Welcome to the Bel Fuse Incorporated Third Quarter 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.

Thank you, Angela. Joining me on the call today is Colin Dunn, our Vice President of Finance, and Lynn Hutkin, our Manager of External Reporting. Before we begin the call, I'd like to ask Colin to go over the Safe Harbor statement. Colin? Colin Dunn Thanks, Dan. Good morning, everybody. Except for historical information contained in this call, the matters discussed on this call, including the statements regarding opportunities for Power solutions and Connectivity solutions, the effects of data centers initiative and Bel's positioning, are 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; 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 assurances 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. That's end of the Safe Harbor statement. I'd now like to turn the call back to Dan for a general business update.

Thank you, Colin. I would like to just take a few minutes to provide a brief update on how the businesses are doing from an operational standpoint this quarter, and what we see going forward. As I'm sure you have seen from the numbers that came out this morning, our sales continue to be down from what we'd like them to be. However, we are pleased that we've been able to improve our profit margins. On the Power side, this continues to be the group with the largest revenue decline. This is mainly due to missed design cycles and general market softness, especially with the Hardware sales being down in network markets. But we do see increased demand from companies that are building their own data centers and cloud computer applications. As I said in prior quarters, this is the group with the most upside potential. Between data center opportunities that are in the pipeline and other new business development in the areas of Hardware, Electrical Vehicles and the rail industry, I'm confident by 2018 this group will represent a large percent of our total sales, from where it is today. Our Connectivity business has done a tremendous job with restructuring efforts over the past year. This has largely been driven on approved profitability on lower sales. The aerospace market has continued to be an area of strength in this group, and we think this will continue to be a growth driver for us. Another bright spot within this business was Fibreco, which we acquired back in 2012. We purchased this group and the expanded fiber optic component, and we saw their sales almost double this quarter compared to last year's third quarter with volume expansion. Our Magnetic group saw growth this quarter, both from last year's third quarter into…

Thanks, Dan. Starting with sales, our third quarter net sales were $128.8 million, down 10.6% as compared to the third quarter of 2015. On a product basis, sales of our Power Solutions and Protection products were $44.9 million in the third quarter of 2016, a decrease of 18.3% as compared with the third quarter of 2015. Sales of our Connectivity Solutions product line were $41.7 million in the third quarter of 2016, a decrease of 12.1% as compared with the third quarter of 2015. Sales of our Magnetic Solutions products were $42.3 million in the third quarter of 2016, an increase of 1.1% as compared with the third quarter of 2015. Looking on a regional basis, sales in North America decreased $14.6 million or 18.7% for the third quarter of 2016, as compared with the third quarter of the last year. Sales in Europe were up slightly by $400,000, or 2.2%. Sales in Asia decreased $1.1 million, or 2.3%. Gross profit margin increased to 20.6% in the third quarter of 2016, as compared with 19% in the third quarter of 2015, reflecting the favorable shift in product mix, operational enhancements and cost reduction activity we completed in late 2015. SG&A, selling, general and administrative expenses, were $19.4 million, or 15% of sales as compared with $19.2 million, or 13.3% in the third quarter of 2015. The slight increase was primarily due to a $900,000 non-cash unfavorable variance and the impact of foreign currency gains and losses, offset by $600,000 in lower fixed cost from the cost saving initiatives completed late last year, and lower commissions on the reduced sales volumes of 2016. We closed on the sale of a property in Hong Kong during the third quarter, which resulted in a gain of $2.1 million. As a result of these…

Thank you, Colin. Angela, can we take calls, please?

[Operator Instructions]. We'll take our first question from Sean Hannan with Needham & Company.

The first question here, as you come out of the third quarter and as we enter the fourth here, can you talk a little bit about how revenues are trending? Obviously that's been a point of -- a little bit of pain for you folks. Just trying to get an outlook there, thanks.

Again, I think there's still a tremendous amount of uncertainty out there. We don't hear anything positive, again, we don't hear anything too negative. I think with the election and Brexit, there's just a lot of question marks to how things are going to move forward. At this point I don't think we're optimistic, but I don't think we're pessimistic. We keep hoping that we hit our low level mark but we're just not positive.

Okay. So, should we interpret that as, right now it looks sequentially like you could be flattish, or is that a little bit optimistic?

We're hoping -- flattish is a good term. But we're not sure. As I said, we have a major project that, hopefully we start shipping in December that could be a million, a million and a half per month. We just -- I think once that comes into play, then we'll get backtracked on moving more towards the positive side.

Okay, and then North America, specifically, has been a little bit more pronounced as a challenge for you. Can you talk about your geographic mix, how you see maybe some progress, either specifically in North America or how some of the regions could potentially play out with your current force?

