Good morning and welcome to the Bel Fuse's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please proceed.

Thank you Latonia and good morning everyone. Before we begin, I'd like to remind everyone that during today's conference call we will make statements relating to our business that will be considered forward-looking statements under Federal Securities Laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2023. These statements are based on the company's current expectations and reflect the company's views only as of today, and should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligation to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties and other factors. These material risks are summarized in the press release that we've issued after market closed yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations, is discussed in our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K, for the fiscal year ended December, 31, 2022, and our quarterly reports and other documents that we have filed or may file 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, and thank you for joining us on our call today. We are pleased with our results for the quarter. We continue to execute on our plan for growth and strategic improvement of profitability. As discussed over the past several quarters, the team has taken a multipronged and balanced approach to the way we do business in terms of customers we serve, products we sell and markets we support and doing it all in the most cost efficient manner. Our third quarter sales continued to be healthy, driven by order patterns of our customers whereby we saw different growth profiles across our diverse product offerings. We saw growth in certain markets such as defense, aerospace, eMobility, and rail that was offset in general industrial premise by our consumer. On the distribution side of business, we see some pockets of growth. So however, the distribution channel continues to have elevated levels of inventory that affected our new orders. As we looked at our top line trend, it's important to remember that we are an engineering driven company first. We've been successful in supporting tomorrow's technology for over 70 years and this is a testament to our ability to work closely with our customers and engineers. In developing the future products there is a value associated with that. A few years ago we were eager to support all customers at all costs, allowing us to engage in projects we felt a worthwhile pursuit, but which at times were less than great outcome for us. To be clear, our priority and focus to be aligned with customers will value the quality and technology of our price and are not solely focused on price. We no longer have a problem walking away from these sales that fell below our gross margin requirements. It allows our engineers to work on more beautiful designs and open space in the factory floor to support our growing end markets such as eMobility, medical, industrial and rail. Our internal model in 2023 is building a better value and this touches all areas of our business, HR, finance, product development, business development, procurement and manufacturing. There isn't a single function or department within the organization that doesn't have improved initiative to take place. Our collective actions have evolved and improved profitability and increased cash generation. This gives us financial flexibility to continue to explore various growth and capital adaptation strategies, which could include a potential stock buyback subject to market conditions, evaluation of acquisitions and other strategic initiatives to support future growth of the company. As we approach our 75th anniversary on January 11, 2024, it is exciting to see the recent mindset, cultural shifts that have taken place internally and the level of energy and dedication put forth by our global team as we deliver better value to our customers, shareholders and associates. But that said, I'd now like to turn the call over to Lynn to provide a financial update.

Thank you, Dan. From a financial perspective, sales were fairly stable for our Connectivity and Power segments as compared to the third quarter of 2022, with the largest impact felt within our Magnetic segment. While the Magnetic segment was down from Q3, 2022, we did see an almost 20% rebound from its low point in Q2 2023. Overall, third quarter 2023 sales were $159 million as compared to $178 million in the third quarter of 2022. Of the $19 million decline, $8.4 million was attributable to reduced expedite fee revenue in 2023 quarter versus Q3, 2022. Gross margin continued to increase on a year-over-year basis for eight consecutive quarters and reached 35% in the third quarter of 2023 as compared to 29% in last year's third quarter. Margin improvement continued and was led by favorable product mix and the successful execution of a variety of cost reduction and efficiency program. By product group, Power Solutions and Protection sales for Q3 2023 were $74.9 million, down 2.1% from last year's third quarter. Within the Power group an $8 million decline and expedite fee revenue was largely offset by higher demand for our front end power products serving our networking end market. Sales of our eMobility products also remained strong and helped offset declines in Circuit Protection and distribution sales. Gross margin for our for our Power Group was 41.7% for the third quarter, a 930 basis point improvement from Q3 2022, primarily driven by a favorable shift in product mix, cost reduction effort and favorable FX. Our Connectivity Solutions group had sales of $51.8 million in the third quarter of 2023, an increase of 3% from last year's third quarter with continued strength seen in defense and aerospace. Gross margin for this group came in at 35.8% for the third quarter…

