Good afternoon.
Welcome to the 28th Annual Needham Growth Conference. My name is Jim Ricchiuti, Senior Analyst in the Equity Research Department at Needham and Company covering companies in the Advanced Industrial Technology space. Our next presentation will feature a conversation with the management of Bel Fuse. Bel Fuse is one of the, actually one of the strongest performing stocks in my coverage group in 2025. No pressure, and this is on the heels of a fairly strong 2024 as well. Bel Fuse has a long history of designing and manufacturing a broad array of components that power, protect, connect electronic circuits. The company also has an extensive track record in M&A, including the most recent November 2024 acquisition of Enercon, which expanded Bel's exposure to the defense market at a timely point. I'm pleased to introduce the company's CEO, Farouq Tuweiq, and CFO, Lynn Hutkin.
Farouq, Lynn, thanks for joining us.
Thank you.
So maybe let's start with a brief overview of the company. But I think I'm more interested also, I think maybe people will be interested in really the way the transformation that's gone on in the business the last couple of years.
Sure. So thanks, Jim, for having us. Thanks, everyone, for joining us today. So we prepared just a few slides to give a brief overview of the company, and then we can get into Q&A. So as Jim mentioned, we are in the business of powering, protecting, and connecting electronic circuits. We've been in business for over 75 years. So we were started in 1949. Our annual sales are just over $650 million today, and our EBITDA margin profile is almost 21%. And you'll see on future slides, we've been working very hard over the last four or five years to get to this point on a profitability perspective. And then recent events, we were very honored to be named by Forbes one of America's most successful small companies for 2026. So I just wanted to share that with everyone as well.
As we look across our company, and this kind of gives you the background over the last couple of decades. I would say 20 years ago, we were largely solely in our magnetics product group. We do run the business in three different product segments. There's power, connectivity, and magnetics. If you look back 20 years, we were predominantly magnetics, very heavily focused in networking, heavily tied to China. Over the last 20 years or so, we've done 16 acquisitions, and this is where we stand today. From an end market perspective, we're almost 40% servicing the aerospace and defense end markets. To Jim's point earlier, the Enercon acquisition that we did in November of 2024 was in that space. That brought us from 17% in A&D up to 40%.
So we have been expanding in that end market. We do still have almost 20% in the kind of legacy networking end market. That continues to be an area of strength for us. And then about 13% in other industrial-type applications. Today, about a third of the business goes through various other end markets, including our distribution channel. About 75% of our sales are direct to our customers. The other quarter is sold through our distribution partners. So those are, if you think about like an Amazon-type company, but specific to electronic components, engineers that are customers can go out, order products from all different companies, and it comes to them in a single box. So the distribution channel is very meaningful for us. It's a way of getting our products out into the new designs. As I mentioned, we run the business within three product groups.
Power now accounts for more than 50% of our sales. Our connectivity solutions, which are really connectors, cable assemblies, that type of thing, that accounts for about a third of the business. And then that magnetics group, which was so concentrated 20 years ago, is now only 13%. Geographically, most of our sales run through North America, 65%, and the balance is split between Asia and Europe. So Jim was mentioning our transformation over the last four years. So I'll focus on that on this slide. So you can see as we worked through the last five years, on the top left here, our sales have not really changed all that much. I mean, we were $540 million in 2021. If you strip out the Enercon acquisition that we did, we were fairly flat on sales over the last five years.
Where the story was historically is on the margin side. So back in, call it 2020, our EBITDA margin was 5%. And we had been at this low profitability level for years. I mean, we've been in business for 75 years. We've always been at a low gross margin percentage compared to our peers. So when Farouq joined us back in 2021 as our CFO at the time, he came in with an investment banking background, very familiar with the industrial technology space, familiar with our competitors, and was really tasked with figuring out why we didn't look like the others from a margin perspective, from a trading multiple perspective in the stock market. So we've kind of been on this journey over the last four years of doing things like looking at SKU level profitability and eliminating negative margin business.
