Good day, and welcome to the Bel Fuse Inc. Third Quarter 2020 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, Anna. Joining me on the call today is Craig Brosious, our Vice President of Finance; Lynn Hutkin, our Director of Financial Reporting. Before we begin the call, I'd like to ask Lynn to go over the Safe Harbor statement. Lynn?

Thank you, Dan. Good morning, everybody. Before we start, I’d like to read the following Safe Harbor statement. Except for historical information contained on this call, the matters discussed on this call, such as statements regarding fourth quarter sales, anticipated cost savings from the closure of our Power R&D facility in Uster, Switzerland and our sales office in Germany, as well as from a streamlining of our North America sales organization, and the impact of potential future acquisitions, 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 impact of public health crises, such as governmental, social and economic effects of COVID-19; 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 to the company's new products and competitive responses to those new products; the impact of changes to U.S. trade and tariff policies; 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.

Okay. Thank you for joining our call today. I hope you and your families continue to stay healthy during these times. First, I would like to provide an update on the facilities around the world as it relates to COVID. We are pleased to report that all our manufacturing sites, globally, have been operational throughout the third quarter. As always, the situation around COVID remains fluid, especially as we enter the colder months. We will ensure ongoing compliance with local regulation to migrate our risk. Our production managers, manufacturing associates, have shown unrelenting dedication to Bel and its customers over these past seven months, and we truly appreciate what they do for us each day during this challenging time. Now turning to our results. We are pleased that our global reduction plan over the past year has again translated into meaningful gross margin improvement during the third quarter. The inclusion of sales related to our recently acquired CR business, along with our ongoing strategy to streamline the organization, while eliminating certain low-margin products had driven much of improvement in our results. Our sales level remains consistent with the pre-COVID level of the third quarter of 2019, while Bel adjusted EBITDA as outlined in our release, improved by 33% during this period. Excluding CUI sales in the third quarter, we were down $10.9 million from last year's third quarter. With declines seen across each of our product groups, the weakness in the commercial aerospace end market accounted for $7 million of the decline. Sales of front-end products, power products were down $3.1 million from last year's third quarter, largely due to us accepting new orders from a low-margin data center customer. This was partially offset by the growth in our circuit protection sales of $1.4 million. Our integrated connected module sales…

Thanks, Dan. Sales by product cycle for the third quarter of 2020 were as follows. Power Solutions and Protection sales were $47.8 million, up 18.5% from last year's third quarter. Connectivity Solutions sales were $38.5 million, a decline of 13.5% and Magnetic Solutions sales were $38.2 million, down 3.7% from last year's third quarter. On a consolidated basis, gross profit margin, excluding R&D expense, increased to 26.9% in the third quarter of 2020 as compared with 23% in the third quarter of 2019, as a result of the combination of factors. Overhead and indirect labor costs were $3 million lower during the third quarter of 2020, primarily due to restructuring measures implemented during late 2019 and a reduction in the cost structure of our Cinch Connectivity Solutions segment to align with current sales volumes within that segment. A portion of the margin improvement in the third quarter of 2020 related to lower material costs and stocks of high-cost components that had previously been built up in our supply chain have now been worked through, resulting in significantly lower material costs in the P&L as compared to the same quarter last year. Research and development costs were $5.7 million during the third quarter of 2020, a decline of $450,000 from the third quarter of 2019, primarily due to restructuring efforts implemented during the latter part of 2019. Our selling, general and administrative expenses were $18.9 million or 15.2% of sales as compared with $18.5 million or 14.9% of sales in the third quarter of 2019. Lower travel expenses of $514,000, a reduction in ERP costs of $242,000 and savings from other cost containment efforts, largely offset the $1.9 million of incremental SG&A expenses associated with the recently acquired CUI business. SG&A expense also included an incremental gain on the cash surrender…

Thank you, Craig. At this time Anna, we please open the call up for questions?

[Operator Instructions] We'll take a question from Mike Cikos with Needham & Company.

Hey, guys. Good morning and thanks for taking your time for the questions today. First thing I wanted to ask you about was this guide for the flat year-on-year revenue, as we look to Q4. And I know that you guys are walking away from some of this low-margin business now from two customers and you have the CUI acquisition under your umbrella now as well. Can you talk to I guess some of the puts and takes for the underlying organic business? Just wanted to get a sense of how you guys see the different segments playing out in Q4 to help you get to flat revenues from a year-on-year perspective?