Thank you, Lynn. Over the past months, I've spent quite a bit of time visiting Bel facilities in Europe and in the Dominican Republic and what a big change I've seen from just one year ago. As I look at the mindset shift that has resulted in improved productivity and cost containment at the factory level it has been nothing short of stellar. We continue though to challenge our facilities to improve globally and expect big things from there. We also have been devoting a good amount of time on our material spend to ensure we are aligned with vendors appropriately matched for our size that we believe will ultimately result in a higher level of savings. Dan and I also attended our European sales meeting a few weeks back and believe it's in great hands as Charles it's passed forward to further penetrate Europe. On a side note, Europe has been a strong performer for us this year despite some of the challenges there and we think there is more to be done in this region. Looking out to the fourth quarter, based on currently available information, we provided sales guidance in the range of $146 million to $154 million with gross margins roughly in line with Q3, 2023 levels. In addition to some voluntary trimming on the top line, as Dan mentioned, the channel continues to be over inventoried, especially with our distributor customers. We expect this situation will continue for another two quarters or so before it returns to normalcy, though there are certain pockets of growth in the channel which is good to see. From a supply chain perspective, there has been easing and availability of passive components, but we are still seeing longer lead times for others, mainly on the IC side. In summary, it's been a busy year on all fronts, the progress made in many areas of the organization. I'll reiterate my sentiment from prior quarters and that is that we are on this journey of continuous growth and improvements. Change is rarely linear or immediate. We do know we are building a healthier organization that's more focused on pursuit of growth and demanding operational excellence. These are all things that excite all of us. With that, I'll turn the call back over to Dan.

And I thank you Farouq and at this time, I'd like to open up the call to any questions you might ask.

Thank you. [Operator Instructions] Our first question comes from Theodore O'Neill with Litchfield Hills Research. Please proceed.

Thank you and congratulations on the good quarter. Lynn, I know you said at the Jeffries conference that your debt is as low as it's going to get. But I was wondering if you could talk about either M&A or how you're going to deploy the capital because at the time of the conference you didn't have $100 million in cash and you do now and you're talking about bringing inventory turns down as well, so that would add to your cash balance as well.

Yes. So, I'll just jump in here Theo. We did have a nice cash build this quarter. I'd also point out that we're roughly on track to double last year's CapEx spend internally here as we look at kind of various growth avenues and investments. As Dan had had pointed out too we are obviously always on the hunt for M&A. We think that there is a little bit of a slowdown right now in the M&A market given some of these global circumstances and kind of situations that we keep reading about. We do believe that will change and as we build our cash here obviously we're always looking for ways to invest in the future of the business for the long-term. So we think that there will be a use for it. History has shown that, if you look you know back to a bunch of years quite frankly. So we do know that there will be a use there for it. But as also Dan called out, we're always looking for ways to improve our capital allocation strategy, so I'll kind of leave it at that.

Okay. In the eMobility segment, are you seeing any particular pockets of strength or growth in there? And could you comment just broadly about if you're seeing any inflation effects in the supply chain?

Yes, I mean inflation is all around, you know, whatever the wage level and obviously that doesn't just impact us, it impacts all of our suppliers as well and our customers. So I think inflation is something that everybody's wrestling with and how to contain it. So as we think about automation, as we think about streamlining, there's a big emphasis on ensuring efficient operations. So it is definitely something that we are thinking about and managing as quite frankly that with our numbers, our facility consolidations will help us manage and some of this inflation, but it is a point of consideration quite frankly through everything we do, whether the customers would pursue the products, we pursue our pricing, our operations. So it's definitely front and center. So we do think it is something that everybody is wrestling with quite frankly.

And on the eMobility side, any particular pockets of strength there?

Yes. So on the mobility side, generally maybe just a general comment on industrial eMobility. These are big ticket items. They cost more than traditional let's say ICE buses as an example. So as a result of that we're still seeing overall industry excitement around the future of eMobility. I think some of -- the nature of our customers we are seeing that are called a little more startup in nature, so as they go through funding rounds, those are points of consideration. But the good thing about our eMobility business, it's diverse and it covers customers from startup mode all the way to kind of mature household names. But overall I'd characterize it as a very good end market. But like any other market a little bit of challenges there at the customer level, but I think for the most part we're bullish on that for sure.