Well, I think a lot of it comes in the Power Supply of the business with the acquisitions we had, where a lot of those products are shipped to North America. I think that's what, really, we got dinged pretty good on. Again, that -- we missed these deciding cycles, and caused young buyers, also, distribution's down. So, that's where we -- again, where we see the big hits coming from. Again, Asia, where we have most of the CMs for most of our products, that product, we see that as a little more consistent. Then Europe has been flat or down. Right?

Yes. Actually it was up a little bit but it's sort of flattish. It depends a little bit on the product line.

Okay, and then in terms of margins, nice job in what you accomplished in the quarter. Is there an opportunity for further margin expansion from here, if we're able to maintain at least a flattish environment, revenue-wise? Any perspective around margins would be great. Thanks.

We're working on one more opportunity to take out cost. I think we're just looking at a million and a half on a yearly basis that we could start taking next year. But I think we're getting pretty close to that -- there's not much cost we can take out going further, so we definitely have to start improving the top line to improve the margins.

Yes, one of the things, Sean, that Bel's always done and I think we've done it again this time is that, when times get a little tough, we don't slash and burn everything. If anything, we tend to bolster our R&D and we'll bolster our sales efforts. So, we tend -- while we normally run a pretty lean machine, we really do really try to put more effort in, in times like this. That does tend to add just a little bit of cost, and that's not going to go away.

Okay, and then last question here for the moment, on taxes for you folks. Certainly, it has been a very variable figure in your EPS result. Can you help us to understand a little bit better around what to expect for continuing tax benefits, either for the remainder of '16 or even moving forward? Any color on that would also be great.

I'd like to get a good answer on that question, too, so I definitely appreciate you asking that question. You'd better write this down so we can hold our accounting group to this question.

This is Lynn. On the tax rate, you asked two questions about the tax benefits and also about the tax rate itself. It does vary significantly, depending on where our pre-tax earnings or losses are generated, and as we just went through with the sales, North America has been heavily hit by the reduction in Power Solutions sales. That brings down our taxable earnings on the US rate, which is the highest. And then our Magnetics business, which is mostly based in Asia, has the lowest tax rate. So, depending on where those profits are generated, that will determine the resulting tax rate.

And then, to your second question, on the tax benefit, I know that we had some large tax benefits come through in the first half of the year, and we do not anticipate at this time any further large adjustments in that regard. There were certain items that could be resolved, which we completed in the first half. We do still have about $14 million of tax liability on the books, and unless those are otherwise resolved prior to the expiration of the statutes of limitations, those would just roll off gradually over the next eight years or so. So, we don't see any other large, one-time tax benefit adjustments like we saw in the first half.

Okay, and can you remind me, what was the -- did we have the no-benefit in the third quarter?

We did not have any adjustments that were similar to what came through in the first half. What we saw in the third quarter mostly related to the fact that North America had a pre-tax operating loss, and Asia had the bulk of our operating -- or our pre-tax earnings. That's what's driving the benefit in the third quarter, it was just the shift geographically.

We will now go to Harsh Kumar with Stephens.

Kind of on the similar lines of what was just asked earlier, let me ask you, a lot of the work that you put in here is sustainable work. So, can I -- can we assume that the margins will stay up even if revenues are flattish, or how should we think about it, Dan and Colin?

The margins should stay where they are. The -- certainly, any lift in sales is really going to move them up very quickly from where they are. But, there is nothing from our operating model at the moment that -- even at these levels, that would -- that should make any significant change to the margins as we've got them at the moment.

So, let me understand this correctly. If everything goes, like, so-so, the kind of economy that we're in, they'll stay where they are as long as the sales are flattish. But you'll get a pretty good bump up if the sales rise. Colin, maybe take a second to explain to me why that would be, because you get fixed cost leverage? Would that be the biggest impact for utilization, stuff like that?

Absolutely.

Okay. Then, I know you've done a lot, you've been at it, this Power and Connectivity solution, trying to squeeze out cost and I think you just mentioned there's not a lot left. But let me ask you again, is there -- you always manage to surprise us by taking out a couple of hundred grand or a couple -- a million or two here and there. Is the run rate more in the low hundred to thousand in terms of cost cuts over there, or can we still see a million or two taken out over the course…?

I think we have one more take out which is going to be around a million dollars of cost we're going to take out, and then I think after that, that's about it. Then it's all going to be kind of minor stuff. That's why we're saying, probably in the fourth quarter, we'll probably have one more write-down. But after that, I don't see anything going forward that is going to move the barometer too much, that's why it's so imperative for us to get the top line to grow, because again, we can't improve the margins any more from cost cutting.

