Good morning and welcome to the Bel Fuse Fourth Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the call over to Jean Marie Young. Please go ahead, Jean.

Thank you and good morning, everyone. Before we begin, I'd like to remind everyone that this conference call contains certain forward-looking statements regarding the company's expected operating and financial performance for future periods. These statements are based on the company's current expectations. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks and other factors. Additional information about factors that could potentially impact our financial results is included in yesterday's press release and is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our subsequent quarterly reports and other filings with the SEC from time to time. We may also discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are all available at the IR section of our website. Joining me on the call today is Dan Bernstein, President and CEO; Farouq Tuweiq, CFO; and Lynn Hutkin, Vice President of Financial Reporting and Investor Relations. With that, I'd like to turn the call over to Dan. Dan?

Yes. Thank you, Jean. We're very pleased to report a strong finish to a record-breaking year at Bel, where we demonstrated that even during a year with a challenging supply chain environment, our team's dedication and hard work has paid off. We would like to thank all our associates for allowing us to reach these milestones. Each of the three product groups show a double-digit top line growth this year with our Power group leading the way with a 32% increase in sales year-over-year. Excluding the $32.5 million of raw materials surcharge invoicing during 2022, Power sales were up 17% over '21. Sales of our circuit protection products and CUI and EOS Power products have all had record sales in '22, reflecting double digit growth over the respective '21 levels. Over the past 3 years, the Power group has been a major focus. Through a combination of strategic acquisitions, targeted investments in EV and a thorough review of [indiscernible] SKU profitability, this group closed '22 with sales up $288 million at a gross margin of 30.5%. Even within the '22 fiscal year, this product group showed substantial margin expansion every quarter, starting at 27.1% in quarter 1, 28.2% in quarter 2, 32.4% in Q3 and finishing quarter 4 at 33%. Our Connectivity Solutions group saw a 30% increase in sales in '22 over '21. With this segment, commercial aerospace revenue closed at $31 million for the year, up 75% over '21, highlighted by a jump in aftermarket revenue as well as continued support on new aircraft production. Shipments through our distribution partners remain strong throughout '22 with some offsetting softness noted in our military and network end markets. Our Magnetic Solution group posted 11% increase in sales in '22 versus '21, largely due to a high demand from our networking…

Thank you, Dan. Overall, fourth quarter sales were $169 million, an increase of 15% from the fourth quarter of 2021. Gross margin for the quarter increased to 31% as compared to 26.7% a year prior. By product group, Power Solutions and Protection sales were $82.1 million, up 39% from last year's fourth quarter, primarily led by an $11.1 million increase in sales of our front-end power products, $4.1 million of higher sales of industrial power products and $2.8 million of growth in EV sales. Of these increases, $10.5 million is related to invoicing of premium charges on materials. Gross margin for this group was 33% for the fourth quarter, a 210 basis point improvement from Q4 '21, largely driven by a favorable shift in product mix, the benefits of pricing actions taken over the past year and some favorable impact from FX. Our Power Solutions and Protection group had a book-to-bill ratio of 1.0 during the fourth quarter of '22 and a backlog of orders of $356 million, an increase of 48% from the 2021 year-end. Turning to our Connectivity Solutions Group. Sales were $47 million, an increase of 8% from last year's fourth quarter, mostly due to the continued rebound of commercial aerospace and strong sales through our distribution channels. Military sales continued to be challenged this past quarter, resulting in a 12% year-over-year decrease in the defense end market. Gross margin for this group came in at 23.6% for the fourth quarter of 2022, down slightly from 23.7% in the fourth quarter of '21. Throughout the majority of 2022, this group had been impacted by inefficiencies related to a ramp-up in the workforce needed to accommodate the rebound in commercial air. The Connectivity Solutions group had a book-to-bill ratio of 1.06 during the fourth quarter of 2022 and…