Okay, thanks very much.

Our next question comes from James Ricchiuti with Needham and Company. Please proceed.

Hi, good morning. Maybe just to close the loop on the eMobility side, I think you said at one point that you expected this revenue to double this year. Is that still the case or are you seeing some macro influencing some of the demand in that market?

Yes, so Jim, last year eMobility sales were in the neighborhood of $20 million for the first nine months of this year we're at $22 million. So probably it will not be doubling this year at this rate. But we've already been seeing, we're already exceeding last year's full year eMobility sales. So we'll not double this year.

Also I think on the eMobility side given some of the components, there was a little bit of challenges in getting products out the door earlier this year. So we do expect a nice finish during Q4, but I don't think it will be at double level.

Got it. Sure. Yes, there's a lot of moving parts on the shelves line. Just you are exiting some, you've exited some low margin business. You have these raw material surcharges that impact. Is there any way to think about what the revenue growth was organically nine months or Q3? I'm just trying to get a better fix on the top line.

So revenue excluding PBB?

Yes, I mean, Farouq we could discuss this offline, it's just we -- I know that you are deemphasizing some low margin business that's coming out. There's an impact from the raw material surcharges, but yes, is there on an organic basis are you seeing growth? Clearly there's some overhang in the channel, the distribution channel, I think we all get that.

Hey Jim, I think because of the long lead times that we're faced over the past 24 months, our pricing that we put in place really in effect that we didn't lose out because of price increases. I think going forward that might change as lead times come down. So as I said over the past 24 months our new strategy, I'm looking at margins and not just taking business and take business hasn't really, we haven't seen the effects of it because of the lead times, so most of it is coming from PBB.

Okay and maybe just moving to the facility consolidation, you gave a little bit of color on some of the early benefits. How do we think about the balance of that rolling out over the course of 2024 is that expected early in the year or is it going to be spread more evenly over the course of the year?

I think, the way I think about it Jim is, it's kind of a phased rolling approach. So we started seeing a little bit of benefits in Q2 more in Q3. We expect to see more in Q4. My guess is they're, if I were just going to hedge a little bit, my guess is that there will still be a little bit maybe cost that dribbles into Q1 next year. But I think largely we expect that that this will be behind us in 2023 maybe with a little bit of overhang and into next year. But I think for the most part we made some pretty good progress here. So yes, I think we'll largely see the benefits of that throughout all over next year.

And just to circle back quickly on your question about the expedite fee revenue, we do now have in the earnings release itself in the non-GAAP tables, GAAP net sales and what the expedite fee revenue is along with the non-GAAP adjusted net sales. So for the nine-month period, the numbers are noted there. So on that basis year-over-year for the nine-month period it was a $22 million increase in non-GAAP adjusted net sales which was just under 5%.

Thanks Lynn for pointing that out. And then just in terms of that some of the business that you deemphasized, have you put a number to that through the nine months?

So I mean we talked about in the last quarter there was kind of a slug of roughly $9 million that we talked about. Right away I would also tend to think about it though Jim it's really at a SKU at an order level right. So when the orders come in we kind of or when we quote stuff we're going to put our price that that works for Bel Fuse right. But maybe we'd ultimately not get there, so we could walk away. So I tend to think of that as regular way SKU maintenance as opposed to kind of big grandiose walking away. I think we're -- I'd say we're largely probably behind some of these kind of grandiose things and it's going to become an order driven event. And remember orders could be small as cost $1000 or smaller and up to hundreds of thousands of dollars. So it's really going to be done at that kind of line level.

Now that's clear Farouq. Thanks for that. And you too Lynn, I just want to make sure I'm clear on one other thing on commercial air, you gave up bookings number and I just -- did you see say what the commercial air revenues were in the quarter? I think my recollection is the revenues from commercial air were $15.9 million in Q2 or was that a bookings number?

No, you're correct. So the commercial air sales in Q2 were $15.9 million, for Q3 they were down a bit, they were $11.3 million for the quarter.

Okay. But generally it sounds like you're still seeing pretty healthy demand in that market.

