CFO Farouq Tuweiq, NASDAQ 4th Annual Small Cap Forum

Thanks, Adam, appreciate the introduction. We're very excited and honored to be here. NASDAQ is obviously a big ally of us in our story and supports us in multiple ways. So maybe thank you to the NASDAQ side, and we appreciate the opportunities to, quite frankly, spotlight our story. I think as we get into some of the lessons we learned along the way, those were instrumental, and taking advantage of that was pretty critical. So we look forward to sharing our story with you, and hopefully it's an interesting factoid for some of the folks out there.

Yeah, sure. So Bel Fuse, we are a global manufacturer of electronic components. Our tagline is 'power, protect, and connect' electrical circuits. We are based in New Jersey, in West Orange. We have a global operational footprint with manufacturing sites in North America, Europe, and Asia. We pride ourselves on being engineering focused, hand in hand with our customers, and that's been really a recipe for our success. We service pretty demanding customers in places like defense, commercial airspace, rail, network data centers, industrial, and then we do a little bit of consumer as well. We generally excel in the low to medium volume type business with medium to high mix. We obviously go beyond those parameters, but that's generally our sweet spot. Over the past 15 years, we've been heavily growing both organically and inorganically, as we've done 15 acquisitions over the past couple of decades. I point to that because we've been around for 75 years; we were founded in 1949 by our current CEO's father, who grew up in the business and took over as CEO in 2001. I point to that because, believe it or not, we started out in the business of making fuses for black and white TVs back in '49, and then we went to color TVs and personal computing. The theme is continuous evolution with technology and competition. Obviously, we've seen the competitive dynamics change in our industry from the Asian side, the overall approach to business, and just the overall level of competition. We've really established ourselves and pride ourselves in our ability to adapt and transform technology over time. So to your comment, Adam, around what sparked this: during 2020, when we were all obviously during lockdown with COVID days, our CEO Dan took the opportunity, not traveling on planes and going out, to really reflect on where we have been. He saw a mismatch between the good products, the good customers that we service, and our stock price and our shareholder perspective, and obviously the financials that were a little bit off market. So as he wanted to reconsider and redraw where we've come from, he made a conscious choice that big changes and a reset, if you will, on where Bel Fuse is. He initially did so by trying to tackle the main partnership at the executive level. That was in early 2020; Dan reached out to me, and I ultimately took the plunge in February 2021. Dan and I, along with other folks, spent really the balance of 2021 thinking and reflecting on the previous decade: what has worked, what hasn't worked, where should we be, how do we increase shareholder value and become a live up to our potential of where we are. So 2021 was a big year of reflection. I'll just highlight a couple of quick points. 2022, 2023, and 2024 were very busy years. In 2022, we focused on SKU profitability. We took certain pricing actions, we walked away from business, we added and replaced members of the executive team, we hired a new head of sales in Europe and ultimately replaced and supplemented our European sales team. We kicked off four facility consolidations as a public company in the US, UK, and China. That was a big move, but we took it because it was the right thing to do. We also increased our investing in IT and all things data. Heading into 2023, we restructured nearly the entirety of the sales team in Europe, as I said. We redid executive comp for the first time in 2023 with clear targets and metrics and outside consultants' help. We added new folks to the executive team as well, and then we completed the four facility consolidations I just talked about. We really started focusing on factory and operational excellence, including raw material procurement. 2023 was our all-time high CapEx, so less factories, more CapEx as we really lean into our cost management. 2024 was really more of the same: strengthening the executive bench, we implemented a sales commission for the first time in our team, and we created two new key positions: Global Head of Sales and Procurement. When we look at all of that, our stock price really is simply an output of all the efforts that went in. To your point, our stock, we've been fortunate, we've been on a nice run despite some of the market challenges that were happening. When we boil it all together, we say, where are we at today compared to 2021? We were around 5% EBITDA margin down; today we're 20%. We were roughly four times levered back then, and then we came into a net cash position in Q3 last year. We implemented our first stock buyback earlier this year, and we're doubling down on investing in strategic and exciting growth areas. So that was kind of the pivotal moment, what we did and where we came from.