Thank you, Lynn. Hello, everyone, and nice to speak with everybody. Looking back at 2021 and 2022, we recognized tremendous amount of contribution and work that has gone into getting Bel to this point in our journey. This is really an all hands on deck efforts across our global team members and locations. As Dan mentioned, we're happy to close out 2022 with the wind at our backs and head into 2023 and beyond with a sharpened sense of focus and direction in our pursuit. As we look out to 2023, we see a good amount of opportunity for both growth in certain areas and margin improvements. While managing continued supply chain constraints in certain components, inflationary pressures, COVID restrictions easing in China and our previously announced facility consolidation plans, we will continue to pursue growth in certain end markets, lean out the cost structure and position Bel to capture the long-term positive tailwinds related to our products broadly speaking. Pivoting to backlog for 2023 -- as we enter 2023. This quarter, in 2024, we saw a sub-1 book-to-bill for the first time in a while as we have been working on reducing our lead times and getting deliveries out the factory. We're working with our customers to get this rationalized as it related to their needs today versus what they thought 6 months to 9 months ago. While we see some softness in demand in consumer-facing end markets, we believe the larger factor here is customers needing to work through their high levels of inventory [indiscernible] and adjusting to the reduction in lead times across most of our products. This is particularly the case for magnetics. On the other hand, we are seeing robust demand in the areas of commercial, aerospace, military and e-mobility. To that end and as…

[Operator Instructions] The first question comes from Theodore O'Neill from Litchfield Hills Research.

Congratulations on the good quarter. Couple of questions about innolectric. Not clear, is this a customer or are you selling the product to them or both?

So, they are a manufacturer of a product. They have a complementary product set. It's its own business. We took an equity stake in the business. And we think we bring a complementary skill set on the operations and business side of it in terms of sales and marketing, customer connectivity and manufacturing side that would be additive. They have a great product set with a lot of nice software and packaging capabilities, but it is an ownership stake.

Farouq, it's just a little bit -- I'm sorry. Just a little bit more clarification. I wouldn't call it a manufacturer at this time. We see it more as a technology product portfolio. They're in the process now of building up their sales. So they're at an initial stage. We felt very strongly that their product portfolio will align very nicely with our product portfolio going forward. So for us, it was more of an extension of our R&D and their R&D capabilities and how we believe that they have the best products going forward in the EV marketplace where we participate in.

Okay. That makes sense. And what sort of milestones are you looking for to take further investment stake in the company?

Yes. So it's really a revenue and certain profit thresholds, it will be the key guiding post there.

Okay. And Farouq, you mentioned sort of leveling out the revenue for this year and talking about how there was expedited costs, et cetera, there was about $32 million of revenue in the year. I would have thought those would be like super high margin part of the business. Was it not?

No, it's not margin. It's actually lower margin than our kind of gross margin. So I would say it actually brings us down as a percentage of sales. But we -- these are not intended to be a high-margin moneymaking thing. This is really a convenience expedite fees, trying to get product out of the door, partnering with our customers and paying, let's say, unnatural fees just given the times we're in. So no, from a percentage of sales, they're actually dilutive.

Okay. And Lynn, the $27 million in orders that didn't ship due to component availability, is that in some specific area?

That's -- it's really across the board, Theodore. Probably largely in power and magnetics, not so much on the connectivity side.

The next question comes from James Ricchiuti from Needham & Company.

I just was hoping to get a little bit more color on the Q1 outlook. Are you assuming that there's still this relatively high level of raw material surcharges in the quarter? And then is this a case where you see that gradually dissipating as we go through the year and eventually going away Q2, Q3?

Yes. Yes, I would say we start really seeing this in a noteworthy amount in Q2 last year. We thought it would slow down into Q3, Q4, but it actually didn't. So it's really tough to predict that, but we don't think they are going to be around here because these are not part of the normal way of doing business. As for Q1, we are seeing still some PPV surcharges in there, but it's really hard to take a guess at what that would be. So we generally are not going to try to guess it, given that we do know this is not usual.

