Bel Fuse Inc

NASDAQ:BELFA

Earnings Call Analysis

Significant sales drop but margin improvements for Bel Fuse

Bel Fuse reported Q2 2024 sales of $133.2 million, a 21.1% decrease from Q2 2023, driven by declines in power and magnetic segments. Despite lower sales, gross margin improved to 40.1% from 32.9% last year, influenced by Power and Connectivity segments. Notably, power product sales fell 32.8% year-over-year, while rail products rose over 40%. The Connectivity Solutions segment saw a 5.4% sales increase, with strong performance in commercial air and defense applications. Looking ahead, Q3 2024 sales are forecast to be between $118 million and $126 million, reflecting ongoing destocking and trade restrictions impact.

Overview of the Second Quarter Performance

In the second quarter of 2024, the company reported sales of $133.2 million, reflecting a significant decline of 21.1% compared to the same quarter in the previous year. This downturn is primarily attributed to performance challenges within the Power and Magnetic segments. Despite the decreased sales, the company's gross margin improved to 40.1%, up from 32.9% in Q2 2023, showcasing effective cost management and price optimization strategies.

Segment Performance Highlights

Breaking down segment performance reveals stark differences. The Power Solutions and Protection segment posted sales of $58.6 million, a 32.8% decline year-over-year. However, it achieved a gross margin of 45.7%, marking a substantial 1,000 basis point improvement due to ongoing procurement, pricing, and cost-containment initiatives. In contrast, the Connectivity Solutions segment experienced a revenue increase of 5.4% to $57.8 million, driven by distributions into commercial and defense applications, with a gross margin rising to 38.9%. The Magnetic Solutions segment, however, suffered a 37.3% decline to $16.8 million in sales, albeit with an improved margin of 26.4% due to lower fixed costs and favorable currency impacts.

Future Guidance and Market Outlook

Looking ahead, management anticipates a continued challenging environment in Q3 2024, estimating sales between $118 million and $126 million, down from $159 million in Q3 2023. This projection is influenced by expected reductions in the Power segment of approximately $20 to $25 million and further declines in Magnetics. Notably, the ongoing destocking trends within the networking sector are expected to contribute to these challenges, while continued strength in rail markets is anticipated to partially offset losses.

Operational Efficiency and Strategic Initiatives

The company is actively pursuing operational efficiencies through various initiatives. In the magnetic segment, there are ongoing product and process management projects to align costs with future demand expectations. The connectivity segment has benefited from previous facility consolidations, resulting in a 150 basis point improvement in margin. The $25 million stock buyback program has progressed, with $14.2 million already spent, reflecting the company's commitment to returning capital to shareholders.

Impact of Trade Restrictions and Supply Chain Adjustments

Recent trade restrictions affecting a China-based supplier have added complexity to the supply chain, potentially impacting up to $4 million in sales for Q3 2024. Management is in the process of onboarding new suppliers, but this could lead to delays and increased costs in the short term. The transition period is expected to be several quarters as new suppliers are qualified and integrated into the production process.

Long-term Growth Opportunities in Emerging Markets

In the long run, the company is strategizing towards growth opportunities in sectors like AI, e-mobility, and data centers, which are expected to be significant markets. Despite current challenges, there is optimism regarding potential sales from these sectors, particularly as they align with the company's existing technologies and product offerings. The Power segment is notably expected to benefit most from the developments in AI.

Concluding Insights

While the current sales climate for the company appears challenging, the management's focus on margins, operational efficiencies, and future growth avenues provides a balanced perspective for investors. The anticipated transition towards new suppliers and ongoing market adjustments signify both challenges and strategic opportunities. Investors should closely monitor upcoming quarters to gauge the effectiveness of these strategies and their impact on overall performance.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to the Bel Fuse Second Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please go ahead, Jean.

[Jean Young]

Thank you, 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. That will be such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2024.

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 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, 2023, 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?

[Daniel Bernstein, executive]

Thank you, Jean. Good morning, and thank you for joining our second quarter 2024 earnings call. Overall, we were pleased with our second quarter results. The collective work of the global team over the past year has resulted in improved margins, even in a challenging top line environment. Our sales came in at $133 million, achieving the higher end of the forecast range we provided on last year quarter earnings call. And in relating earnings press releases with gross margins well above forecast range.

