Good day and welcome to the Bel Fuse Inc. third quarter 2017 results conference call. At this time, I would like to turn the conference over to Dan Bernstein, President and Chief Executive Officer. As a reminder, this conference is being recorded. Please go ahead, sir.

Thank you April. 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, including such statements regarding the impact of the growth with our distribution partners, the introduction of an Internet of Things application into the consumer marketplace, order volumes for recent customer wins, the contribution of specific products and the impact of the NPS divestiture 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 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. Overall, we are pleased with the year-over-year growth with our connectivity solutions and magnetics solution product groups this quarter, which allowed us to maintain a strong gross profit margin on slightly lower consolidated sales. On a consolidated basis, our backlog at the end of the third quarter was $144 million which is up 20% compared to the same time last year. Revenue in connectivity solutions grew up almost 3% in the third quarter compared to last year, despite a $1.3 million decline in passive connector sales. The growth was led by Cinch sales to the military and aerospace markets as well as sales growth within our distribution channels. Our connector products continue to find applications in the U.S. defense programs such as Joint Strike Fighter and the Patriot Missile. With the anticipated increase in military spend in 2018, we see this segment as an area of growth in future periods. On the commercial aerospace side, one of the major customers has recently increased their aircraft build rates that will strengthen the revenue stream in this market for us. With our connectivity distribution channels, increased orders through our catalog distributors in recent quarters has translated into growth with our broadline distributors in the third quarter. A healthy flow of orders booked during the quarter leaves this group well-positioned as we enter the fourth quarter. Sales in our magnetics group increased by 6.2% from last year's third quarter, reaching a new two-year high of quarterly sales. This was due in large part to a new product introduction at one of our large OEM customers earlier this year. We…

Thanks Dan. Starting with sales. Our third quarter net sales were $126.4 million, down 1.9% from the third quarter of 2016. On a product basis, sales of our connectivity solutions products were $42.8 million in the third quarter of 2017, an increase of 2.8% as compared to third quarter of 2016. Sales of our power solutions and protection products were $39.5 million in the third quarter of 2017, a decrease of 13.5% as compared with the third quarter of 2016. Sales of our magnetic solutions products were $44 million in the third quarter of 2017, an increase of 6.2% as compared with the third quarter of 2016. On a regional basis, sales in Europe increased $2.6 million or 14.3% in the third quarter of 2017 as compared with the same quarter of last year. Sales in North America were down by $3.8 million or 6% and sales in Asia were lower by $1.3 million or 2.7%. Gross profit margin increased to 21.9% in the third quarter of 2017 as compared with 20.6% in the third quarter of 2016 due to several factors. The shift in product mix towards higher margin connector and magnetic products had a favorable impact on our margins during the third quarter of 2017. We also recognized $500,000 gain on the sale of our interest in a China joint venture during the third quarter which had a favorable impact on our gross margin. Our selling, general and administrative expenses were $20.9 million or 16.5% of sales as compared with $19.4 million or 15% of sales in the third quarter of 2016. The $1.5 million increase in SG&A cost from last year's third quarter resulted from several factors. We incurred $400,000 in consulting costs related to our ERP implementation in the third quarter of 2017 and legal and…

April, can you please open up the call for questions?

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

Yes. Thanks. Good morning folks. Thanks for taking --

Sean, we lost you. Hello?

Better?

You are in and out.

Okay. All right. Let me see if I can try here, otherwise I will jump back in the queue. So we have been waiting for power to ramp back up for a period. It seems that at this point it's happening a little bit slower today than your hopes maybe a months ago, although maybe this momentum based on the comments you guys provided in the release, it seems to finally be quality happening. Is that accurate? And then are the identify programs that you folks hit on in terms of the networking solution into the data center, eMobility and cord, are these really the lion share of the programs you folks have specifically targeted to get that power business moving? Or there are others that you are really focusing on here?