We went through a whole phase of measure to manage, making sure that people are designing and manufacturing and selling profitable products. There's been a mindset shift within the organization to be more pay for performance. In the past, our executive team would all have kind of the same bonus every year, regardless of how their individual segments may have performed. So we've put in a lot of what we'll call the boring basic things within a company that just didn't really exist in the past. So we've done price adjustments. We've done work on the procurement side. We've done turnover in our sales team. So all of these things over the course of the last five years has helped us get our EBITDA margin from where it was back in 2020 at 5% up to almost 21%.
And even in times of sales being flat, we've been successful at expanding those margins. So that's kind of the transformation that Jim was.
What we've seen in terms of company transformation. Maybe just let's go back to the nine months of 2025. You won't be reporting Q4 for a while. But talk to us maybe about how you were seeing the demand trends across some of the markets, maybe starting first with commercial. And then we're going to spend a lot of time on defense for obvious reasons, but maybe start with commercial. What kind of demand trends were you seeing there?
Yeah. So I think when we had our October call in 2024 heading into 2025, we expected the year to continue to go from strength to strength. So Q1, we expected growth in Q2 and Q3 and so on. And I'd say that has really remained the case there. So as we've gone through Q4, robustness and demand drivers, our industry went through a pretty long destock. I'd say unusual for the length of time that the world was in. That's why you see the sales decline there back in 2024. But 2025 went as we expected it, which is continued strength from quarter- to -quarter, whether it be the bookings, the order book, the new opportunities. What we are seeing, we still have some minor pockets of weakness, but we continue to see more robustness in the growth.
When we released our Q3 numbers, what we really liked about Q3 is the strength was all around from all the BUs, right? It wasn't a one-hit wonder where something kind of led the way defense and everything else was down. So really kind of more of the same. The other thing I would say, this recovery coming out of the down cycle in 2024 has been a little bit unusual. Historically, when you look at our industry coming out of, let's say, a reset destocking year, usually the demand drivers get going in a restock element. Right now, we haven't seen the restock element. I think there's some nervousness in the world out there given some of the geopolitical tensions. So the recovery that we're seeing is really more kind of ship to bill, right?
So it's actual demand met, which we think is a good thing because there's a little bit of rationality versus the exuberance of let's refill and stock the shelf. So we like where it was going. And we kind of maybe kind of extending that a little bit beyond, we see 2026 is kind of more of the same, right, in terms of robustness on growth and where the world's going. So it's been all around.
Within the power product solutions business, again, taking out the defense component of it, talk to us about what some of the major applications are. And you've talked, I think, in recent calls about opportunities even related to the AI infrastructure building.
Yeah. Yeah. So when we look at power, excluding our aerospace and defense business in there, one of the nice things we like about our portfolio is the diversity of applications. If we were to look at, let's say, big ticket items in that business, I'd put networking in there. We'd lump in data centers, AI, broader networking applications. And that obviously has gone from strength to strength, which I'll get to that in a second. Rail also is another contributing from there along with our e-mobility business and general industrial. We also service consumer out of that business, which has a nice rebound post. If you recall in 2024, we had an issue with one of our suppliers on the Chinese do not buy list. So it's been a little bit of, so you kind of got to look at each product group within the power side of it.
But coming back to the networking piece of it, and you're correct, Jim. We talk about AI. For us, on the AI piece of it, we think of it as a floor versus a ceiling because some of our products, when they go to our networking customers, we lose visibility as to where it goes. But we know AI is uplifting. The AI that we've called out, which I think is around 13% on a trailing 12-month basis in September, that's really more of the GPU manufacturers. So if you think of the big headline name out there, NVIDIA, there is a world underneath there where it lends our expertise better to it. So we've seen very robust strength from those kind of GPU folks, which resulted in the nice growth rate into AI. But we know all around us, there's AI, and it's obviously helping drive our networking customers.
So I'd say that's kind of the big one. And then also power does go through distribution, right? Well, it's not going to forget that. And distribution started coming back to life in Q2 and in Q3. And we've seen more of the resilience in those applications.