Again it's just we have certain segments within product groups, as we mentioned that CUI have had since acquiring them. They have done a tremendous job on topline growth. Our Fuse Group has done very well on topline growth. The Cinch group has really got hit the stomach pretty hard because what you have, one of the major aerospace companies are not -- plane is not allowed to fly. We're hoping that they have permission by the end of this year. But when they do get permission at the end of the year, how many airlines are going to be buying airplanes? So we have no idea. At one point, they said they would be back in 2024. Now, the latest news is 2022. So, this just fits limited visibility on the aerospace side. It's tough to determine how we move forward there with topline growth. On the other hand, we did have substantial military growth and we're really pleased by that and we think we can maintain that military growth. That'd be difficult offset what we lost in aerospace. And again, with the CUI addition has made that group substantially the power group substantially stronger from a topline growth. Also, circuit protection as we mentioned, has had 40% growth. We do do a lot with e-mobility. We've probably signed about 50 NDAs a month. So, there's a lot of activity. In addition to that, we've been averaging $2 million a week bookings. And this past week, we did about $5 million. So, I do not know if that's a good sign or not, but it's the best booking week we had in probably three years. And then, I think the Magnetic Group, I think that has very -- out of all the groups we have that probably has the most limited growth potential at this time because of the limited customer base we have within that group. So, we still think we still have a lot of potential again on the Cinch military side. And then again, on the power side, I think they have growth in e-mobility circuit, protection, the adapters. And also, we are doing a lot on basic power products we build ourselves before the acquisition.

That's helpful. Thanks for walking me through that. And I guess another item, I wanted to touch on again, these gross margins continue to grow and be a point of -- now a positive point for the Bel Fuse story. Just curious, if you could talk to anything that might have been one-time in Q3. I know you spoke to the material costs in Q3. Were you able to size up what the benefit was for Q3 from those material costs? And if that becomes a headwind now in Q4, as well as typical seasonality going from Q3 to Q4, I believe that those gross margins typically come down sequentially. But any input there would be beneficial.

Okay. Craig, do you want to address this, or you want Lynn to discuss it?

No, I can address part of it I think. With respect to maybe some onetime items that may not continue going forward, I mean we did receive additional subsidies from the Chinese government during the quarter to the extent of about $900,000. So, whether those continue into the New Year, we don't know. There will be some impact in the fourth quarter, but not as substantial, we don't expect anyway. But I think, what we'll see going forward is kind of a continuation of the impact of streamlining our product offerings and so on and so forth. So, with the sales volume expectation being comparable to last year, I think we'll see a little bit of margin degradation overall percentage-wise just because of the volume. But I don't know, if there's any other significant one-time items that would be rolling through here. And Lynn, do you agree to that?

Yes, I agree. And Mike, just to answer the part of the question on material costs, so the lower material cost in Q3 '20 contributed 270 basis points to our gross margin for the quarter. So, to put that in perspective, in Q3, 2019, our material cost as a percentage of sales was 44.9% and that declined to 42.2% in Q3 '20. If you recall, we still had very high material costs running through our P&L in 2019, so we have seen that come down in the 2020 quarters and we expect that to stay at generally around this lower level. It may tick up a little bit, but I think the 2019 level was unusually high.

That’s great. Thanks for all the color there. And then one more if I may just to squeeze it in. But question on the streamlining that you're talking about for the North American sales organization. I know that you announced that today in conjunction with the closing of the Germany facility. What is that you guys have to do on that front? Just curious from an operational standpoint in the mechanics for that I guess $1 million in annualized cost savings to start flowing through the P&L. Thank you.

Craig, do you want to do with the cost savings, when it starts flowing through the P&L?

Craig, I can have that.

Oh, you have it? Go ahead Lynn. That's fine.

I do. I do. So, the aggregate cost savings for those two actions will be just over $1 million. And we expect that to mostly start in 2021. It's just a small amount maybe $50,000 or so in Q4, 20. Q1, 2021, we expect about $125,000. And then going forward, it would be $275,000 a quarter in cost savings through the end of 2021.

All right. Thanks for all the color guys. I’ll turn it over to anyone who has the amount of questions. Thank you.

We'll now take a question from Theodore O'Neill with Litchfield Hills Research.