Okay. I think, to be positive to your point, we are extremely disappointed since the acquisition of the sale through the power group. And historically, we thought we had this thing, an uptick 18 months ago. And we haven't been able to do it. And every time we think we have got one step forward, we get two steps back, either from a quality problem or a design push out. So at this point, we just are taking a, we will say, pessimistic view but more of a wait-and-see view. Our focus has been in the datacenters going forward. Our focus has been on HEV and industrial. And we see some nice inroads. Again, one of our major customers, which we thought we could have run rate of $4 million a quarter, just incurred a quality problem. So now we are getting dinged on that. We don't know when that's going to be back up and running. So at this point in time, we realized that we had to cut back, get the cost in line. We took out another $1 million of cost this quarter. I am, however, really not touching the R&D centers we have throughout the world. But I feel like when it comes to power, I am the boy that cried wolf. So until we really get some positive signs from more than three or four customers, I think at this time we just simply wait-and-see.

Okay. On those comments, the quality related issue, was that tied to you folks at all?

The quality issue was tied to us and it was a software glitch.

Okay. And then if we do in fact get moving, at least with again going to these programs referenced within the release, the networking, eMobility and cord, are those key to moving this forward? I am still not clear if that really puts a fair amount of scale to accelerate your revenues in that segment.

Sean, our sales to [indiscernible] is not going to take much to move the needle. You know what I am saying? So again, when we have projects now, some of these projects that could be $8 million or $10 million in a year. but again, there can be nothing. Again you look at it, people that are building their own datacenters, like an Amazon or Google or Facebook, they are probably all spending about $40 million to $50 million on power supplies in a year. Now if we can tap into that market, you are talking again, $5 million or $10 million. So there is some big opportunities we are working on and the module group is working on opportunities in the lighting that just got released for people who still run this. So yes, there is a lot of these products are not singles, it could be doubles or triples.

Okay. Fair enough. And then moving to connectivity, you folks sounded encouraged or you sound encouraged in talking about this space but it's down a little bit quarter-on-quarter. I think the segment is down for the nine months thus far this year versus similar time last year. So just trying to see if you could maybe help me to better understand whether there is something here that's turning upward or just help me to close the gap in terms of the implication on the sentiments there?

Well, we had Stewart Connector which is passive connector group that really supports the housing market and there has been consolidation of two major customers and we lost a big chunk of business there of about $4 million, $5 million. However, when we look at Cinch, the military aerospace side of it, that's very strong. And so in this last quarter, we have done a great job with the military and we still haven't seen the upsurge in what Boeing is predicting out there. Boeing is planning to go from 42 737s up to 52. And we have a good portion of the connector business on the 737. So that's why we are very optimistic and we see strong growth in that area. But on that Stewart side, we got dinged on that. So maybe we should move Stewart over to the Bel side.

Fair enough. Okay, so at this point, do you feel that we are going to start seeing some growth acceleration within connectivity? Or is it still going to take a few quarters for that to all shake out before that actually could occur?

Again, it's just that the Stewart negative sales affecting the positive sales in the military aerospace and so forth.

So Sean, I believe the third quarter is the last year-over-year decline that will see really the two that fewer product lines. It first took a dip in Q4 last year. So we won't have that in there starting in Q4 this year.

Okay.

And I think on the military side of things, on the military specifically, I think we are seeing increases in the volumes of release of certain programs that we are involved in. So we are fairly optimistic that the military side of that business will grow better in the next few quarters.

But Sean, what the problem with the military is, it's very, the way they book orders, the way they ship orders, really it's a lot of times not much rhyme or reason when these programs may choose when they ship. So for example, we have one sales guy that had 300% growth for the quarter in sales but negative 300 in bookings. So it is very difficult to really get a handle on how these programs come and when they are shipped and so forth. While most of our other non-military, it's a lot easier to come up with projections of how things move forward.

Sure. I understand it can be fairly choppy. Okay. So if I step back here, how do you feel about the businesses as we are heading into the fourth quarter? Now clearly there are some puts and takes. Do you feel that at least we are operating at a similar cadence as to what we had seen within September? Or is there potentially another letdown before we get the opportunity for some of the right pieces of momentum to start driving the story forward a little bit more consistently?