Now, the PS&P business contains the Enercon operation, which is probably as good a place as any to talk about the acquisition. How has it performed? You now have a pretty good history of it, a little over a year or so, right? Are you satisfied with the performance? And then we'll talk a little bit more deeply into about that business.
Yeah. We really tend to think, and we are able to think about our business really from an end market perspective. So when we think about the end market, which is a bigger reason why we acquired Enercon, is we decided we want more exposure to the A&D markets. And this was a new application within the A&D markets. And as Lynn had said, we've been in the A&D markets for multiple years, right, through our connectivity business. And the nice thing now, we have two product sets that lend themselves to the A&D market. It's performed very well, similar to the connectivity business. A&D, as we think about in there, we put commercial aerospace, and we also put space and defense. And when we look across all these spectrums, they've been performing very well for a bunch of last quarters. We expect more.
Specifically to your question on Enercon, it's gone basically exactly to plan as what we thought when we acquired the business November 2024 and 2025. So a year later, it was going to be exactly what we thought it was. There's a long lead time in this business. There's a very good visibility heading into the year. And same thing as in 2026, we expect another very good year.
And remind us, you acquired 80% of it. You had the opportunity to buy the remaining 20% in early 2027?
Correct. So we're going to measure EBITDA for 2026. And then we're going to apply the same multiple that we acquired it, which is roughly 10 and a half times. And then you worked out your way down equity value and 20%. And we pay that out Q1 2027.
That business, I think, had a high level of the sole source business, second source business. How does that, is your broader A&D business, how would you characterize that in terms of your market position within customers?
Yeah. I'd say generally, we want to play for the sole. And if not, then the two. But I'd say Enercon has an exceptionally high percentage of sole source, which basically all of it is. And then when we look at our connectivity business, I'd say the significant majority of that also tends to be more on the sole source because where we excel at is modifications, customization, some unique problems that need solving. So the engineer to engineer, the handholding, that's where we do good, and that's where we strive for. And that's really coming out of the legacy of our brand, which has been around for years and decades, and our strong engineering. So that's where we want to play, and that's where we generally find our wins.
When I think of the A&D, well, the broader business, I think of Bel as being a lot of book and ship business, fair? The A&D piece has backlog. I'm just wondering whether you want to talk about the Q3 backlog position. I'm trying to get a sense as to within that business, I would think there's some line of sight, better visibility. Is that a fair way to characterize it? What is that as you think about 2026, your line of sight on that business?
Yep. I'll take that.
Yeah, sure. So I think from a backlog perspective, it's really shifting over these last couple of years with the addition of Enercon. So to your point, Jim, on the A&D side, we definitely have more visibility. Customers place orders far in advance, and those orders can be scheduled for the next year, 18 months, two years. On the rest of the business, it's basically subject to lead times. So you can have things being booked and shipped in the same quarter. So our backlog, we do have more visibility on it now, especially with the 40%. That's within the A&D segment. So based on that, as Farouq was saying, we expect 2026 to be strong, similar to what we were seeing throughout the year.
Yeah. And as we went throughout the year, we saw the backlog continuously grow, right? And no difference as we came into kind of year-end across the business. So that's a little more healthy. And the backlog growth hasn't really come from the restock side of the equation, which we talked about, which might be another leg down the road, right? So as we look at where we are, the work that we've done over the years that we see at these charts, we're seeing the benefits of that across the business. And also, I think we are been going after some interesting business and wins that are a little bit more chunky, a little bit more embedded with our customers. So I think the game has shifted a little bit. The other thing I would say is maybe just going back a little bit here.
So if we look at revenue back in 2021 to 2020, let's call it five, putting Enercon aside, we've walked away from a fair amount of business. So we've rotated the portfolio on this concept of shrink to grow. And there's business we walked away from. We divested a business. We've closed the business. So today, we think we have a better, healthier business that's really more cemented with our customers. So when we look at all of that backlog and bookings and discussions we have with our customers and new shots on goal and designs, we kind of like where we are.