That's right. So as we mentioned earlier, we did have a record bookings quarter for that end market in Q3, so the bookings for Q3 was $15.7 million.

And I think Jim, the way I kind of think about these end markets kind of defense, kind of it just the ordering patterns and shipping patterns kind of are little bit maybe more and more lumpy. So I think that's why I threw -- as Lynn noted with the bookings and kind of as and obviously the conversations we're having with our various customers, is kind of what gives us that sentiment of positivity on outlook.

Got it. Thanks very much. Congrats on the quarter by the way.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Hendi Susanto with Gabelli Funds. Please proceed.

Good morning, Dan, Farouq and Lynn.

Good morning, Hendi.

So Dan I would like to hear your insight into inventory at the customer and distribution across various businesses. Like we have heard like some many companies reported broadening weaknesses in industrials and I'm wondering like how much we should factor that in going forward? And then if you look at Magnetic, can we assume that inventory correction or digestion is at the bottom of the half of market? And then I'm also wondering, like when we may see a growth recovery in Power Solution and Protection?

Okay, I think we talked more Power Solution and Protection a lot of it, again it is coming from the Circuit Protection area and that's a very heavily distribution period business where most customers buy circuits, fuses, circuits through distribution because of the low price. From everything we understand, people like Arrow and Avnet, Digikey and Mouser that they still have to work through their inventory. They really brought away too much inventory and that's their highest level. We hope and believe and most of it should be flushed out by the 1st or the middle of the second quarter and we should get back to normal ordering at that point in time. So I would say middle of second quarter next year everybody's predicting that line from an order process will go back. And then sorry, what was the next question?

I think that answered because your collaborators about return to growth, right, Hendi?

Yes, yes, yes.

Yes and then may be just to also kind of supplement that Dan kind of triggered my memory here. So as a reminder generally Q2 and Q3 are strongest quarters, Q1 historically is our weakest quarter and then Q4 somewhere in the middle. So the way we kind of look at just kind of the guidance we gave out is kind of the normal cadence of Q4 with some of the holiday patterns and you know goal that we can in [indiscernible] and so on. So I wanted to kind of throw that out there.

Yes. And then Farouq, how sustainable is the gross margin at 35% level now?

Yes, I mean, so I mean if you look at it right, we see, we do know that there is more cost improvements to be done within the business. Magnetics, while sequentially up on sales is still down on low margins. So we do expect improvements in the Magnetics side of the house. And so as I think about those two things coupled with weakness that we do see a little bit of power as Dan mentioned and also a little bit of connectivity. So we've yet to hit on all cylinders, right. So our expectation is, we can kind of do this in some pockets of weakness. Our expectation is between cost and a little bit of recovery and across the business we do think it's sustainable. Now it doesn’t mean that we may be impacted here and there, sure, but at the end of the day I think our expectation is at the gross margin level we're -- at a consolidated level we're kind of in the zip code of where we should be. But at the same time we are working through a lot of things internally and externally here.

And then the press release also called out rail application. Would you refresh our memory? Like where the opportunity and then where your products are in rail applications?

First of all, so maybe it's on the rail business, the rail business is really quality business, but as we know rail I kind of think of it as a step or move from kind of Defense in the sense of ordering patterns. The complexity and demanding nature of rail is a business that we've been in for I think over for 40 years. So this is a great business for us. We've seen more investment coming just quite frankly globally, but predominantly out of Europe and Asia I would say as they invest in their rail applications. So we're seeing increased orders there. also some of the new kind of products and quite frankly we reassigned some more resources to focus on that market. So we're seeing the benefits of that here. I think we started doing that in 2021 or perhaps early 2022 to kind of really focus on that side. In terms of applications, we tend to be on the passenger rail side of the business and we have various applications through other cart anywhere from I think the lighting application, signaling and kind of other components. So it's a pretty diverse business product for us. In terms of size of that business…

Yes, so our rail sales in Q3 were $6.4 million. So it represented about 9% of the Power segment.

Got it. Okay, yes. Thank you, Dan, Farouq and Lynn.

Thank you.

Thank you. At this time, I will turn the call back over to management for closing comments.

Thank you for joining us today and we're looking forward to speaking to you next year and have a good day. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.