Yeah, so in the spirit of revisiting everything we did, kind of what we were saying about earlier in 2020, there were things that we needed to upgrade and do across the organization, down to the factory level, down to the way we make things, the way we sell things, the way we invent things, and the way we do our back office, whether it be on the HR side or on the finance side. So specifically on the finance side and function, we in 2021, towards the beginning of my time, we had seven or eight ERP systems, with many of them being outdated with limited capability. So there was a lack of visibility on things like SKU profitability. As that got completed, we really came down to having two—roughly 80% of our business on one instance, on another. But once the system was implemented, we went on through this journey to really scour data and examine objectively where we are as a company. That looked at backlog assessment, profitability, segment and sub-segment P&Ls, assessing factory level profitability, and looking at customers with a different lens. We wanted to be objective to understand where things were. One of the things that we said in 2021 is, with the new ERP system, we really need to measure to manage. As we went to that measuring mechanism—what are the KPIs, what are the comps, what the things should be, what did they look at in the past—we just asked a million questions. Because in my experience with companies that are trying to grow and change, they're really focused on managing the business, but they manage it from gut, from experience, without those measurement tools to provide some level of objectivity and north guiding stars for people to aim for. So we really wanted to get to this objective element of improvement. So we did a lot of this kind of stuff. The other thing we did, obviously, we had to close our books faster, we had to be more accurate. We started this journey when we were a little under $200 million of market cap. As you scale, the investor makeup changes, so your answers need to be more sharp, more thoughtful, more detailed. As a result of that, we had to do it with the ERP system that allowed us to get this data. As we come into an accelerated large accelerated filer next year, as we've gotten bigger, those stakes get higher. So this concept—you never arrive, it's always evolutionary, especially as people change from an investor perspective. In terms of where we want to allocate capital, again, it has to be data factual driven. Given we were four times leverage initially, we wanted to pay down our debt and get that under control in a rising interest rate environment. Once we accomplished that, our priorities started shifting a little bit. So we did our first buyback program since 2012; we implemented it earlier this year. Then we started generating cash, and we had this cash problem: do you invest, do you buy T-bills, do you do money market? So some new elements in our classic corporate finance type things that we're focused on. We started doing hedging on the FX and on the interest rate again to introduce some stability on earnings. So all our finance structure was, let's call it, revamped. Now it's more about standardizing processes instead of relying on people. Let's look at processes, having visibility at a corporate level versus having capability in different locations. Add it all up, introducing commonality of language and mindset so that we can reduce redundancy and increase resiliency within our business. So it's been a pretty holistic change. As we've automated, we've been able to deliver better outcomes, better data, better results, better intelligence with less resources and quicker response times.