I'd like to touch on the shots on goal, but before we do, I just want to, on the PS&P business, margins in that business are the highest, right, in the company. Do you see that as being sustainable? Any reason why that would change?
I'd say across the business, there's just generally things going on, right? So we hear about the gold and the copper of the world. There's going up, right? There are inflationary pressures globally, wage inflation. We've done a pretty good job at passing some of these things along and taking costs out of our factories. I would say we agree with you that they are maybe industry-leading, which is an interesting position given where we came from, which we're not industry-leading. But I think a testament to all the hard work that's gone. I would say today, we like our overall gross margin of the business. There's a fine line between picking out too much and losing opportunities, especially as we think about our R&D and SG&A relatively range-bound. So we need to get operational leverage through the OpEx that we are spending. So how do we do that?
The other thing I would argue is we, historically, as a company, that really struggled on gross margin profitability, and we saw the consequence of that for many years. The question we ask ourselves is, how can we use gross margin as an opportunity to accelerate top-line growth? Is there investment revenue or relationships that we want to do in? Is there a new technology we'd like to get in? Today, we have the luxury of doing that, which we never had. But when I say that, I would be very clear. We worked really hard to get these margins. We need to be smart that we're not looking to go back to the old days here. But yeah, we agree with you. It's a great margin, it's a great testament.
That's why we generally guide when we give our guidance, we're in kind of high 30s is kind of the way we think about it.
The other thing that I'll add is specific to power is on the FX side. As we compare 2025 to 2026, there is some downward pressure there expected, particularly on the Chinese renminbi and the Israeli shekel.
That's a good point.
The currency issue also, correct me if I'm wrong, with the shekel, that would hit you R&D as well or not?
It would. Yeah. Yeah. It's kind of across all three.
Because the shekel, I think, is at.
Is a cost level.
Multi-year highs, I think, versus the dollar.
Yep.
Correct.
Okay.
And we're hedging and doing some of that stuff, but nonetheless, it is a headwind, right?
You mentioned shots on goal. Tell us about some of those and what areas that we need to really track as we think about the opportunity to drive growth?
I think the good news is, Bill, if we're good at something, we're probably consistently good at it, and if we're bad at it, we're probably consistently bad at it, so as we think about go-to-market and sales, right, I think we have transitioned or largely transitioned from a story about margin and can you operate a business at a sustainable, healthy level in good times and in bad times to a story now that needs to be really focused on the growth side of things, and it's not controversial to say that's something we struggled with back to 2015, okay, which was very unusual given what the industry and the peers have gone through, so today, we think the big underlying thesis is the growth side of it, so to expand on your question, Jim, is what are we doing today to sell?
We have great products, great engineers, great brand name, great end market fits. We're in all the right places with the good products. You can always add to products, but we're in a lot of good places. The question is, how do you stitch all that to go selling? On the last earnings call, we talked about implementing a CRM, which is a little bit surprising to people because they think we do have a CRM. And the answer is we don't have a CRM, right? So the building basic blocks of go-to-market is a little bit missing. We talked about dashboards on the call. We talked about rep agreements external. So we're building the ecosystem. I'll take it a step further. In 2024, we had a whole sales team that wasn't earning commissions. So we put a commission in place in 2024 and 2025.
So we hired our first-ever global head of sales late 2024. We just hired a new person to run all of our Asia sales, right? That comes from a real place. We're seeing some nice wins. So stitching together of the team to go tackle is what we're going for. Now, we didn't start this today. We didn't start this on October Q3 call. We started it previously, but we're doing a better job at it and moving with purpose. So this is why we are seeing some of the performance we are seeing. This is why we are seeing the backlog and the bookings and the new opportunities that are coming our way is because of actions we took one, two years ago. Can we do a better job? Yes. Do we need to do a better job? Yes. But we think of this as climbing stairs.