I had a product question. Being Connectivity sales, I'm not familiar with that, but you, you talked a lot about it in the -- especially the big factor for why the numbers weren't up, but the margin's up. Would you talk about what it is and why it's so important?

Well, Dan's deferring to me, here. So, basically what -- it's a fiber connector, and really, it's used primarily in harsh environments. When you've got a fiber connector, it's a very small fiber, it's very hard, you have to get -- you basically just sand the ends of the fiber to make the connection and if you get any speck of dust, it spoils the connection. So, what this connector does is, at the point of connection, it really expands the signal across a much broader spectrum. That way, if you get a little bit of contamination on any one of the points, it's not a big thing because the rest of the points are still open and can get the signal through. It's used primarily in entertainment type devices, like TV trucks at concerts and stuff like that. It's also used in downhaul applications for drilling and it's also used in military applications. A typical military application would be, like, the backpack that a soldier has and is using in the field or maybe in a tank or something like that.

For communications. So, again, it's very hard, it's very -- it can handle harsh environments very well.

So, that particular end market shouldn't really -- we haven't heard any indication that that end market is going to go away or slow down or anything like that. If anything, it should be fattened slightly up as time goes on, like in the near future. Correct?

Yes, I think it’s a lot of jobs related to military projects. So, it’s kind of home runs in singles kind of thing. I don't think it's consistent. If you get a project for the military, it's a one-time knock-off project. If you support that, then you've got to wait until the next project gets approved. So, again, we worked with the Scandinavian Army on a project and we get the order, then we might not see another project from the Scandinavian Army for a year or two years. It really is like, more kind of a feast or famine product.

And then last one or two questions from me. On the Power side, how close are you to the data centers finally coming on? I know you probably have a little bit of revenues, but when can we expect you to be talking more about data centers like it's a significant portion of your business 10, 12, 15, 20, are we there yet, now? Or when can we--

I think we're knocking at the door and we've got the door open, so we're starting to think we can hopefully see maybe a million dollars of revenue in December, and then going forward, we're looking at a minimum of $1 million, $1.5 million per month, going forward. We're hoping that it continues to grow.

Okay. So, this is what, Dan, you were referring to earlier, on new projects. And then, with your product set, do you see opportunity for enhanced sales, like more content, more of your stuff going into a data center, or do you think it'll just…

No. Some of the people we compete with do a whole vertical and set up the whole data center and do all that, but we just supply the power supply and some of the racks. I don't think we want to go more vertical than that, because some of our customers are putting the whole data center together so we sell to them. Again, I think we're pretty much at where we want to be on this product line. We know someone like Delta for example are looking very heavily at becoming 100% vertical and setting up a data center, and I don't think that's what we're looking to try to do.

Dan, one more, and maybe, Colin, you can help me out on this one as well. As we think about sales rising, for every -- maybe, if you can help me out, as a model, for every million in sales, how much of the margins -- how should we think of the margins acting up, or how many -- for every $10 million in sales, whatever works better for you. We just want to have an idea of how we should be thinking about margins and sales…

I think it's very difficult at this point, and let me explain why. Because we took such a hit in sales from the Power side; in addition to that, because of previous Management. We lost a lot of opportunities, major key customers. We've been extremely aggressive on our pricing, just to get back at these customers and get a good taste for these customers so they can open the door for us. I think, initially, the margin might not improve as much as we'd like, just until we can get back in the door. Once we're back in the door with these customers, then we can look at more new projects, and then we get better margins. For example, we had a major customer today and we had to come in as a second source, and we knew we had to be overly aggressive. However, if we can get in with that customer as a second source and they can appreciate everything we can do, then the next project we look at, hopefully we're the first source so we don't have those margin constraints. So, again, that, even though -- what I'm saying again is that we're looking -- we’re going to be more aggressive, to get more business in. I think that should -- it won't be as positive as we would like from margin growth.

We'll now go to Hendi Susanto with Gabelli & Company.

Dan, if you look year-over-year, sales decline trends, how should we attribute the decline between pricing decline and lower volume?

We really don't think we're losing business because of pricing, substantially. I think, in our business today, I think where we get hit nowadays is not on the pricing side, but more with the payment terms and inventory, that we see a lot more of consolidated inventory or payment terms of 90 days, 30 days, I mean 60 days. So, that's -- we’re not losing sales, I don't think we're seeing tremendous pricing pressure. I think, again, where we really got more hit is basically that the market is -- like the Ciscos, the HPs, the Alcatels, that market is not expanding as quickly as they'd like to see and I think that's where we're getting hit pretty bad.