Yeah, so when we were $180 million market cap with, let's say, a few years where the stock hasn't really gone anywhere, and this was in 2020. If you recall, the advent of the SPACs were coming on pretty big, and a lot of strong upward momentum in a lot of stocks. So I joined in February 2021, and we got kicked out of the Russell 2000 Index in May. We became too small. So all of a sudden, you're not in any index in a world where everything is cool on the back side of it. And then we also just had—we were not getting out there, we were not a visible company. Historically, we would do two to three conferences a year. That's not going to cut it in a crowded field and an environment where I think we hadn't done an NDR since 2017, 2018. So in 2021, we said, listen, we just want to get on people's screens. We want people just to know who Bel Fuse is, because as we go on this journey of transformation and change, at least people are monitoring us. Then we start building investor credibility and awareness. So that was the big thing: credibility and awareness. In December 2021, we finalized our plan, we partnered with a great IR firm. What we did in 2022, I think we did 13 or 14 conferences versus our usual two to three. We called every bank, we called every shop, we said just take a chance on us. Luckily, we found allies. I think we did four or five NDRs that year as well. So we started getting on people's radar. As we started seeing improvement in our margin profile, people started noticing us. So that was kind of step one: just awareness. As we started getting more people aware and more people kind of spreading the gospel, people started writing articles about us, which was great to get that advocacy. Then as a result of that, we started getting more inbounds from people. As we grew beyond the awareness side, it became this concept of we still need to build credibility, and then we also need to be transparent, maybe to a fault. Because to build credibility, you need transparency, and that means in the good times and in the bad times. We started doing that, and our investors always knew where we're going, what we're doing, what our sins are, what's good, what's bad, what's ugly. That I think helped drive some of the conversations here. The other thing I would say, it's important to hear back. We were a small company at the time, $180 million, wanting to grow up, but you need the investor feedback. So as we started having these conversations, it was very valuable to get this conversation from, listen, you should disclose this on your earnings, you guys overemphasized this, and you didn't push on this. So this was that two-way street we thought was pretty important. Where we are today, it's always working till tomorrow. There's always a new set of investors coming in, but transparency is paramount. Do what you say you're going to do, in the good and the bad, and make sure that you are listening to your investors. We think that's a valuable opportunity to potentially pull levers that add value to everybody.

Yeah, so I'd probably put it in three buckets, just our personal journey here. Bucket one, let's call around the $200 mark. Those conversations, I think, were with smaller investors, let's call maybe retail plus—somebody who manages a little bit of money. It was really hard to get on a call with your mainstream guys that invest in the $2 to $500 range, but we got on some of those guys' radars, which was exactly what we accomplished. That kind of initial cohort was pretty important for us because they're pretty vocal, maybe more retail or smaller investor or retail plus. They would focus on it a little bit maybe in the short term, like what does your next quarter look like, where's the world go, where's the world end, and a little bit more around, let's call it, shorter term. I think we also, as we started getting some more publicity, we started seeing that level change maybe around let's call it $400, $500, maybe $500, $600 range. So as we start going from the $2 to $500, we started getting some of these folks reaching down. They're waiting for you to get up to that level, and then we started getting folks in here more that were trying to gear to that $400, $500, $600 level. At that level, it seemed to be slightly changed, more bigger funds, slightly bigger funds with a little bit longer horizon for a hold. Maybe they manage some family's money, some personal money, and they were maybe not focused on the next quarter or two or three, but what you're going to look like in the one to two year world that we're in. They dug into the story a little bit more, so the questions started becoming a little bit more nuanced. Obviously, there's always exceptions, but I'd say they were deeper, they started to focus on your sales organization, how do you develop, so a little bit more sticky type questions. Then there is obviously, as we're going through this transformation, there was a focus on how sticky is it, out of COVID, right? This was 2022 time frame roughly, and we had to continually improve that. So the focus was equal, let's say, between what did you do and what will you be doing going forward. I would say M&A started coming into that conversation a little bit, along with some of, what is it, how do you think about accretion dilution. Then as we scaled to that $900 level, as we approached the billion, we started getting also a different set of folks that started reaching down a little bit, waiting for you to maybe get to a more acceptable level, because obviously these folks have different equity slugs that they got to put into play. So as we got to that, it was more definitely larger funds, more kind of folks that we maybe hear on a more regular basis. I would say they were very focused on—they wanted to understand our turnaround, but that was maybe number two. Because okay, tell me how you got here, and really the conversation shifted to, well, what are you going to do to grow? So it became, let's say, a relatively hardcore discussion around organic and inorganic growth, because you've kind of proven out a little bit. The market these days is going against us—too much inventory in the channel in general for 2024 in the industry—but we've kind of proven our ability to hold our margins in a pretty difficult environment. So that is kind of, you got to discover what you have in bad times. When times are good, it's very easy for everybody to make good margins and good money. So as we went through the hard times, it proved it out to investors, and now they become more growth oriented. The other thing obviously is we got back into the Russell and some of these other indexes, which also was another kicker in terms of demand generation.

