Lynn Hutkin - Director of Financial Reporting Dan Bernstein - President, Chief Executive Officer, Director Craig Brosious - Vice President of Finance.

Sean Hannan - Needham and Company Hendi Susanto - Gabelli and Company Lenny Dunn - Mutual Trust Company of America.

Good day and welcome to the Bel Fuse Inc. fourth quarter and full year 2017 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dan Bernstein, President and Chief Executive Officer. Please go ahead, sir..

Thank you, Stephanie. Joining me on the call today is Craig Brosious, our Vice President of Finance and Lynn Hutkin, our Director of Financial Reporting. Before we begin the call, I would like Lynn to go over the Safe Harbor statement.

Lynn?.

Thank you, Dan. Good morning, everybody. Before we start, I would like to read the following Safe Harbor statements.

Except for historical information contained on this call, the matters discussed on this call, such as statements regarding the amendment to the company's credit agreement, the possibility of future acquisition, the repositioning of the Cinch Connect business, potential growth in the company's commercial aerospace business and the potential impact of increase backlog.

Our forward-looking statements as described under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Actual results could differ materially from Bel's projections.

Among the factors that could cause actual results to differ materially from such statements are, the market concerns facing our customers, the continuing viability of sectors that rely on our products, the effects of business and economic conditions, difficulties associated with integrating recently acquired companies, capacity and supply constraints or difficulties, product development, commercialization or technological difficulties, the regulatory and trade environment, risks associated with foreign currencies, uncertainties associated with legal proceedings, the market's acceptance of the company's new products and competitive responses to those new products, our ongoing evolution of the consequences of the U.S.

tax cuts and jobs act and the risk factors detailed from time to time in the company's SEC reports. In light of the risks and uncertainties, there can be no assurance that any forward-looking statement will in fact prove to be correct. We undertake no obligation to update or revise any forward-looking statements.

We also may discuss non-GAAP results during this call and reconciliations of our GAAP results to non-GAAP results have been included in our release. I would now like to turn the call back to Dan for a general business update..

Thank you, Lynn. Before going through the financials, I will like to provide a brief update on how the businesses did from an operation standpoint this quarter and how we see things going forward.

Sales during the fourth quarter were 119.9 million up 1.2% from the fourth quarter of 2016, led by sales growth driven our connectivity solutions group of 8.1% this was partially offset by decline in sales at our magnetic solution product of 1% and our power solution and protection group of 3.3%.

While sales increased during the fourth quarter over last year, our bottom line was unfavorably impacted by the following items.

An $18 million increase to our top provision related to the new tax reform, $1 million of incremental interest expense related to the acceleration of deferred finance cost at our prior credit facility in connection with our refinancing, inventory relating charges tolling 2 million which had a 170-base points impact on our gross margins for the quarter and $1.1 million increase in consulting fees related to our ERP implementation.

As many of these items are not expected to reoccur in 2018, we anticipate improved profitability going forward. Looking at the full year we’re pleased that two of the three products groups showed year-over-year sales increase in 2016.

Our magnetic solutions group closed the year with 5.8 million increase in sales over 2016 levels largely due to our new product introduction with our ICM Signal Transformer product lines. We've been expanding the presence of our magnetic products through our through our distributor channels which also continue to grow year-over-year sales growth.

Our Connectivity Solutions group has year-over-year sales growth of 1.5 million, our Cinch business increased revenue by 7.1 million compared to 2016 led by a strong demand for our active optical products using high grade high speed communications and encrypted applications.

The top line growth in Cinch was also aided by more breadth and depth of our products going through distribution channels throughout the year. These gains on Cinch side were largely offset by a 5.6 million decline in sales within our Stewart Connector business due to customer consolidation in late 2016.

There has been renewed focus on repositioning the Stewart business which has led to a 1.5 million or 43% increase in Steward backlog since 2016. Our Power Solutions and Protection group had yet another challenging year in 2017 with a 15.8 million decline in sales in 2016.

Much of that decrease related to a 10.1 million drop in sales from our NPS product line which was previously divested. Sales of our front-end and board-mounted power products declined further in 2017 as large OEM customers continued lower demand for their hardware products.

These declines were offset by growth within our Power Europe group in Italy which generated 3.1 million of higher sales related to marine and broadcast applications.

Our circuit protection business has also experienced much success in 2017 with better utilization of our distribution channels yielding a 1.2 million or 11% increase in circuit protection sales compared to 2016.