Each of our product groups trended as expected with modest essential growth in connectivity and magnetics from quarter 1 '24 being offset in part by a $1.7 million reduction in power sales. We are proud of the excellent results achieved by the team.

On the management side, earlier this month, we welcomed Steve Dawson on to the executive team as the new President of Power Solutions and Protection. Our Power group is going through a pivotal transition with AI and e-mobility as long-term growth drivers. And we are excited to have Steve at the helm as these new markets unlock with new opportunities. We would like to thank Dennis for his almost 4 decades of dedication to Bel and helping achieve the success we have today. His commitment and friendship have been displayed, deeply valued by all of us at Bel, and wish him the best in his retirement.

To provide an update on our previously announced $25 million stock buyback program, we have continued to make open market purchases of both class of stock. As of June 30, 2024, our program to date purchased a total of $14.2 million, representing 20,600 shares of Class A and common stock of 214,900 shares of Class B common stock. Lastly, we're pleased for our Class A stock to be added to the Russell 2000 Index in late June. This is a testament to the overall growth of the company and our recent IR efforts, which aided in the class of stock meeting the eligibility requirements for inclusion in this index for the first time in Bel's history.

And with that, I would now like to turn it over to Lynn. Lynn?

[Lynn Hutkin, executive]

Thank you, Dan. From a financial perspective, in summary, we saw continued margin expansion on a lower sales base when looking at Q2 '24 versus Q2 '23. Second quarter 2024 sales came in at $133.2 million, representing a 21.1% decline from the second quarter of 2023. The majority of the sales fluctuation was driven by our power and magnetic segments, as we'll discuss further. Our gross margin increased to 40.1% in Q2 '24 from 32.9% in Q2 '23, and these profitability improvements were largely driven by our Power and Connectivity segments.

Turning to some details at the product group level. Power Solutions and Protection sales for the second quarter of 2024 were $58.6 million, representing a 32.8% decline from Q2 last year. The decline in sales was mainly due to lower sales of our power products used in networking and consumer applications. On a positive note, we saw continued strength in sales of our rail products, which grew over 40% from Q2 '23, accounting for a $3.2 million increase in sales from Q2 '23.

Despite the overall decline in sales, the segment posted a gross margin of 45.7% in the second quarter, reflecting a 1,000 basis point improvement from Q2 '23. We are viewing the Q2 gross margin level for this group to be high and estimate approximately half of this basis point improvement in power margins as being driven by the completion of internal initiatives related to procurement, pricing, and cost containment and is therefore viewed as sustainable. The balance of the basis point improvement in gross margin versus Q2 '23 relates to items that are either nonrecurring or temporary in nature and should not be factored into a normalized view of gross margin for this segment.

Turning to our Connectivity Solutions Group. Sales for Q2 '24 came in at $57.8 million, up 5.4% from Q2 '23. The main growth driver within connectivity was within the distribution channel, where sales were up $2.5 million as compared to Q2 '23. Sales into commercial air applications amounted to $15.4 million for the quarter and sales into defense applications totaled $12 million for Q2 '24. Each of these levels were consistent with the respective sales from Q2 '23.

The year-over-year increase in sales for this group was despite the divestiture of Connectivity's check business in June 2023, which previously contributed around $1.5 million per quarter to this segment. The gross margin for this group was 38.9% for the second quarter of 2024, which represents continued improvement from the 37.4% in the second quarter of 2023. This margin expansion was made possible due to the operational efficiencies achieved through facility consolidations that were completed in 2023, along with implementation of contract renewals on more balanced terms. These favorable margin factors were partially offset by minimum wage increases in Mexico that went into effect in Q1 '24 and the unfavorable impact of FX related to the peso.

Lastly, our Magnetic Solutions group posted sales of $16.8 million and Q2 '24, representing a 37.3% decrease from Q2 '23. This reduced sales level was generally in line with the expectations discussed on last quarter's earnings call and largely related to lower shipments into a large networking customer as they work through inventory on hand. The gross margin for this group was 26.4% for the second quarter of 2024 as compared to 24.6% in the second quarter of 2023.

