Good day, and welcome to the Bel Fuse Inc. fourth quarter and full-year 2018 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dan Bernstein, president and chief executive officer. Please go ahead, sir.

Thank you, Allison. 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'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 anticipated growth from the company's distribution channel, the effects of the ERP system implementation and other positive business and growth trends are forward-looking statements as described under the Private Securities Litigation Reform Act of 1995 that involves risks and uncertainties. Actual results could differ materially from those 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 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; 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 may also discuss non-GAAP results during this call and reconciliations of our GAAP results to non-GAAP results have been included in our release. And just before turning the call back to Dan, I just wanted to give everyone a heads up that our EBITDA reconciliation table in our original release was incorrect. There were errors in that table and a new release is coming out. So please disregard that initial table. So that's the third table, which is on Page 7 of the release.

Thank you, Lynn. Before going through the financials, I would like to provide a brief update on how the businesses did from an operational standpoint this quarter and what we see going forward. Overall, we are very pleased that we closed the year with another solid quarter, bringing our 2018 sales to $548 million, our higher sales year since 2015. More importantly, our net earnings for the year of $21 million was the highest in over a decade. Sales during the fourth quarter were $142.7 million, up 19% from the fourth quarter of 2017 with double-digit growth in each of the 3 main product lines. Our backlog of orders remained strong at $171.2 million at December 31, 2018, an increase of 17% from a year ago. The increase in backlog is also seen across each of our major product groups, which is a good barometer for diversified future growth. And looking through at the full year. Our Magnetic Solutions group closed the year with $24.4 million increase in sales over 2017 levels led by high demand for our integrated connector modules that are used in next-generation switching applications. Sales of our Signal Transformer products were also strong during 2018 as new programs with medical and industrial applications moved into full production. We have also expanded the presence of our magnetic products through our distribution channels, which add to the year-over-year sales growth. The backlog of orders from magnetic products grew by $9.7 million or 28% increase since the 2017 year-end. Our Connectivity Solutions group had year-over-year sales growth of $16.4 million. Our Cinch business increased revenue by $8.2 million compared to 2017 led by strong demand for optical and copper products used in encryption, communication and threat detection radar applications. Our Stewart passive connectors also saw increase in sales of…

Thanks, Dan. To provide a quick recap on sales. Sales during the fourth quarter were $142.7 million. By geographic segment, North America sales were $70.3 million, Asia sales were $49.1 million and Europe were $23.3 million. By product group, Connectivity Solutions sales were $46.4 million, Magnetic Solutions sales were $48.6 million and Power Solutions and Protection sales were $47.7 million. Gross profit margin increased to 21.3% in the fourth quarter of 2018 as compared with 18.5% in the fourth quarter of 2017 as incremental sales in 2018 led to improved fixed cost absorption offsetting higher labor costs during the year. In addition, our gross profit margin during the fourth quarter of 2017 have been impacted by inventory-related charges totaling $2 million in connection with maintaining our inventory at the lower cost or net realizable value. Our selling, general and administrative expenses were $22.2 million or 15.6% of sales as compared with $21.1 million or 17.6% of sales in the fourth quarter of 2017. While the increase in SG&A expenses during the 2018 period $900,000 relates to a decline in market value of our COLI policies, which was in line with the general stock market activity during the fourth quarter of 2018. We have already started to see this reverse in 2019. Other offsetting factors that affected that the variance in the fourth-quarter periods were higher legal and professional fees of $800,000 offset by a decrease in bad debt expense of $500,000 and a reduction in depreciation and amortization of $400,000. On a go-forward basis, we would expect SG&A to run between $20 million and $21 million per quarter in the near term, barring any significant fluctuations in foreign currencies. As a result of these factors, we generated income from operations of $8 million in the fourth quarter of 2018 as…

Yes. Can we open up the call for questions, please, Allison?

Certainly, sir. [Operator instructions] We will now take our first question from Sean Hannan from Needham & Company. Please go ahead, sir.

Yes. Thanks. Good morning, everybody. Dan, I was looking to see if I could ask you could provide us with a little bit of detail around the segment. I know you provided some in your prepared comments. Can you perhaps get into a little bit more specificity in terms of how were you feeling with each of these segment today and the activities we ramp here in the first quarter and in '19. And perhaps how that may have change or might be different versus what you were expecting maybe just a few months ago? Any insight there would be very helpful. Thanks.

Okay. Of course, all of our product groups and all of the subdivisions within the product groups, a majority, I would say, 80% of all have been very strong. We have one group, is the Modular group and the DC to DC group out of Italy that have some large customers that they lost, but that hasn't been anything to do with the market conditions just because of the situation with these customers. So overall everything has been, extremely positive. Going into this quarter and next quarter, January was a very -- we saw a strong January, and again, we think we don't see any changes in the first quarter. The only concerns that we do have is there are some IC companies that are seeing some softening in the market and we do hear some rumblings that there might be too much inventory in the pipeline. But so far it has not affected our sales or backlog. So again, that's why I think we're somewhat positive for the first quarter and let's say, I think close out after that.

Okay. Fair enough. Now as we look into the Power group, it is obviously always a topic on each call. There is a lot that you've done in terms of correcting the quality issues from some of the acquisitions you have taken on, there's a lot you've been doing to step-up executions, a lot that you've done in incrementally winning new designs and into new programs some of which has been getting some momentum. And I think you talked about that a little bit earlier today. What more should we expect in the trajectory of these businesses? Is there anything in the background that is incrementally being worked down or is out there a bogey that could accelerate the growth trajectory that you're now setting into today? Or how should we think about how this continue to develop as a product segment for you? Thanks.