Yeah, no, we were over levered, right, with a low EBITDA margin and our cash flow, I'd say, wasn't there. So our focus was—it's an interesting discussion. We were making 5% EBITDA margin, let's say 26-27% gross margin. Today we're at 36%. So as we scaled that, we said, okay, we don't really necessarily like some of what we saw in our networking capital in terms of our receivables and how long people are taking to pay the bills. But we had to make a choice: do we go and say, listen, we want to address pricing, and by the way, I'm going to take down your payable days? That was a little bit too much of a tough pill to swallow. So we focused on that P&L as a pathway to generate cash flow and pay down our four times leverage business. As we focused on the P&L, our EPS went up. Now we understood that balance sheet items, networking capital, are important as well, but we couldn't hit everything at once. It was a little bit of a journey. So we focused on the P&L, generate cash flow, pay down your debt, opens up optionality, facility consolidation, CapEx, and so on. So we did not experience the need for—I have been involved in my previous life with that situation where you do need capital. Hopefully, if that's a situation that you need to go through, obviously there's the math to think about what's the cheapest cost for capital and all that kind of stuff. But I think there's an important user-friendly element to it. So who are you bringing into the story? Are they going to be a constructive partner, and are they going to be additive to you, or are they going to be short-term oriented? So ultimately, if you need to find a solution, I would say you got to figure out how to get to yes with the least amount of pain during that journey. But I think sometimes what I've seen with people that struggle with those issues is they really let perfection be the enemy of the good. It's like, we really need capital, okay, it might come with some things that are not ideal for us, but if we believe this is what's going to get us to a better tomorrow, better shareholder value, and a better long-term platform, then you need to go for it. That would be my kind of suggestion. So maybe not getting hung up too much on the ideal outcomes if you really are in a jam and need capital.

Yeah, you know, I think sometimes when I speak to my peers or back in my investment banking days, people tend to think of these things as isolated lanes. The reality is you need to have a healthy symphony of inputs. So we talked about the investor side of it. Obviously, you got to perform, so you come out with your results every three months and say this is what I did and this is what I'm doing. You need some people to read that, and we call them investors. You're going to need analysts that believe in you because investors, especially at our size—and we were at the $200 to $500—the analyst community is very critical because they do get a lot of inbounds from investors that will call and check on the model and to understand the story. So you need research folks, you need the investors, and you need some eyes on you. It's a very competitive world out there. So on the publicity side, any kind of exposure like this, or like we did the TD Ameritrade interview one time, there were a couple of magazine write-ups on it. While it's maybe a little bit out of my comfort zone, ultimately if you believe that's good, then just kind of go for it. Those things along the way and being top of mind was very critical because as we came out on a quarterly basis and did something or we did an announcement, people saw the value in that and they saw these guys are doing stuff right, they're on the move, they're doing what they say they're going to do. It all goes together. From an analyst perspective, as we know, the game has changed a lot; it's expensive to do equity research. So how do you do it? One of the things that we used to say back in '21 is the results you want in three, four, five years, you got to work for those today. So back then, when we went to all these conferences, we knew we were too small for anybody to care about us, and people just wanted a fee. But we wanted to know who we were dealing with. So if that fee event does come or they launch research, we know who we want to be in a relationship with, who understood our story, who kind of chased us a little bit, versus if you just pay a fee, everybody will jump in the room. We get that. So that's why we went to 13 or 14 conferences: partially we wanted investor exposure, but we also wanted to understand who could potentially be our partners. As we've gone through that journey and done it, we become a good story because analysts want to sell to their clients, and they want to have that side of it. So if they see you as an attractive story and accessible, doing what you're going to do, that's a good thing for them. So we've had some success in picking up research without paying fees to that, and I think we'll have more of that. So that is key. Then on the publicity side, I would say just go for it. Whether it be a TD interview or a spotlight with the NASDAQ folks, one of the resources we're talking about, it's ultimately fundamentally good. It gives you a marketing opportunity to take that and put it out to your email list, saying, 'Hey, look at us, we did something.'