We've done some good, and you're seeing the numbers, but you can do better, and that's kind of what we're trying to get to is the doing better side of it, but we know for a fact that we have great products and market-fit engineers that can hang with the best of them, so that's how we kind of tend to think about it and improving that, so when we think about goals and shots, we have some commodity business in places like fuses, where it's like a brand name, legacy thing, which is one of our oldest product lines. We're seeing some definitely more significant opportunities, which I'm not sure I'd have thought about that two, three years ago, and we've won. We've also seen it when our consumer business went down. The team did a phenomenal job rebuilding in Q3 while too much inventory in the channel.
These are the outputs of a lot of the inputs we've been doing the last two, three years. We got more room to go, undoubtedly. We like what we're seeing, and we like how it's shaping out and showing up in the numbers.
Last couple of calls, you've talked about opportunities in commercial space. What kind of opportunity is that for you as you think of relatively small revenues, right?
On the space side?
Yeah.
That's around, I think, 11?
That's around $9-$10 million on a TTM basis.
So I'm thinking about that.
Yeah. So this is actually an interesting kind of case study. We've been in space since the 1970s. We have a long heritage in space. But space was always a small dollar amount for years. And for us, it was always $1 million, $2 million, $500,000, $1.5 million for years. It wasn't really a big dollar amount. As space started to commercialize and money started coming into it into the teens, we were one of the first people there because of our long legacy and history and performance and complicated situations over time. So we have reached, I think, over something like 150 customers. We tend to get in, design in, get the performance, get that sole source kind of position. And it's gone from one, two to nine, roughly in two years.
So as things are getting launched up there, probably I'd argue in most of the programs they read about and don't read about, that's where we are. The bottleneck there is launches, right? Getting space on the shuttle to send it out. So there will be a direct line with how that performs and coming back to us. And that's something we historically, I would say, just kind of let space be at it. But we hired somebody to focus on that, get into the key relationships, and that is where we went. So we think space will be interesting. And we're seeing also different interesting defense applications as well. But I think commercial is a little bit ahead, the defense side.
Yeah. On some of the legacy Bel business, it sounds like we're seeing some recovery in the networking area, which you guys historically have had some relatively high concentration with one customer. What are you seeing in that market? And then the other market that it fits into this discussion around aerospace and defense is you made a, I think, a well-timed acquisition that expanded your footprint in the commercial aerospace market. I think it was when the market was kind of on its back.
'21.
Yeah. Yeah. I'm just curious, how are those legacy markets? How are you thinking about them?
Yeah. You know, I mean, we have products in rail and defense that can span 20 years. And that is the exact reason why we will win and get on new programs, right? Risk-averse customer base that wants to know you're going to be around, have been around for a long time, and you're going to be around for a long time. So when we look at commercial space, we took a contrarian view back in 2021. We are heavily levered to the max, right, on the Boeing side. And it was grounded. And that business struggled. And we did a timely acquisition that went from a dual source to a single source in the kind of bottom pits of grounding. And that was a great example of us leaning into longer-term kind of views. And here we are living the benefits of that acquisition back in 2021.
I'd also argue the Enercon acquisition we did, we also bought in the middle of a war, right? So we took a little bit of a contrarian view for a good value, good benefit business with a growing tailwind. So where we've come from, you had to be a little bit more creative in how to get to yes. And that's kind of proven out. So commercial air, we'd say we're obviously levered to Boeing. And what we usually tell investors is you should take a view on what do you think about Boeing. Is it going to grow? Is it going to sell more planes? Our view is yes. The backlog is pretty full. And they're increasing production rates and what's rolling off the line. We think there's also a great consolidation of their verticalization of their supply chain, which we think is also good.
So we like the outlook. We think it's going to be here at least for the near term.
Just jumping quickly on the networking business, is that rearview mirror where hopefully the destocking is behind us and we're seeing real demand?
Yeah. We had networking. We think so, yes. I don't think anybody's really talking about destocking anymore. Usually, people in this recovery talk about restocking, which we're not also talking about there yet, but I think it's more demand-driven, and when we look at the customers out there and what we're seeing, it's looking pretty good as kind of where we think the world is going.