This improvement in margin was primarily driven by lower fixed overhead costs, resulting from the facility consolidations in China completed in late 2023 and favorable FX related to the Chinese renminbi versus Q2 '23. At the consolidated level across all product segments, our backlog of orders was $304 million at June 30, 2024. R&D expenses were $6 million in Q2 '24, a level consistent with Q2 '23. We expect future quarters to generally be in line with the Q2 '24 expense.

Our selling, general and administrative expenses were $24.1 million or 18.1% of sales, down from $25.1 million in Q2 '23, but up as a percentage of total sales. Within SG&A, an increase in salaries, fringe benefits, and amortization expense were largely offset by lower legal fees. If you recall, we incurred $1.2 million of legal fees related to the MPS litigation in Q2 '23 and these expenses did not recur in Q2 '24. As there are no unusual items of note contained within SG&A during Q2 '24, we view this level of expense is generally indicative of the anticipated run rate for future quarters in 2024.

Turning to balance sheet and cash flow items. We ended the quarter with $143.8 million in cash and securities, an increase of $16.9 million from year-end. We generated $38.3 million in cash flows from operating activities during the first 6 months of 2024 and had capital expenditures of $4.3 million. From an inventory perspective, the downward trend that we experienced over the past several quarters have continued into Q2, reflecting an $8.6 million reduction from year-end. The lower inventory levels were primarily seen in the areas of raw materials and finished goods as we continue to work through our own inventory on hand.

I'll now turn the call over to Farouq for additional commentary. Farouq?

[Farouq Tuweiq, executive]

Thanks, Lynn. As noted in our last 2 earnings calls, we anticipated 2024 to be a reset year, and our second quarter and first half results were in line with our expectations. We do expect a slight downward shift as we enter the third quarter. As noted in our earnings release, based on information available as of today, we expect Q3 '24 sales to be in the range of $118 million to $126 million. This compares to sales of $159 million in Q3 '23. We believe the following factors are the main drivers of Q3 '24 sales as compared to Q3 '23.

At a high level, connectivity is projected to grow a bit, power is expected to be down approximately $20 million to $25 million with the remaining $10 million to $15 million decline related to magnetics as it has been going through that correction. Many of the factors contributing to these year-over-year declines in power and magnetics in Q3 '24 compared to Q3 '23 are not new as destocking and networking and distribution have been ongoing factors for the past few quarters now.

There is, however, one new factor this quarter that will impact us beginning in Q3 '24. One of our China-based former suppliers has recently become subject to trade restrictions applicable to it beginning in the second quarter by executive order of the Biden administration. The team has been diligently working to onboard a replacement supplier and thus expect a few quarters worth of impact given the work needed ahead. It is unclear at this time of the ultimate impact of the supplier change. For purposes of our Q3 '24 guidance, we're assuming a full impact to be on the conservative side. Our sales in Q3 '23 that were supported by this supplier amounted to $4 million.

These factors are expected to be partially offset by continued strength of our rail and market, which we anticipate will be up by approximately $2 million as compared to Q3 '23. When bridging Q2 '24 sales to anticipated Q3 '24 sales, our Power segment is the main driver of the decline, with Q3 sales expected to be down by approximately $9 million due in equal parts to the previously discussed softness in networking, sales impacted by our former supplier, China-based suppliers discussed, and lower volume of shipments out of Europe due to the usual European summer break at our manufacturing sites and at those of our customers based in the region.

We anticipate modest continued improvement in magnetics in Q3 '24 on a sequential basis from Q2 '24, and this is expected to largely offset a lower ship quarter anticipated in our Connectivity segment due to primarily the timing of military programs.

Turning to our operational initiatives. Our team has continued its efforts in maximizing efficiency level at our manufacturing sites globally. To highlight a few initiatives within our magnetic segment, comprehensive product, process, and facility cost management projects are ongoing at our new manufacturing facilities to better align our magnetics cost structure with anticipated levels of near/medium-term future demand for these products. We're also continually exploring other areas of production to better meet customer requirements, including non-China sites.

In addition, we had recent efficiency improvements at our Signal Transformer facility in the Dominican Republic. Shifting to the Connectivity Solutions segment. The facility consolidations completed in the U.S. and U.K. in 2023 have resulted in improved operational efficiencies, contributing to the 150 basis point improvement in this segment from Q2 '23 to Q2 '24. On the restructuring front, the recent initiative to transition manufacturing operations from our Glenrock, Pennsylvania location to other existing sites is on schedule for completion by the end of 2024. Anticipated annual cost savings related to these initiatives are expected to be in excess of the initial $1 million estimate.