Thank you, very much. In the prepared remarks last quarter, you talked about a $1.6 million award for power supplies for a cost-effective ventilator. Has that shipped yet? And is there any follow-on business from that?

I think, we're in the process of [Indiscernible] now and I do believe we have other additional orders, but not to the extent we thought probably. And I think the customer there was the Canadian Army.

Yes, Canadian government, we have started shipping. We did start shipping that in the third quarter.

Okay. Great. Thanks very much.

[Operator Instructions] And we'll now take a question from Hendi Susanto with Gabelli Funds.

Good morning Dan, Craig and Lynn. Dan, can you share what you are seeing in China? Other companies have talked about the impact of shipment ban to Huawei, some pulling inventories ahead of the ban. And then so, what are you seeing in your markets in China now?

Again, for us, Huawei has never been a big customer of us, in China. We do see certain customers, minor customers that are having a difficult time to deal with American-based companies. And we're starting to see some prejudice, but none of our key customers. Most of our major customers in China are the large subcontractors that go for the Cisco or HPs of the world. So like a Hon Hai/Foxconn, or Flextronics, Jabil these type of big large CEMs generally have to buy off the spec of the American customers or the European customers and that's where a majority of our business goes to China. So there's always some concern about the political situation being in China; A, between America and China; B, between Hong Kong and China; and C, between China and India. So, again, there's a tremendous amount of uncertainty that we are concerned about. And one of the reasons we are looking at other areas of manufacturing besides China that gives us the same low cost. Not to say that we would move out 100% of manufacturing, but I think we would like to get to a point that we're not still dependent on the low-cost manufacturing in China.

Got it. And then, some companies have also talked about inventory or capacity digestion among data centers. Do you have any insight into that?

About capacity regarding capacitors?

No. In data center space, some companies have talked about the fact that sales to data centers has been strong in the first half of 2020 and then now we may see some inventory digestion.

No. I don't think we have seen anything yet, sorry.

Yes. I think, there -- I think, we may have benefited a little bit in the first half from that, Hendi. And I think going into the fourth quarter, we have seen our order book soften a little bit with respect to some of those networking data center clients. So, I think, we are seeing a little bit of that.

Got it. So, Dan, when you share that, the growth in Magnetic segment is somewhat limited now, what can be the next growth drivers for the Magnetic segment?

That's a good question. Again, I think, our focus would probably -- I think, the Magnetic group, at some point, might fall into the Power group. So every power supply needs a magnetic. But I think there's -- again, we make a very specific product that we're the market leader on. We control 70%, a good percentage with the high-end customers on that product. So when you control 70% of the market -- available market, I think it's very difficult for us to grow it. So, again, I think, where our focus now is, how we can combine our magnetics we have there with CUI, with signal transformer with our power supplies. I think, we have -- what we're looking at is how better we can solve our customers' problems, but be a one-stop solution company, especially for the second tier, third tier accounts. So, again, it's how do we bundle all these products we have that are very similar and the first step to that was combining the sales force. So before we would have a direct signal transformer guy go to New England, then we have a CUI guy go to New England, then we would have a Bel guy go to New England. Now we have one point of contact that would go to New England that can sell all these products. So we're hoping, by having one point of contact and make it easier for our customers and channel partners to deal with us, that we should get greater sales at these customers.

I see. And then, one more question, a question for Lynn. So, Lynn, you talk about the benefit of material costs coming down from 2019. Is lower material cost behind now, or do you still have some runway? And then, secondly, I think, in the past you indicated that the gross margin should normalize between 23% to 25%. Should we still expect that gross margin range?

So the first part of your question on the material costs, I think, we're probably at where we will land. I think that the Q3 material costs, and Craig correct me if I'm wrong, is probably where we will land. If anything, it might go up a little bit. I know the cost of some of the precious metals has been increasing, so that might put some additional pressure on it. But I think we can use Q3 as a basis for that. Regarding a normalized gross margin, I mean, really the only thing that was in our margin this quarter, as Craig mentioned, was the $900,000 of subsidies from China that we received, which would be non-recurring. I'm trying to think. Other than that, the renminbi, we do need to keep an eye on. We did have some higher labor costs in Asia in this year's third quarter, just due to the unfavorable comps in the FX versus last year. So that is something that will impact our margins going forward, if that continues to trend in an unfavorable direction. I think if we had to put a range on it, mid-20s, maybe 24% to 26%. Craig, do you have any thoughts on that?