And then, in the context of that, companies like Cisco, HP, Alcatel, they are competing with, for example, new players or start-ups. Do you have exposure into, let's say, like start-up players in the data center environment, too?

Yes. They're seeing competition off of people that are building their own data centers. So, again, if you look at -- I think Facebook is a key example of this, Facebook and Yahoo! and other people are building their own data centers and are designing their own data centers. That's where we have to do a better job, is address the internal data center customer that are building their own data centers, and do a better job supporting them and their needs, and support them with power supplies.

And then, the press release mentioned next-generation avionic products. When we should see sales much realized and what kind of products that you are working on?

We have a licensing agreement we developed about a year and a half ago with Radiall on our rectangular connector that is used in many aerospace opportunities, and we're trying to get approval to add a Boeing or Cessna or AirBus now. But that approval process can take anywhere from two to three years, but we're probably about a year away before we do get approval and see some volume. We are locked in pretty well on the 737, and it's our understanding that Boeing will do -- have substantial increases in the 737, the MAX 737, and so that should be a great opportunity for us.

So it's more for, like, long-term opportunity, let's say three to four years from today?

I'm hoping sooner, but again, I was hoping two years -- again, on the 737, we piggybacked Boeing pretty well. So, every time -- and I think we supply about $50,000 of connectors on every plane. Again, if they go up a hundred planes, you'd multiply that by our $50,000.

So, $50,000 on--

On the 737.

The 737, and then, Colin, I would like to ask questions about your EBITDA calculation, mainly about why the gain on sale of property was not excluded from your EBITDA?

The EBITDA that we show in the earnings release is just utilizing our GAAP measures, it's just starting with our net earnings and then, it did not add back any other non-GAAP items such as the gain on sale that was pulled out from the non-GAAP EPS on the last page. It was just the more traditional EBITDA calculation.

I see, okay. Yes, the reason I ask that, because I viewed that gain on the sale as more of a one-time item.

Yes. It's typically a one-time item.

Yes.

If you look at the nine-month number, turning the page here. We also have a large impairment charge from during the year. That is baked into this EBITDA number as well. So, it has not been adjusted for the non-GAAP item that's on the last page of the earnings release.

And then, last question. Dan, you mentioned that you can take out $1 million to $1.5 million out of your cost structure next year. In terms of thinking where to put that in our model, would it be linearly distributed, or should we see some, like, step up, like earlier than later?

It'll start in the first quarter, and it'll be a cost of sale item.

[Operator Instructions]. We'll now move on to Lenny Dunn with Freedom Investors Corporation.

The Power one certainly is taking a little more time than you anticipated to turn around, but it looks like it's headed that way. Now, could you give us a little more insight into the data center business, which is obviously a huge opportunity? You named some of the customers; can you name some more, or is that confidential information?

We're not ready to give -- we're really not permitted to -- they don't like us giving their names out, so I really wouldn't want it. But again, any major service engine company are looking at building their own data centers as we move forward.

It seems like a huge opportunity, because there's a lot of movement to it and that's one of the reasons Amazon's stock was so high and Microsoft moved up and so on.

All those customers you just mentioned are people that we have on our hit list that we're trying to break into.

We'll now go to Alexis Horn-Snyder with Polaris Capital Management.

So, my question has to do with, you mentioned in the press release kind of more emerging opportunities within the hybrid electric vehicles market. So, what changed within that market compared to before that makes you think there are additional opportunities, and if you can elaborate on a little bit of who you're competing with within that market, too, that would be great. Thank you.

Again, a lot of it is very custom work, so we're not really competing or don't see we're competing on it. We had a major opportunity with a company called VIA Motors based out of Salt Lake City. They were working on the vans of the -- they had money backing from, I think, Bob Lutz, the former Chrysler President, was the head backer of this company. With that, we had a very good understanding of what's required in this type of technology. So, this is -- and working with a couple of major companies in North America and Europe with the hybrid vehicles. Mostly not cars, but more in the bus environment, the truck environment. We have signed NDAs with these companies and it tends to be pie in the sky, but we are -- they are signing up for NREs and they are making commitments to us to design these products. We just don't know how -- at this point it's too early to tell, but if you laughed a year ago, it was pretty well dead to us. Over the last two quarters, we see that -- the person we put in charge is doing a substantially better job, so we do think there's opportunities that are out there that we haven't seen in the past.

With no other questions, I'd like to turn it back to today's speakers for additional or closing remarks.

Once again, we'd just like everybody -- thank you again for joining us, we appreciate your time and hopefully we can improve the top line, and again, we're working very hard in trying to accomplish that goal. Thank you again.

Ladies and gentlemen, this does conclude today’s conference. We thank you for your participation, and you may now disconnect.