Shifting over to M&A. The heightened level of activity described in our last earnings call has continued. There is something -- there's nothing to report here today, but the team is actively evaluating a number of opportunities within our existing product groups in support of our growth strategy. Consistent with prior quarters, we'll continue to influence those areas within our control, and we remain very optimistic about Bel's future.

I'll now turn the call back over to Dan. Dan?

[Daniel Bernstein, executive]

Thank you, Farouq. Can we open up the call now for questions, please?

[Operator]

Certainly. We will now be conducting the question-and-answer session. [Operator Instructions] The first question is from Bobby Brooks from Northland Capital Markets.

[Robert Brooks, analyst]

So last call, there was a healthy amount of discussion on the emerging opportunities, specifically within AI, but also within EV and space. So any color you think would be helpful to hear about that. I understand that these are long sales cycles, but also from my perspective, it seems like stuff within AI is moving quite fast. So am I right in thinking that those sales cycles could become shorter?

[Daniel Bernstein, executive]

Yes. Thanks, Bobby. I appreciate the question. We're -- as we said previously, our Power segment will be the biggest beneficiary of the AI world. We do see that, obviously, as we are seeing more exciting opportunities in that space as well. One of the things that we have talked about previously is, given the high level of complexity and sophistication of our products, they've been AI ready, call it, for the most part. So as a result of that, as we think about the networking destocking, there is a little bit of a preference to using some of the product that's in the channel.

So we tend to focus on really what is the new inbounds or where the new opportunities coming in, and we're seeing those come in. And we do expect sequential growth from our AI customers on play as we go out through the year and definitely heading into 2025. So we're optimistic about it, and we're seeing that. We think it is a real thing, but it will take a while, especially as the channel clears out a little bit and some of our -- where we're playing a position there, takes a toehold.

[Lynn Hutkin, executive]

And Bobby, I can just add on the space side. So revenue there continues to grow. So in Q2 '24, our revenue into space applications was $2.3 million. On a year-to-date basis, it's $4.3 million. And we're still looking at $7 million for an estimate for full year 2024, expecting it to be a little lighter in Q3 and then picking back up in Q4. So $7 million for the full year still on place.

[Robert Brooks, analyst]

And then kind of stepping back a little more, on the fourth quarter conference call, you guys listed several growth focused sales initiatives along with the revamped European sales force. So we're several months into those after announcing them. Curious to hear, any early results from it, any lessons learned? Or just any color on kind of those growth-focused initiatives that you talked about in the fourth quarter conference call.

[Daniel Bernstein, executive]

Again, I think it's too early to state when we're going to see improvement. But I'm very surprised with the sales incentive program that most of the salespeople did receive it very positively. And even though in the first 2 quarters, the majority of them didn't get the compensation bonus because they didn't hit their targets, they still believe that they find it to be very beneficial. So I think just something that they are motivated with this new structure is a really good sign. And with the activity level in Europe since Sabine came aboard, we are seeing a lot more activity, a lot more quality and substantial great opportunities that we have seen in the past.

[Farouq Tuweiq, executive]

And maybe to double-click on that, Bobby, as well, all our 3 regions; U.S., Asia, and Europe, I could say we are seeing some bright spots in a challenging market, right? So as the markets calm down a little bit and things flush out of the system, I think that will be what we're looking forward to. But to Dan's point, I think early signs are optimistic.

[Robert Brooks, analyst]

And then last one for me. So you guys gave it a good amount of color on the trade restriction on that Chinese supplier. So I guess one thing that I was kind of wondering if we could double-click on was with the third quarter guidance. So you said that, that supplier initially was supporting $3 million to $4 million in sales into the consumer end market and that the guidance took a conservative view on that.

Does that mean that, essentially, you're backing out saying that, that $4 million that you would see in a quarter for -- from this supplier essentially saying like that $4 million goes to 0 in this quarter, kind of any more color on that? And just when did -- how long was, so from when the Biden administration made that executive order to when you found the new supplier, like how long did that take? And is this new supplier going to be -- I'm going to -- am I right to assume -- am I right to assume that's probably going to be, yes, high, lower margins or I should say cost more?