With our 2017 sales were not very impressive from the overall Power Solutions and Protection group, we did see a turning point in the fourth quarter as that was the first quarter since 2014 acquisition of Power Solutions business when we saw a year-over-year growth excluding effects of the NPS divestiture.

On a regional basis in Europe increased sales by 3.2 million or 4.2% increase in 2017 as compared to 2016. Sales in North America decreased by 10.9 million or 4.3% and sales in Asia were lower by 770,000 or a 5% decrease.

On a consolidated basis the company backlog has increased a 146.5 million at December 31, 2017 which represents a 33-million-point increase or a 29% increase from its level of December 2016.We were unable to predict the fact that this increase will ultimately have on 2018 sales, it's a good parameter.

We're well positioned for organic growth in the future periods over the next four quarters. At this point I'd like to turn the call to Craig..

Thanks Dan, as previously mentioned sales during the fourth quarter were $119.9 million up slightly from the fourth quarter of 2016. Gross profit margin declined to 18.4% in the fourth quarter of 2017 as compared with 20.7% in the fourth quarter of 2016.

This was largely due to $2 million of inventory related adjustments recorded during the fourth quarter of 2017. Our selling, general and administrative expenses were 21.2 million or 17.7% of sales as compared with 16 million or 13.5% of sales in fourth quarter of 2016.

The 5.2 million increase in SG&A cost from last year's fourth quarter resulted from several factors, foreign currency gains of 2.7 million reported during the fourth quarter of 2016 did not occurred during the fourth quarter 2017, in addition there were incremental cost in the fourth quarter of 2017 related to our ERP system implementation and higher professional fees related to tax consulting and the adoption of the new revenue recognition standard as compared to the 2016 period.

On a go forward basis, we would expect SG&A to run between $20 million and $21 million per quarter in the near-term barring any significant fluctuations in foreign currency. As a result of these factors, we generated income from operations of $708,000 in the fourth quarter of 2017 as compared to $7.6 million in the fourth quarter of 2016.

Income from operations in the fourth quarter of 2016 also included a $1 million gain on a sale of a property in San Diego, which had a favorable effect on last year's operating income.

Interest expense was $2.3 million in the fourth quarter of 2017, up 900,000 from the same period last year, during the fourth quarter 2017 we refinanced our credit agreement which follows us to accelerate $1 million of amortization related to our prior deferred financing cost.

The impact of higher interest rates in 2017 was mitigated by our lower debt balance compared to 2016. The terms under the new credit facility improved the pricing grid over the new 5-year term, which should help to offset increases in the LIBOR rate.

Our effective tax rate for the fourth quarter of 2017 was a provision of 1219% compared to a provision of 46.9% during last year's fourth quarter. The change in effective tax rate was primarily attributable to $18 million impact related to the U.S. tax reform, recorded during the fourth quarter of 2017.

This consisted over $16 million transition tax on our accumulative foreign earnings and incremental tax provision of $2 million related to the revaluation of our deferred tax assets due to the lower U.S. corporate tax rate.

Based on the two-year average of where the profits have historically been earned, we're estimating that the reduction in that U.S. corporate tax rate offset by the effects of the guilty tax on our little [ph] tax foreign income, will result in an estimated global effective tax rate of between 17% and 19% for 2018.

Loss per share for Class A common shares was $1.66 per share in the fourth quarter of 2017 as compared with earnings of $0.27 per share in the fourth quarter of 2016. Loss per share for Class B common shares was $1.74 per share in the fourth quarter of 2017 as compared with earnings of $0.29 per share in the fourth quarter of 2016.

On a n on-GAAP basis which excludes certain unusual or other nonrecurring items, EPS for Class A shares was a loss of $0.09 per share in the fourth quarter of 2017 as compared with earnings of $0.31 per share in the fourth quarter of 2016.

On a non-GAAP basis, EPS for Class B shares was loss of $0.10 per share in the fourth quarter of 2017 as compared with earnings of $0.33 per share in the fourth quarter of 2016. And now I would like to go through some balance sheet and cash flow items.

Our cash and cash equivalents balance at December 31, 2017 was $69.4 million, a decrease of $4.1 million from December 31, 2016. During 2017 we made net payments of 18.8 million towards our outstanding debt balance, we also used cash for capital expenditures of 6.4 million, dividend payments 3.3 million, and interest payments of 4.4 million.