Got it. You've given us some percentage growth in e-mobility. I may have missed it, but have you been able -- did you quantify the level of the e-mobility sales in the quarter? And what I'm trying to get to is how we're thinking about the outlook for this business, which clearly, it sounds like this is one of the areas of the business that you see some pretty good growth opportunities as you look at, not only in the current quarter, but further into '23.

So, Jim, I can take that one. So e-mobility sales for Q4 were $6 million, and that was up from $3.2 million in last year's fourth quarter. And just to clarify, we did have additional sales out of our e-mobility group throughout the year, but these numbers are just looking at products that go into actual EV and applications. So $6 million for Q4 versus $3.2 million in last year's Q4, and on an annual basis, it was right around $20 million versus $10 million last year.

And just with respect to the line of sight you have in this business, it sounds like this is an area of the business you feel still has some pretty good growth prospects for this year. Is that fair to say?

Yes. We do have a big growth prospect for this here. I think it would not be -- we definitely see the potential for it to double again this year. We have committed CapEx dollars to expand our production capacity. And I think we just ideally need to get a little bit of help from the component shortages side that will help us to get that stuff out the door. So it's a very rapid growing line for sure. I don't know, Dan, if you have any more insight on that, but that's kind of my insight.

No.

Got it. And just on the Magnetic Solutions group, there obviously are some puts and takes in that area. And I guess what I'm wondering is, you have a sense as to when some of these customers will be working through the inventories that they have? And I have one quick follow-up.

Okay. On that one, I think we deal a lot with the networking people. And again, their hands are tied with -- it's really their hands are tied with -- basically, they can't get power supplies in from us because of the ICs. So we have customers that are expediting fees to us, on the other hand, are canceling magnetics from us because we can't get the ICs in properly. We still think there's a long lead time out there. But to flush out the inventory for the magnetic side, we think it'll probably be at least 6 months to 9 months. I mean, 6 months probably best case, 9 months more worst case.

Got it. And the follow-up to that is just you're still seeing pretty good demand clearly on the power side from this segment of the market. Is there -- how do we think about the potential that as things begin to normalize, do you see the level of demand in this part of the business slowing a bit?

Again, I think the sales -- because of the IC constraints, I think, again, our backlog -- I think the difference we see now is instead of a bar gives us 4 orders during the year, the bar now gives us 1 order a year. So we spent a lot of time more focused on the backlog, where that's staying compared to the bookings. And from the Power side, the backlog is pretty strong. We do think we do have a lot of NPR that is going on with the acquiring of CUI -- that's been a real growth engine -- plus EV, that's really leading the sales growth. We still think that Power has great opportunities going forward from a growth standpoint.

The next question comes from Hendi Susanto from Gabelli Funds.

Farouq or Lynn, can we go over the math for commercial aerospace market? Like where the current run rate is versus the pre-pandemic level. And then I think is it reasonable to assume that based on past acquisitions, when things go back to the baseline, your new baseline should be higher than the pre-pandemic level?

On the commercial air side, we finished the year -- and these are direct sales into customers. So this excludes anything going into commercial air through distribution. Year-to-date, sales were $31 million. That was up from $18 million last year. So a 75% increase. If we look at the pre-pandemic levels, it was around $40 million, $45 million in that range, and that was for our Cinch business and RMS combined. So we are not back at that level yet. We certainly hope to get past that in the next year or 2, I would say. Farouq, I'm not sure if you have any additional comments?

Yes, we'll surpass into your point, Hendi. I think there'll be a new baseline. So I think that number, the $45 million is kind of the 3, 4 year ago baseline. So I do think we're discovering what that baseline is.

And then similarly for the defense market, would you be able to share what the current run rate versus historical baseline?

Sure. So for the military market, that was around $38 million for the year. And that was down slightly. It was down about $1.5 million from the prior year on a year-to-year basis. I know that military has been running low the last few years. I don't have the historical view at hand, looking back to 2019-2020.