Okay. So the Power group, again, as we stated over the last two or three years, we believe very strongly that has the greatest growth potential for Bel from a top-line standpoint. On the Power, we did have is when we acquired the company previous management really didn't focus on quality and customer service. And it took us a long time to change that; a, first change our factory then change the customer opinion, and over the past 18 months, we have all our customers are back and consider Bel to be a power supplier. I think two things that we have done that we've changed recently. One was, I think, as we were so desperate for sales, we took a shotgun approach and really put all restrain on our R&D group without getting the type of results that we would like. So what we have done is, really gone from much more selected approach of what customers you want to deal with, how they fit into us and will they be long-term customers? With that said, we are streamlining our R&D group because we don't have to go with the southbound approach, we know what exactly engineers we need to support these products as we move forward. The key problem now is that we do have two or [indiscernible] key customers that can go anywhere from $8 million to $12 million, $13 million. And when we're talking about data center-type of customer, we do have big client type of customers. Again, those fluctuate very big from a revenue standpoint. Again, however, we do think that we have positioned ourselves a lot more in the marketplace, and currently I think we have 90 NDA signed on high-efficiency vehicles and we're starting to see that business go from $3 million to $5 million. So we're hoping that would double again, gives us a lot more diversification, and we are working with other data center type of customers. So we get that more diversified. So again, we are still shooting. Our goal has always been to get power to that consistent 10% growth over a two to three-year period.

Okay. That's helpful. And then last question here. Just to see if I can get some perspective around a customer of yours directly or indirectly. Huawei, I understand that you're not necessarily even a 5% customer, but can you talk about how do they play into your business historically? And is there anything that we should be mindful of thinking about that relationship or revenue generation and maybe somehow tied to them on a go-forward basis? Thanks.

Well, I think, again, being a Chinese company, I think they tend to go with Chinese vendors in China. I know, for example, they sold their power supply group to Emerson about six years ago, and now former Huawei people have their own power supply company. So we know it's a tough nut to crack. We do some ICM business, but not substantial at all. And for us, it should be a strong benefit because we think people like Nortel, Cisco should pick up the business that they are losing. So I know there are certain countries, Czech Republic, even Canada and the U.S. how they view Huawei going forward. And that they can't buy equipment from Huawei for 5G, they will probably go with -- I didn't mean Nortel, I apologize, Nokia, that Nokia and Cisco will probably pick up that slack and possibly Alcatel, and these multinational non-Chinese customers we do substantial amount of business with them. So we're hoping that our business should increase as more and more 5G is introduced.

Very good. Thanks so much, folks.

[Operator instructions] And we will now take a question from Hendi Susanto from G. Research. Please go ahead.

Good morning. Dan, you travel to China a lot. How do you characterize your China market now? How different is it compared to a typical year?

We always -- for us -- throughout the world, I mean, Europe and China there's so much uncertainty and how they believe in Donald Trump and the job he is doing. There is tremendous amount of nervousness. For us again, for the China market, it's always been very difficult to break into that market because of the pricing parameters that you have selling to, again, a Chinese customer. However, a good portion may be 35% of our sales go to China, but it goes through the CEM like the Flextronics or Hon Hai, Foxconn, and those are non-Chinese companies. However, we do -- we are starting to see more people look at China in a different light. We know the ODMs in Taiwan, they have majority of their production in China. They are now moving some of that production back into Taiwan. We see other multinationals moving products around to get around the tariffs. So if you have production in Malaysia, use that for all products coming to the States and then you use your China production to go into Europe and the Far East market. But again, nobody likes uncertainty and that without question with the tariffs there's tremendous amount of uncertainties and that's not good for anybody.

Got it. And then Dan, given solid sales growth and your backlog growth in 2018 and current ERP implementation, how much improvement in gross margin and operating margin we should expect in 2019?

I will leave that to my accounting group here.

Yes. I think assuming the reasonable sales growth that we're expecting, moderate sales growth, I think we have some leverage ability to move the gross margin up to maybe a point, point and a half. Again, a lot of our production costs are based in the -- in China and depending on which way the trade agreements go, it could have an effect on the exchange rates that we have to deal with on the cost of that -- on the labor costs, particularly. So barring any significant moves in those exchange rates, we have opportunities to expand margins a little bit.

And then another question on cost. So I think Bel Fuse is dealing with increase in labor cost, and I think that has been there for a while and then you have been mitigating or taking actions or increased your labor cost. When we go through like 2019, when can we compare on an apple-to-apple year-over-year comparison with regard to the labor cost? And like how -- and then you should be able to quantify how much labor cost was?

I think we -- to get to an apples-to-apples comparison, we will probably need to get in the third quarter of this year because we had cost increases going into effect in the first and second quarters of 2018. So I think once we get to the third quarter, we get some reasonable comparatives.

The only thing to add there is, in 2019, we are also experiencing increased labor cost in Mexico that will impact the 2019 period, but was not there during the 2018 period. So we have that as well.

Okay. And then the majority of the tariff cost has been passed to customers. Can you quantify how much has been passed and what's next?

I think it's been about $7.8 million, in that range.

In 2018, it was about $2.4 million, in total for 2018, so that was a partial -- that was a partial year.

So like Dan had mentioned previously, most of our sales at least coming out of China do not end up directly into the U.S. So we're not significantly impacted by the tariffs. So we were able to -- basically $2.5 million or so that we had to add.

Okay. Got it. Thank you.

[Operator instructions] It appears there are no further questions. Mr. Bernstein, I would like to turn the call back to you for any additional or closing remarks.

Thank you for joining us today, and we look to speaking to you in the future. Thank you for your time.