Accounts receivables was 78.8 million at December 31, 2017 as compared with 74.4 million at December 31, 2016. Day sales outstanding was 60 days at December 31, 2017.

The increase in our accounts receivable balance was largely due to the higher sales volume in the fourth quarter of 2017 as compared to the fourth quarter of 2016 coupled with an increase in DSO which was primarily a function of the timing of payments from larger customers in our Asia segment.

Inventories were 107.7 million at December 31, 2017, up 8.8 million from December 31, 2016. The increase was seen mostly in raw materials and finished goods to accommodate the increase in bookings during 2017. Accounts payable was 47.9 million at December 31, 2017, up slightly from December 31, 2016 due to increase in raw material purchases.

Bel's total outstanding debt as of December 31, 2017 was 125 million excluding deferred financing costs. This represents a net decrease of 18.8 million from our 2016 year-end debt level.

Book value per share, which is calculated as stockholder's equity divided by our combined A and B classes of stock, outstanding was $13.30 per share at December 31, 2017 as compared to $13.17 per share at December 31, 2016. And now I would like to turn the call back to Dan and open it for questions..

Tiffany at this point we'd like to accept questions from our listeners..

Thank you. [Operator Instructions] We'll take our first question from Sean Hannan with Needham and Company. Please go-ahead sir..

First thing I am not sure if I perhaps missed in the prepared comments, what were the explicit revenues for each segment in the quarter?.

I can get back to you Sean, are you looking for the fourth quarter or the full year?.

Fourth quarter?.

Fourth quarter sure. So, for Power Solutions, and Protection fourth quarter was 39.4 million, Magnetic Solutions is 38.5 million, and Connectivity Solutions is 42 million..

And then in terms of inventory effect that you had it sounds like for the most part you're not expecting that to continue or repeat in any manner the next few quarters is that accurate or is it just much smaller magnitude how do we think about that?.

Well we continue to evaluate our inventories for net realizable value in the fourth quarter -- it's a higher than normal adjustment that we had in the fourth quarter we would have adjustments every quarter but this was just an outlier in terms of the magnitude..

And what specifically drove that? I mean is there any further detail we can get to understand exactly what happened there?.

Well there are two things there is one was related to the valuation of some inventory where we had to make an adjustment to our purchase price variance allocation to the inventory between cost of sales and inventory balance of that was an item that kind of rose as we were reviewing yearend balances.

The other items that was some inventory that we had a reserve on in prior periods, again we’re expecting we would be able to do some rework on some products that near the design there was an incremental design change and we thought we would be able to rework our existing inventory to satisfy the customer requirement, as time went on the customers made some additional incremental design changes and we made a decision at the end of the year where we sell that it was going to be too costly to rework that inventory so we basically reserve for the reminder of that.

.

And so next question, just in terms of looking at the backlog here, the first that I have is can you remind us as I think about your backlog and try to think about where the revenue opportunity is all have our models say for '18.

What do you typically see as a split in revenues that come through a quarter, what comes out of backlog versus what’s typical booking shift, is there a way to characterize that for each of your segments, don’t know if its 40% of that backlog, 60% book ship, any help on that would be great. .

In our magnetic segment the turnaround is typically pretty fast, we didn’t say all of the difference in the following quarter but large majority will return in the following quarter because our lead times tend to be a little bit shorter there.

In the connectivity segment some of our -- some of these orders are either, in our aerospace or military applications and those tend to be longer term in nature.

So, I don’t really have a good handle on how much our Q4 backlog will actually turn in the first quarter and the power and protection segment that’s kind of in the middle, we've have a couple of large orders that are longer term in nature but then we also have our recurring orders which was again kind follow in the same pattern as itself, it’s a difficult to answer.

.

Okay at least we have some perspective there, okay so moving on to another topic here, as we look at the cost incurred around ERP which we continue to factor there and how is that overall effort going when you folks sense that the elevated cost burden from that would be concluded etcetera. .

I think the last -- the fourth quarter was we’re making a very large push towards getting the first phase of the project completed at the end of the first quarter or late spring.

And we expect probably we will have more expense I don’t know could be similar to what we had in the fourth quarter hopefully lighter in the first quarter, it should start to trail off in the second and third quarters..

I think we are looking at 500,000 a fourth quarter was about a 1 million and we projected probably for another year and half..