[Daniel Bernstein, executive]

Yes. So we are taking a conservative approach. Generally, obviously, we kind of take these things pretty aggressively. In Q2, the mandate came out. And in the early days, there was a little bit of confusion what's allowed, what's not allowed and working through all of that. And where we've settled in on is really no new orders, right? So there might be some things left in the inventory side or being shipped over that may be a little bit -- we see some uplift there.

But given our design cycles, as you know, it's not as easy as shifting things over, right, because a lot of these things have to go get retested and requalified. And -- so once you identify the replacement side of things, right, it's going to take a little bit of time as it goes through the re-quals and recertification and that takes different timelines, if you will.

So as we're going through all that iteration of understanding, we have suppliers identified, I think, for maybe not everything yet, but a decent amount. And it becomes a question of how fast you can get that in the market re-qual because there's going to be some dollar spend on the customer side. So we said, let's just kind of take a view of saying, we're going to have really no sales of that here in the quarter. And then maybe we can be pleasantly surprised a little bit to the upside, but that's not something we want to sign up for.

Again, trade restrictions are serious, so we just want to make sure that we're inbound on all things. So it is a little bit of a conservative view. So we'll have a better update on that in the October call in terms of progress and where we think things will shake out.

[Operator]

The next question is from Theodore O'Neill from Litchfield Hills Research.

[Theodore O'Neill, analyst]

Just on the Power segment, a little more granularity, if you could. So I would expect that given -- we already talked about AI, but in terms of AI, e-mobility, data center, blockchain power conversion, can you give us some more information about how the Power segment is doing in those areas?

[Farouq Tuweiq, executive]

Yes. See, it's kind of -- really kind of more of the same, right? I mean, the way we tend to think about it is really more simply, Theo, anything that influences growth in data centers, whether it be new builds or upgrade cycles is good for us. And then we also -- may also think about, as we think about data kind of transmission and the whole ecosystem around data, we think that's good.

We've talked about previously our avoidance of the hyperscalers, which is kind of all the news and the headlines these days for various reasons. And we think that the hyperscalers are roughly 50% of that market, and we're on the other 50%, if you will. But ultimately, we are bullish, right, on that. But right now, there is a little bit of a clear out of some of the products in the system.

[Daniel Bernstein, executive]

But we are -- again, just so you understand, when we look at data centers, we did a substantial job with Facebook maybe 5 years ago. And it was almost a $12 million, $15 million customer for us, but the margins were extremely low. And I think since Farouq came aboard, we really try to focus on margin improvement and realize that top line growth is not the end all and be all for us.

So with that in mind, we really are focused on the niche markets. So even though EV is a very big market, our niche market in EV are school buses, tractors, large equipment. So not going after the Teslas of the world, but really who can we support properly, who can understand our engineering proposition we offer them. In the same way we look at data centers, we support for one of our big customers in that area is the testing equipment that they're using for the ICs that are using into data centers.

So again, it's any time electronics goes up, there's a lot of areas that we can grow in. And again, we really are focused on areas that we have to be profitable in.

[Operator]

The next question is from Jim Ricchiuti from Needham & Co.

[James Ricchiuti, analyst]

I wonder if you could spend a few moments just talking about the pricing environment. Just given the weak demand environment, I'm trying to get a bit of sense of what the gross margins could look like in a more normalized demand environment, whatever that looks like. But just any sense as to what you're seeing from folks.

[Daniel Bernstein, executive]

I hate to say this on the phone, but it will be shocking. I think this is -- I've been involved for over 40 years, and this is the first time in a down market that we haven't seen very little price pressure. I think everybody is still trying to focus on supply. It's very difficult when you push back your orders asking for a price decrease at the same time. So I think for the past 18 months, the focus hasn't been on pricing at all. It's really been on inventory management.

And then if it does cut loose and the lead times do get stretched out, then pricing increases become available. But again, this is the first time in my memory that there's a down market, and we haven't seen any overt price pressures.