No, I think, that's right. And it's all, obviously, dependent on the mix of revenue that we have. Obviously, when the commercial aerospace recovers, that will influence margins and how successful we are with some of our other cost actions, will influence margins. But I think, the 24% to 26% range is a reasonable range for projection purposes.

Got it. Thank you. Thank you Dan, Lynn and Craig.

Thank you. Have a good weekend.

Thanks, Hendi.

We'll now take a question from John Hudson [ph] who is a private investor.

Good morning.

Hi, Dan.

Yes. Hi, John.

Look, relative to operations in China and I recognize the issues between the Chinese government and the U.S. government. And I don't need any further comment on that. But I'm interested. It appears to me that the relation between the company and the Chinese government has been basically very good over the COVID period and part of that as indicated by the subsidies that the Chinese government have provided. And I just wonder, is that your opinion? And how do you see, specifically, the relationship between Chinese government and the company today?

Generally when we talk to government, we generally deal with the loc, because we're not that big of an employer in China. So we generally deal with the local government. And we've been there substantially longer than a lot of other companies. And we are -- in the communities we deal with, we are a large employer. So historically we employ a lot of people in the local town. So we do have a very good relationship with the local community and the town government. And I think that's why, we've been able to work so well. Our concern again is the political unrest and the tariffs and how the U.S. government view things going forward. And again, we do have a good portion of our activity is done in China, because I spend -- before-COVID I did a tour of the Philippines, Vietnam, Malaysia looking for another facility to [Indiscernible] as a backstop. And we're hoping that we can have an announcement shortly, on one of the things we looked at. But from our standpoint, I think if we have -- setting up a Greenfield operation from scratch, I think we would be a lot more in the area of acquiring a company that has manufacturing in one of those low-cost areas. So we could get up and running very quickly. And not worry about the political and who you have to know to get things done type of situation. So again, at this point knock on wood, things are okay. But when it comes to China, it's like COVID. And again, we do have -- we do have some people. We have 50 people in Hong Kong that work for us. And what they're going through now in China, is very upsetting. And the relationship between the Hong Kong people and the China people is not a good situation. So it's something that we do keep a watchful eye on.

Sounds good. Thank you.

And we'll now take a follow-up from Mike Cikos with Needham & Company.

Hi guys. Just one more, if I could, thinking about the CUI acquisition, it seems to be going at least better than, what we had initially thought. So curious on what your assessment is of that acquisition. And then, the follow-up to that would be, if you're looking for different opportunities on the M&A front, what kind of technologies would be of interest to you? Is it focused on a specific segment, or maybe it caters to this diversifying the manufacturing footprint that we were just talking about? I'm going to leave it at that. Thanks guys.

Yeah. Okay. Let's just discuss CUI for a minute. First, it took us three to four years to finally acquire CUI. Again what we find very interesting with them is it's a different model than historically Bel has. Bel has always built everything we've sold. CUI doesn't manufacture anything, they private-label. They have a very tremendous diversified customer base. What they've done better than any other company out there, is more from a marketing NPI, New Product Introduction. When I started in the business, everybody wanted to see a sales guy. Everybody wanted to go out to lunch. Now, nobody wants to see a sales guy, nobody wants to go out to lunch. They just want to go on the Internet. And get their parts as quick as possible. And get it designed in. And this is where CUI really shines. They work with the largest e-commerce catalog houses, like the Digi-Key Mousers. And they do a great job with them, to get their product out there to a diversified customer base. And that customer base could be 4,000 to 5,000 customers. And no customer accounting for more than 5% and that's why they tend to be, very profitable. And that's the same model that Signal Transformer has. So again, we looked at them -- we're tremendously pleased with the sales growth and the booking growths they had, since we acquired them. And at this point now what we really have to do is, capitalize on their marketing NPI. And bring it to the other Bel products. And how do we market us as one company to solve customers' problems. So I think from that side, as I mentioned before, I think there's tremendous upside, that we can penetrate, our existing customers. And there hasn't been as well as I…

That's great. Thank you, guys. Best of luck.

And we have no further questions. And now we'll terminate this conference call. Thank you for participating.

Okay. Thank you everybody for joining….

Thank you everyone.

And we look forward to talking to you again.