So 500k a quarter next year and half next six quarters. Okay, that’s helpful..

Trust me it [indiscernible].

I have a Blackberry, so what do I know, right?.

And so last question here and it’s really kind of been a big topic for a while, it’s referenced a little bit in your prepared comments the power business.

What comments can you share with us in terms of understanding or thinking about or any incremental degree of enthusiasm for finally getting a much more material uptick in that revenue generation? We have been waiting for a while as lot that you have been designed into. You are getting good indicators through increases in backlog.

Just trying to get a better understanding around where you folks sit.

How are you thinking about this business? Do you feel you are almost out of the woods and we are going to start picking up here?.

Yes, we felt that we were out of the woods for the last year or so. So, we think we are pretty well in the bushes still to be honest. You look at our backlog we do have a win from again in 2015. If you just look at the Bel Power Solutions which is a large part of the power one it was 32 million in 2015 last year it was 29.5, this year is 34.4 million.

So again, I think we have made some really good strives and good roads. What's really hurt us tremendously is the quality issues where we have a Facebook where we think we address the issue properly and then something happens and we get pushed back.

And we are talking about sales that should run about 1 million a month so we are looking at today possibly that we think its fixed now but we said that four other times. So, I don’t want to misuse.

But again, we can pick up 12 million from Facebook get back to our normal run rate which we think is going to occurred now in May, that definitely help out everything we do. Again, we do see a lot of good signs.

We do see a lot of good things coming out of the data centers work at OCP, again until I see it and until I see consistent sales growth I just don’t want to hype it up, we are streamlining the organization a little bit more. We are taking a 1 million [cut] course over the next two months out of the group.

So, we know that it’s still our priority of how do we top how do we turnaround the topline growth..

So, when you talk about the potential for a normalized run rate maybe in May and we will see if that happens are you thinking -- about what kind of number, I'm assuming it's not 12 on top of the 39 but just trying to understand little context?.

Well I think well we are hoping for we like were our once currently our sales are at 110. I think our goal is to get back to 125 this year will be our goal..

And that's just the power solutions, the acquired power solution business. .

Will go next to Hendi Susanto with Gabelli and Company..

Dan could you talk about growth opportunities new product and gross margin expectation in 2018?.

Again we are predicting mid-single digit growth in the 7.5% range I think we feel so much confident about we do have some big opportunities I mean our modular group where we do see it could be positive 10 million growth we have awarded for the products we just don’t know because it's a retail product we just don’t know how it's going to be expected in the field so that we see consistent growth with our Fuse group and then off course one of our large customers is Boeing and we do a lot of work on the 737 so as they grow from 42 to 49 planes we think we see up swing there.

Also, with the military budget that we see a lot of strengthening with the Raytheons, the Honeywells and the Boeing defense those are opportunities that we grow our business. So overall, I think we're handling the current backlog we have. I think we're pretty confident that we should hit that 7.5% growth.

From a gross margin standpoint Craig, you want to touch that?.

Yes, we and we should be able to leverage that growth into some improved gross margins.

Again, it's kind of varies with our whatever line of business we're talking about in the Mil-Aero segment and that has a little bit of more leverage on gross margin than let's say the power protection business but so I think we've expected a 1 or 1.5 of margins if we can accomplish what Dan's saying within the same 7.5% sales growth..

And then Dan would you mentioned some retail products, are they consumer electronics?.

Again, as we were working with the company that used to the group came out of NEST working on a new lighting….

The smart lighting application ended so it's consumer focused but not mobile phones or anything like that. .

And then Dan I think I would like to comment that I think you sound more optimistic than in the past in terms of growth opportunities and I think that kudos to you?.

I think a lot of that's based on our backlog and again looking at our backlog we are going from as that had in 2015 our backlog was a 126 in 2016 was 113 and today our backlog is 146 so I think that's gives me finally some good hope and hopefully some light through the forest now.

I think the other things I think is pretty exciting for us and as we mentioned in our press release our ability to look at acquisitions be a lot more aggressive with the acquisitions going forward with the new credit schedule we have in place, so it's going to add lot growth opportunities to us also..

And then Craig for our model how much cash spending do you need to make to account for the one-time U.S.

tax reform adjustment?.

In the first year I believe it's 1.3 million..

And I believe that it's that over eight years?.

It's over eight years, that's correct..