Yeah, you know, we still have investors that bought in when we were $180 million market cap all the way to a billion, so they're still in. Then you picked up some other people along the way, and now there's a new set of people. So I would say, I think maybe the classical perspective is all investors want the same thing, but the reality is that's not accurate. You're getting input from different people that want you to do different things. So as soon as we came cash positive, literally the next day people started pounding the table on buybacks. We said okay, we're that cash. But then some people said no, we want dividends. The classical approach to somebody at our size, dividends is usually not the main driver. We do pay a dividend, but usually it's not kind of the thing. Then we actually had the request of what about a special dividend, which was really interesting to me. Then we had people say, listen, ignore all the buybacks, I don't want to do any dividends, just do M&A, go do M&A. So it was very interesting to see how different they are. Obviously, we're taking all this feedback in, and then we're saying, okay, well what is good for the company and where does it align hopefully with the majority of your shareholders? Given that you're not going to be in the business of pleasing everyone, the vocal that is not happy you will hear it. But ultimately, I think the north guiding star is you want to increase shareholder value and be a good steward of investment, be transparent even if we disagree on something, and ultimately you try to do the best. So that's been a little bit surprising, that divergence of opinions, to be honest with you. But ultimately, you get some people who are long, some people are short term, and everything in the middle. So some guys say, listen, don't return a dollar, just scale this thing because in our industry there's a real connection between multiple expansion and scale. Nothing too surprising there. So it's been interesting, and balancing all that input. But ultimately, we say we want that input because it then gives us the opportunity to distill it and communicate to the board versus never having that input and then getting surprised somehow.

Yeah, so obviously you get bigger, the stakes are higher, the demands are higher, and everything else in between. So as we have scaled, and back to Dan in 2020 sitting at home during the whole COVID time and kind of huddling with advisors on the board, there was an opportunity to infuse some new perspectives on the board and introduce diversity. So in the last four years, we have roughly a change in 50% of our independent directors. As we've gotten these new opinions and new perspectives, they have really enriched our mindset on operation. There's a cascading impact of how that does so. New members, we kind of did away with our old committee structure and did it to a more regular way committee structure. It was in 2023 when we brought an outside consultant for the first time to talk about executive comp with clear targets and metrics. We redid the board comp, so some of the charters got updated for various obvious reasons, some required, but some of the things we wanted to be what our identity was and being a little bit more front-footed on that. Like I said, now we're at the size we're going to go forward, these things matter. You're on the spotlight. You fought to get into that spotlight from $180 million. Congratulations, you're there. You kind of got to look like the part a little bit.

Yeah, so as I said, I was the first CFO in the company history. I joined in February 2021, and there were seven of us that report to Dan. Today, between February '21 and today, of the seven that report to Dan, one of them kind of predated that period, so there's been six including myself that have changed—some internal and some external—to put some fresh legs on the field and infuse that idea that demands excellence. As you want to kind of grow up a little bit, you need to make sure that the talent pool stays up with that. One of the terms that we use is really a strong bias to action. So if we see there's something that's not working, then we need to make sure that we have a strong bias to understanding what the problem is, develop a plan, and go for it, and not let perfection be the enemy of the good, as I was saying earlier. Because sometimes you're going to have to take some shots on goal to see how that goes. So the mindset shift has been obviously at the executive board level, executive level, and then really what's more important is on down. We want to make sure all the departments from R&D or sales are focusing on the right products with the customers who value Bel Fuse's technology and customer service. We don't want to be everything for everyone, which I think maybe that was a little bit of what we tried to do back in the day. But we bring a lot to the table in terms of technology and customer service, and everybody now understands that. We've evolved, we've grown. So change for us, quite frankly, seems to be weekly. We're always tinkering. We're coming up on three years in this kind of journey, and we tell investors we're still kind of there. We announced our sixth facility consolidation on our last earnings call, so we're still kind of getting there. And we're not doing that to shrink our capacity; we're actually increasing it with automation and lean and all that kind of good stuff.