I think I can help you, Lynn, if you want. If you go to 2020, defense was $34 million, '21 was $32 million, and then I have $30 million for 2022. Based on your email, so I assume it's correct.

And then one additional question on the data center market. Any expectation how long customers will digest their inventories? Some companies see an expectation that there may be some turnaround or return to growth in the second half of calendar year 2023 whether you have any type of that market view?

Maybe I can handle that one. On the data center market, three or four years ago was a substantial market for us where we supplied people like Facebook and Google. However, during the price pressures we saw in that business, it wasn't a portfolio that we thought made sense for us. So for now, it's become more of a niche market in this area, and we are focused on a lot of other markets where we have better margins. But we don't -- again, the cloud is not what we consider networking from our standpoint.

I see. And then Dan...

Does that help you or no?

Yes, I think that's helpful. Any information on the current run rate for the data center market?

I wouldn't -- I can't say. I don't have that breakout. But it's -- I don't think it's enough to move the needle substantially. Maybe three or four key -- I mean, two or three -- I'm sorry, three or four key customers in that marketplace.

Okay. And how...

But none of the big boys. Again, not Amazon, not Microsoft, not Google or Facebook.

I see. And then, Dan, any insights on the networking market?

Hendi, is your question about how big our exposure to the networking data center is?

No, no, like the state of the networking market. I think in the magnetic networking, customers are working down on their inventories. So whether there's any outlook like when customers will fully digest their excess inventories previously on the data center market and then now in the networking market?

But I think it should be reflective. I think data is the same as networking where people are looking -- in our industry, everybody said 6 months. Any time there's a problem, they say, six months. So I think everybody is expecting to flush out inventories over the next six months. Again, the problem was that they brought in too much materials, but they didn't have the ICs to build the material. So now as they get the ICs in, they're working down the other material, the ICs and the other materials will be logged with each other. From what we understand -- go ahead.

Sorry, Dan, go ahead.

No, that's it.

I was just saying, Hendi, just to maybe thread the needle here, from an end market perspective, every kind of the public things that we're reading, it seems to be going okay. But we supply that end market from 2 different sides of the house. The magnetic side, as you pointed out to, is a more simple product set. That supply chain is smoothing out. So we were able to get them and deliver products to them at a faster rate than they were able to get the power supplies that they needed. So they're sitting there with kind of a little over inventory on the magnetic side of us, but the demand is still there in the power. So it's a little bit of a nuanced discussion because it just depends on what product is coming in. right? So it's not a market issue as much as it's what's the product that's going into it.

The next question comes from William Kim from Presidio Asset Management.

And good job seeing to improve those margins. I was wondering, going forward, could you guys provide a cash flow statement for the quarterly earnings releases? And if you could give us an idea of what free cash flow was for the year and the quarter.

Farouq?

Yes. So we can certainly look to do that before going forward. Let me just -- so I can give you the year. So cash flows from, provided by operations for the year, was $40.3 million. And then we had $8.8 million of CapEx. So if your definition of free cash flow is cash provided by operating less CapEx, it's about $31 million, $32 million.

Okay. And I guess I'm assuming there's more capital usage there. Is that going to continue to be a significant use of cash as you grow? And how can we think about free cash flow conversion, I guess, from an EBITDA perspective and a net earnings perspective, considering that it seems that free cash flow is significantly lower than even your net earnings numbers?

So a lot of work last year in '22 gone into the P&L side of it, I would say. So trying to get our EBITDA up and just overall profit margins. And we saw that sequentially happen through the year. That's kind of step 1. Obviously, we saw the cash consumption and working capital investment go in there, pretty rampant as we think about inventory and some of the issues going on there. So I would say we have an elevated working capital number. So in normalized times, it should not be taking that kind of cash [indiscernible], if you will. Historically, we've been around $10 million of CapEx, which is, again, in regular times about right for us. This coming year, we'll spend a little bit more given a lot of consolidation work going on. And then obviously, we have our interest rate and we have our cash taxes, which I'd probably say -- and our dividends -- are pretty probably steady. Obviously, we paid down our debt, in interest rate environment, we all know how that's going. But I would say the biggest thing is we're trying to get our profitability upwards and margin improvement, which we have been and we'll continue to do more of. I think we need to work on slimming down a little bit our inventory position, and we think that will occur as things normalize a little bit.