So, 1.3 million represents I think 8%?.

Yes..

8%..

Right, right..

We'll go to next to Lenny Dunn with Mutual Trust Company of America..

I am glad to see that you have apparently turned things around and digested that Power-One which turned out to be not just a can of worms, but pails of worms.

But it does appear that you have things under control and you can now start paying down debt, I mean this is always a debt free company with a lot of cash, we don't need to be that, but we're carrying a lot of debt and I get a little nervous when I hear acquisitions but you don't know for sure what you're buying and Power-One to be a strong example of that and if you have everything turned around and we're growing internally when I go through some time of internal growth, pay down debt a little before we start moving on more acquisitions?.

I think that Lenny the problem that we have and we've a pretty active board, and one of our key board members is a person called Avi Eden from Vishay, and he was responsible being with Vishay from their growth cycle of 60 million company, up to a 2.4 billion, the problem that we face in our industry is that we're always -- our customers really are not concerned with price increases in labor or what happens with copper now or minimum material course, they demand 2% or 3% price reductions, twice a year, and the only way you really can get those costs to meet those demands even with organic growth of 7.5%, you'll be treading water, and the only way you really can be successful is really growing the top line, knocking out, looking at acquisitions, taking out overhead and really running lot more efficiently, I wish I could do it with organic growth but to be honest to see this demands that we have out there from our customers, at 7.5% it helps but really doesn't get us where we have to be, we were having 15% to 18% growth then I could say hey acquisitions wouldn't be as high as probably as is today.

But at the current rate I do think that let's just tread water, hopefully I made sense..

Well you did made sense but the danger of buying something unknown after the experience we've had with Power-One, makes me a little nervous, that's all..

Okay, that makes me nervous, I think we've learned a lot of lessons, again even though we did spend a lot of money, it really came down to almost, I mean if you look at the sales today it was only one-time sales so we really didn't pay off high premium for it but from a serious standpoint the relationships we have with our customers now, what we can offer our customers and a lot of intangibles have really strengthened our overall relationship with our customers.

And from the Power standpoint one of the things that we never realized generally a lot of our products are commoditized, so a lot times when we talk to our customers its price, price, price but one thing about power it's really engineering designed product and it's not as price sensitive as our other product groups are and that’s a great opportunity for us, we hope we can shine a lot better than we have in the past.

And if I wanted, I have to do the acquisition again, I would do it again but probably beat up the price a lot better than I did. .

[Operator Instructions] We do have a question from Hendi Susanto with Gabelli and Company. .

If I may add one more question, I think some growth areas at Smart Homes, you mentioned smart lighting and then increasing electronic contents for industrial and automotive, how should we view about this position in those growth areas. .

I think it's too early to tell, I mean the internet of things, harsh environment, that’s where we see a lot of growth a lot of growth, a lot of the things are added outside the connect things together, we do think a lot more opportunities for the connector product line, automobiles, we really just started to scratch the surface from a protection standpoint we think there is good growth, I think we can do a lot better and that’s one of our key areas that we look at focusing going forward is the automobile and what goes on inside the car from the electronic standpoint, however at this point, the jury is still out, now for example Tesla was posting [ph] the model three, I suppose he is building 5000 cars a month and there is still at 500 a month, where I can 250 going back to quality.

But those are markets we’re trying to address a lot better. .

So, you can do that organically, inorganically, be intelligent in acquiring companies that have components in those areas. .

Definitely yes, I think what we’re looking at now, some of the companies we're looking at now are stronger in that on those market and we're and that can give us bit of entrée into those markets. So that’s an area by its similar to the products we have today. .

And we do have a follow up question from Sean Hannan of Needham & Company. .

Just really quick how should we think about an effective tax rate as we look out to '18 here. .

We look to that and get its very highly dependent on where our profits are earned, but we did an analysis over the last, looking at the last couple of years and assuming 2018 kind of mirrors the last couple of years, we think it's going to be in the 17% and 19% range for 2018. .

And Sean that does include an estimate for the guilty tax, the global tax on low tax foreign earnings, effective tax rate..

And there are no further questions at this time. I would like to turn the call back over to Mr. Bernstein for any additional or closing remarks..

Again, we thank and appreciate you hanging with us. and again, if you have any questions feel free to call or so. Talk to you in May..

And this will conclude today's call. Thank you for your participation. You may now disconnect..