind of what we're alluding to earlier in terms of some of the volatility around that. So we try to capture our best guess in a base case if we will, obviously we're through October here and it has an impact. So I think really, we had to take into account our guess on November and December. So I would say we're hoping for some recovery, but it's not, we don't think it'll be material in Q3, just given by the time they all come back to work, it'll take a few weeks for everything to

get going. I would think the safe position we take, the way things look, most likely we won't see sales for aerospace for this one customer for the rest of the year.

Got it, thanks. And just on the green shoots that you guys cited in networking and industrial, is this a case of perhaps just the excess inventory being worked down enough and some restocking, and this may be a harder question to answer, just signs of actual improvement in some of these markets and where you think there may be some actual improvement, particularly in the industrial area.

Sorry, I'm understanding the question, are you saying how much of the bookings is a replenishment of the actual demand growth at the customer's level?

Yeah, I guess what I'm saying, we've heard this a bit that in some cases, there may be inventories have been worked down and some of what we're hearing is just some natural replenishment, but not necessarily signs of actual demand driving that yet. And I don't know if that's something you've noticed or better yet, I mean, if you see some in the industrial market, because you guys sell pretty broadly, can you tell where some of these green shoots are coming from? Yeah,

Jim, I think when we talked to industrial, it's a little more harder to pick out, but for us, when we look at new growth opportunities, not replenishment opportunities, I really, the areas that we see that, we see space, for example, we picked up 160 customers and distribution that are buying orders today that might go into high volume. And then with EV, we see those are new opportunities. And of course, AI, I think probably our two largest customers we're gonna pick up next year might come from AI. So I think if you look at new creation, new demand, I would think AI, space and EV are the driving forces of new customers that are buying from

us. And I think I agree with Dan on the new, some of the new customers on Wednesday we're seeing are pretty good. I think on the existing customers, because remember, Jim, I think when inventory gets backed up and Dan, concurrently from here, when inventory generally gets backed up, it's not as bad of a picture from our customer's perspective because they still have inventory to sell. So I think once the inventory comes down, you turn to a little more normal cadence of ordering a little bit more reflective of demand. So they kind of go a little bit hand in hand. So obviously we were down pretty decent numbers this year and I would attribute that demand not being down that much from our customers, so to speak, but it was really kind of working down the inventory side of it.

Yeah, that's helpful. Did you give a commercial space revenue number? I know it's just a small part of the business, but it's obviously a growth area.

Yeah, so the space revenue for Q3 was two million. So that brings our year to date up to 6.3 million.

Got it, thanks very much.

Thank you. Next question comes from the line of Theodore O'Reilly, with Litchfield Hills Research. Please go ahead.

Thank you very much and congratulations on a good quarter. My first question is about Enercon Technologies and I was wondering if you could talk a bit more about what this brings to the table in terms of products that you may not have had before in the aerospace and defense industry and what the cross-selling opportunities are.

Yeah, so thank you for that. So for Enercon, which for everyone's benefit, it will be sitting in our, and ultimately roll into our power segment. Today our power segment does not service these end markets, so it is a new market addition, both on the defense, commercial air, and emerging space as well. So now we start creating some interesting cross-pollination between the connectivity and the power segment. So that's one. Two is, Enercon also opens up a couple of new markets potentially for us that we are not in today. And the other thing, from a product perspective, I would say generally, if you ask power supplies, people will say power supplies are power supplies, or there's some nuances and sophistication to each of them. I would say their product set is a little bit different than ours, but also kind of the same, right? So we sell some of that product into the rail that's pretty highly sophisticated, highly custom type of applications. Where Enercon excels is their MOQs are one piece, right? So they're highly, highly custom. And they are, given the conservative nature of the customer side with various regulatory requirements and manufacturing elements around product tracing and the like, they obviously have that side of it as well. So you've got to look at it while we may know the products and we do know some of these products, it's really the ecosystem, the customer relationships that go to market and the brand name that they bring is what differentiates them. So we tend to think of it more of an end market expansion and some opportunity potentially for the cost side, which we had underwrite as part of our base case, but we think there's opportunity there. But really it's a revenue play.

And just to add some more flavor to it, just for example, one of the target areas they were looking at before we acquired that was Europe. And they realized to be successful in Europe, they had to have a manufacturing base. And we have an ideal factory that can support their needs. We're gonna be with them next week, I'm sorry, in two weeks for them to look at our factory and see what the possibilities are we can offer them. Also from a cost, besides cost selling opportunities, many of our customers are the same, but we do have some customers that they sell to them. We don't sell to them back and forth, but a bigger solution for us is the more we can go to any military aerospace customer and give them a full basket of products, the more we can build up our relationship with that customer. And now there's very few customers that can offer both connectivity and power supply, which takes a lot off their purchasing table. So this way they can meet with one group or a company to solve a lot of their problems going forward. So we think it's just a very exciting opportunity for us to board.

Okay, yeah, makes sense. My other question is just about the rail business. Is this a highly regional business, and what region is showing the strength in rail?

I think the way you think of it is largely our manufacturing comes out of Slovakia, and the customers that we service are global. So when we talk about rail, obviously maybe other parts of the world are working from our customer's perspective, but given our normal cadence in the European shutdown, that's why it impacts the business, because our manufacturing occurs in Slovakia. That's how I tend to think about the manufacturing impact for us.

We would say a good portion of our sales are European-based customers, rail customers, and sell throughout the world.

Correct, yeah, so we'll kind of transact there, then they should ship it around, so to speak. Yeah, that's a good point.

Okay, thanks very much.

Thank you. As there are no further questions at this time, ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to Dan Bernstein for closing comments.

I just want to again thank you for joining our call today, and we'll look forward to continued success, and we'll speak to you at the final floor next year. Have a good day.

Thank you. This concludes our today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Thank

you very much.