So when you say normalized, are you talking about a normalized working capital environment? Or are you talking about kind of the slowing growth environment?

I would say the easing of the supply chain and availability of materials. We have -- as we think about [WIP] and finished goods that we're supposed to ship as Lynn was talking about $27 million of worth that were scheduled to ship, but we couldn't because potentially we had some missing pieces or our customers didn't have the other parts of the bill. So we end up sitting on bigger amounts of inventory. So as the supply chain eases up and becomes a little more predictable where you can build, buy your raw materials, make it and send it out, that will bring it down. Obviously, we put a lot of money in our inventory in the last couple of years and partially because of the disruption of the supply chain.

The next question is a follow-up question from James Ricchiuti from Needham & Company.

I'm wondering if you could perhaps size the impact of the dilution to gross margins in the quarter from some of the material surcharges that you alluded to.

So I think from a gross margin perspective, it's less than 100 basis points. It's -- that's from a gross margin perspective.

I think it's 10 bps. Yes, it's right 10 bps. And say it different, our gross margin would've been higher as a percentage of sales if that was out. Because it rises a little bit.

Farouq, maybe you could also talk to the pricing environment. And maybe more broadly, I think Bel has talked about going through the product portfolio, looking more closely, not only at pricing, but perhaps going through the SKUs and seeing what makes sense and what doesn't make sense. I wonder, as we think about the way you're characterizing the year, to what extent do these pieces play into the overall outlook for the business?

Farouq, do you want me to take that? I'll do the overall pricing. Again, very simple in our industry. As longer lead times go out, pricing tends to be firmer or higher. As lead times come down, pricing does become a little bit more competitive. We're just starting to see it in some of our product lines. We don't think there'll be any pricing pressure overall based on past history. If you look at our military aerospace business plus our power business, we think the pricing overall should be pretty firm or strong. On the magnetics and the Circuit Protection group, they might face pricing pressure that they haven't seen post-COVID going forward. And then our major focus now is if we do face that, are we getting our cost of line to address it properly? So we're doing everything we can to maintain and improve our current margin structure. And we know that we have to do a better job of really streamlining the organization. So when these price pressures do come in, then we can handle it a lot better. And again, not walking away from something because of lower margins. Farouq, can you add some more color to that?

No, I think that covers it. Obviously, we're focused on profitable growth with healthy margins. We understand that it's a price and a cost game. On the price we talked about it already, I think, a lot last year. We're doing a lot on the cost side of it. At least if we do get those phone calls, depending on what part of the business is and the profitability profile as Dan noted, we will have a more cleaner cost structure to make an educated decision on where do we concede where to not. In some cases, maybe the answer is not. Maybe in some cases, we are sole position. And then that's a different discussion and maybe some of our commodity-based stuff. So because of the diversity of our portfolio, Jim, I don't think it's a one size fits all. But I think the guiding post is get our cost in order, add value to the customer and try to resist price downs. But we know we're not going to be successful at 100% of our SKUs.

At this time, there are no further questions. I'd now like to turn the call back to Mr. Dan Bernstein for closing remarks. Thank you, sir.

Thank you, Claudia.

Sorry, just a clarification. I misspoke when the question was asked of the impact of the surcharges. I had said 10 bps on gross margin, but it was really closer. It was a little bit under 100 bps. So our gross margin would a bit higher if it was removed. So just a point of clarification there. Sorry, Dan, go ahead.

No problem. Thank you for joining our call today. And we're looking forward to report our results in April. I wish everybody a good day, and a nice weekend. Thank you.

Thank you very much. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.