I think again, I am happy because we are still very profitable, in my eyes, we are still making good profits. Again when I think this company is really going to take off is when we can get consistent sales growth out of the power fleet. And once we can do that, if and when we can do that, then I will be dancing in the streets. Until that, it is a battle for us to get where we want to have to be.

Yes. I think in the fourth quarter, Sean, just to kind of go by product group, the connectivity group, I think, will be pretty consistent with Q3. The magnetics group, we typically see a bit of a dip in the fourth quarter seasonally related to our magnetics product.

Adjustment of inventory for a major OEM customer that get into the trade as well as possible during the fourth quarter.

So we do expect the typical seasonal downwards trend fromQ3 to Q4 in magnetics. And then, on the power side, I think the one quality issue that Dan mentioned, will have an impact in the fourth quarter. And we also are still running down the NPS business and that would reflect probably $2.9 million decline year-over-year in Q4. We have those details --

What would that be on a quarter-on-quarter?

Over the next couple of quarter, we project it to be about $2 million.

Yes.

And that's fluid, it's got one big business that we are manufacturing for a company that we spun off to a firm.

Okay. So then what was is it in the third quarter, just to get a reference point?

It was $2.2 million?

Okay. So the NPS, on a year-on-year basis, we know that that's kind of working down and moving away, but on a quarter-on-quarter basis marginally down, it shouldn't be necessarily all that disruptive at least coming off of where the September results were?

Right. So to get back to question, Sean, in Q3 2016, those NPS sales were $3.5 million and in Q3 2017, they were $1.4 million. And then it's relatively done at this point. We will have a very small amount of volume in Q4 and little if anything in 2018.

Looking at the last, what's that in decline in sales?

Last year's Q4 was $3.3 million. So it would be now around $3 million in Q4.

Okay. All right. Thanks so much for all the details folks and good luck. I will see if I can hop back into the queue here.

Thanks Sean.

[Operator Instructions]. We will take a follow-up question from Sean Hannan with Needham & Company.

Hi folks. Surprise. okay. So I just wanted to circle up on the profitability front. Dan, I think you make a great point in terms of what you folks are able to generate at these revenue levels. So at this point, it seems that even if we were to maintain this type of revenue rate based on some of the mix that continues to change within the business and some of the cost elements, we should continue to see, at least to some degree, some margin expansion from here. Is that is accurate? Is that fair?

At these sales levels, Sean, I am not sure it's going to move much. The mix element will be the driver. If we see our narrow sales outpace our magnetics sales, then you might see a little uptick but it's not going to move that much at these levels.

I think we really need an increase in the overall sales volumes to see something, any further margin expansion at this point.

Okay. All right. That's helpful. And when we think about the power business as that starts to, let's ay, in theory that starts to work in six to nine months from now driving the revenues, you are going to get the benefit of some operating leverage. But I believe inherently we are getting into some products that might be a little bit lower margin at the gross line versus where you are coming in on a blended corporate level. Is that true? Or how do we think about that as an influence?

I think it's true because material costs for a power supplier is substantially greater than anything else in manufacturing.

Yes. I think that's true, Sean. You will see the margin percentage probably go down a little bit but obviously it will be absorbed in fixed cost on the increased volumes. So I think you will see the overall percentage go but the dollars will improve.

Okay. So it's gong to be a balancing act but basically we might end up 12 months from now more in a 20% to 22% range versus something higher than where we would be at this 22% level we had in September?

I think that's fair, yes.

Okay. All right. Thanks so much for the time folks.

Thanks Sean.

It appears there are no further questions at this time. I would like to turn the conference back to Mr. Dan Bernstein for any additional or closing remarks.

Thank you and I appreciate everybody joining the call. I hope you have a nice weekend.

This concludes today's presentation. We thank you for your participation. You may now disconnect.