Yeah, I think one of the things that helps us, quite frankly, and not losing sight, is we're generally a longer design cycle business. We don't do a whole lot of consumer and a lot of auto. We'll do long design cycle business like defense, which is our largest end market today, or space or commercial air. So you're going to chase business potentially for years before it starts turning into revenue and dollars. So by default, you're kind of locked into this. I would say on average, we're one to two year design cycle before you start seeing influence. So the good thing is people that invest in us understand that we're not, I don't know, a quick service restaurant or something like that where we can do a couple things quickly and then we'll see the impact of that next month. In some cases, sure, like our buyback was pretty quick to put in there, but just on a fundamental business level, it's not quite there. In terms of KPIs, obviously we have financial ones and operational ones and everything else in between. But with the CFO hat, obviously revenue growth is pretty important, and then really gross margin as the first line of defense for us in managing your SG&A. So we want to make sure that we have operational leverage, a little bit faster growth on the bottom margin profile of the business than the top line. That's pretty key. We also focus on networking capital and inventory turns and free cash flow and obviously ROIC. So these are kind of things from a factory perspective: on-time delivery, first pass yield, what we call absorption, are pretty key metrics for us, just to call a few out. On the M&A side, we did our largest acquisition in our company history from an enterprise value perspective two or three weeks ago. We announced it, which was a great addition for our family. Obviously, there's the math and the story. The math: the returns, your ROIC, your multiple, your pay synergies, your EPS accretion dilution—let's call that the math. And then there's the story: how's it fit, how's it additive, how does it help me scale? Because when we need to do is scale as a company, because that introduces a different level of shareholder engagement. So it's pretty broad based in terms of where we focus on.

Yeah, so we keep an eye out on all folks that, whether it be narrowly or broadly, compete with us in electronic components. Our industry grows a lot by end market. So if you're a sensor person or a connector person selling to defense, you're generally going to grow up together in terms of growth rates. So we focus on some multi-billion dollar folks and some of the smaller folks as well, because the size does matter. So we look at all of them, and then we develop what we think is the right approach, balancing what's out there. One of the things that we say is, just because we may win internally on our numbers, but if everybody else is going right and we're going left, even when you technically win because it was your target, maybe it was an off-market target. So we're very focused on what the world out there is doing.

Yeah, I'll give you a couple points here. Measure to manage. Data kind of isolates a lot of the story and the noise you hear. You need something to measure and anchor on. If you don't have it today, start measuring today, because after a couple of three, four quarters, you're going to have trending. So just because you don't have it, don't not measure it. So measure it and then manage it. We understand sometimes it doesn't always work, but you got to measure to manage from our perspective. Change will always take longer than you think, but you got to keep pushing forward. You can't become complacent. You just got to focus on that finish line. If that finish line is a good place to be, then you kind of just got to go through it and make sure you get there in a smart and expeditious manner. In terms of investors, I think you got to be active, be accessible, be transparent, and quite frankly, look at them a little bit as an asset from an intel gathering perspective. Investors talk to a lot of people, they talk to a lot of people in different markets, sometimes competitors. So hear what they have to say. Maybe there's a nugget you're not aware of, some thing that people highlight on their calls. They can do all the work for us, and then they distill it from a feedback perspective versus I have to go to 20 calls. We obviously have our day job. So look at it as really an asset and kind of really leaning in. And we're not done on a journey. Then operational scaling: as you scale or shrink to grow, have your punch list, but you can't do it all at once. One of the things I get frustrated with, and I'm a big fan of paralleling actions, but sometimes you do have to sequence because you don't want to burn out the team. Maybe the team is not tested yet in terms of turning things around. And let's not forget, we are a public company, so we don't want to blow a tire along the way. Things that inevitably will go wrong on occasion, so you need to make sure you can have a quick pivot, but focusing on that finish line if it's a good place to be.