You touched on some of the leadership changes. And my impression is that Bel has always had, at the engineering level, pretty good relationships with customers, engineer to engineer. And that's been one of the strengths of the company. So I'm wondering, how do you build on the culture that, I guess, Dan Bernstein and his father built over the years, including the M&A strategy and with the new leadership team in place? How do we think about that?
You know, I think for good or for bad, depending on your view, our industry, especially that we're not a heavy consumer auto company, so we're talking about long-cycle design businesses, and in bad times, for example, in 2024, when our sales was down 20%, folks would say, "Well, why aren't you guys doing a layoff in your OpEx?" What I would argue is that during those bad times, that's when we see a step up in development. People are living for tomorrow on the up version 2.0, version 3.0 engineers trying to justify their existence, so we, on the Bel Fuse side, starting back to 1949, engineers walk on water. And relationships are extremely key, especially to a highly risk-averse customer base that we have. We're in a long-cycle design businesses, right, so we have to think about the long game. That's why we did the acquisition in 2021.
That's why we did buy a company in the middle of a wartime, and this is how we have to think about it, so the engineering team is definitely, even if things are not necessarily going great, if we need engineering, we hire. We'll retain and play for keeps our engineers because they are key to our reputation, our history, and legacy, and so that's kind of our, I mean, if we want to be an engineer to engineer type company, by definition, you are going to be engineer-led. When you play with engineer to engineer and technology leading, that's how you get margins. That's how you get growth. That's how you get opportunities. That's how you get trust.
We're not looking to be a, we have some standardized products, obviously, but the vast majority of our business, I would say well over 50%, is that hand-to-hand combat in the trenches with engineers. We'll chase business for five, six years. And we've done that. And nothing has yielded. And we lost everything. Investment of time zero. But you do that because the other times that you're doing that, you're going to win and you're the call. So that's kind of the, that's why in downtime, we need to be smart and think about the year after versus just the year today here.
Historically, the company has maintained a pretty lean cost structure. Can the cost structure, the way it stands now, support a much larger revenue base? Or will we see some stepped-up investments, even in R&D?
I think putting aside our regular way, kind of just increases salaries and stuff like that year over year. I think it's really more of a question of reallocation. I also do think that we have underinvested in systems like CRM and some of the other just basic blocking and tackling that we've been putting in place. And we will put more of that in place. We're staring at a big European growth in defense, right? We need to put some more boots on the ground because when we look at 2025, the attitude has shifted in the EU and how they're going about their business. So we can't wait till tomorrow. So we don't expect any big step-ups. But I think our cost today is, but there might be some timing where we move some right pocket, left pocket.
But I think largely we have a good cost structure today.
Okay. And the company with the acquisition of Enercon, you put some debt on the balance sheet, but you're paying it down at a pretty healthy clip just from the standpoint of capital allocation. Main priority near-term is still debt pay down. But how are you thinking about M&A, which you guys have been?
Yeah. So we're wide open for business on M&A. I think today we find ourselves, given the success and reputation we've had out in the market. Historically, we had to kind of knock on a lot of doors for people to let us in. Now, I think we have this other problem where people are calling us. And we got to make sure we have a filtering system to get to the ones that we want to really get to. I'd characterize the overall M&A environment as a little bit not necessarily normal yet. It was normal in Q1 last year. That kind of froze up a little bit post-Labour ay. But we're definitely on the hunt. We have the ample financial capacity for it. We have the organizational appetite and bandwidth to do it. So we're definitely looking for things.
I know you can't be specific, but just in terms of broad priorities, what areas?
We'd love a little bit more A&D. We'd love to get into semi. We'd love to do more medical or smaller medical. We'd love to expand Europe a little bit more. I'd say those are kind of the big headlines. And then we cautiously into networking as well to the extent that we can. And there's some technological product families that we would like to fill in.
Okay. I think we're going to have to end it there. Farouq, thank you. Thanks.
Thank you.
Thank you, everybody. I appreciate your time today.