[Farouq Tuweiq, executive]

Jim, right, obviously, as volumes pick up, right, in a more healthier environment, you'll get some of those pressures. And that's kind of why we've been doing a lot of the work we have been doing around cost management and the facility work that we have been doing. The other thing I should say is, I think, from a mindset perspective and approaching new products and the businesses we're going after in the last, call it, couple of half years, have been lending themselves to a little better potential outcomes. But to Dan's point, we do expect to see that, obviously, in different parts of our business, but we're not there yet.

[James Ricchiuti, analyst]

What kind of demand are you seeing in the military and commercial aerospace market? I may have missed it. Lynn, did you provide revenues for commercial aerospace?

[Lynn Hutkin, executive]

I did. So in Q2 '24 commercial air was $15.4 million. And military was $12 million.

[James Ricchiuti, analyst]

Sorry about that, I missed it. Just a final question from me. I think you've alluded to or suggested that there are some green shoots out there, and we're hearing that from some other players in the market. But -- and maybe just a question for you, Dan. As you think about the recovery, how to…

[Daniel Bernstein, executive]

I've been thinking about the recovery for about 18 months, Jim.

[James Ricchiuti, analyst]

Fair enough. And I guess that was the question, I mean, as -- given your experience in different cycles, what does the cycle look like, when we see some signs of recovery? I guess what I'm asking is…

[Daniel Bernstein, executive]

When is this going to turn around, right?

[James Ricchiuti, analyst]

Yes.

[Daniel Bernstein, executive]

Jim, it's -- I tell it all the time. In our industry, it's always 6 months, always 6 months and you go back to the guy in 6 months. We're in constant contact with Arrow, Avnet, all the major distributors. And we keep asking, when is inventory going to be down? When are you going to see new orders? When are you going to see orders? And they always come back 6 months, 6 months, and then all of a sudden they hit some in a day and they start ordering.

So it is -- I've never seen it to be stretched out this -- maybe during the recession in '89, it was about 2 years, 2.5 years. But just you're not hearing anything, you see little areas of improvement like aerospace, of course. But overall, just I think it's back to that wait-and-see type of thing. I wish I could be a lot more positive is the bottom line.

[Operator]

The next question is from Hendi Susanto from Gabelli Funds.

[Hendi Susanto, analyst]

So I would like to follow-up Jim's question. So is it another pushback of 6 months? I think that is my interpretation. And I want to go from that.

[Daniel Bernstein, executive]

No, I think that this is the -- this is the standard answer they give when they don't know. It could be 2 months, it could be a year. But if you ask anybody, they always come up with a pat and answer 6 months. But I don't know if it has any credibility. That's my point. It's just the checks in the mill kind of line. It's just the line they put out there, but I don't know if you can put any credence in it.

[Hendi Susanto, analyst]

And, Dan, if I may ask further, when the recovery happens, do happen that to be somewhat mixed among different products, different end markets? Like do you see, let's say, like where do you feel it is more negative? And where do you feel there's more positives in terms of…

[Daniel Bernstein, executive]

I think the down market really -- the down markets really hit us in networking more than any other area, our networking customers.

[Hendi Susanto, analyst]

And then how concentrated in networking?

[Daniel Bernstein, executive]

Networking, which a lot of our distribution comes. It's distribution, but they go out to networking customers also.

[Farouq Tuweiq, executive]

So I think it can be just -- those are obviously our 2 biggest markets, right, distribution and networking. And I think both of them are where we're getting hit on.

[Hendi Susanto, analyst]

And then are they under-shipping the end demand?

[Farouq Tuweiq, executive]

Can you expand on that a little bit?

[Hendi Susanto, analyst]

So in networking and distribution, are your customers under-shipping or shipping like lower than the end demand there?

[Farouq Tuweiq, executive]

I would not think that's the case. I think they will ship to meet demand.

[Daniel Bernstein, executive]

No. I think they're still using the inventory they have to meet demand. So they don't have to sell over inventory. They don't have to place new orders until they get their inventory down a lot less.

[Farouq Tuweiq, executive]

And what we will look at, Hendi, is inventory levels, right? So we -- and our view is inventory levels have been coming down pretty significantly. So we do feel -- and that's why the last kind of few quarters we've been saying, we feel like it's bottomed out and we continue to hold that view. But when does it get back to a little more regular rate patterns. So we tend to focus on inventory levels, but we don't think anybody is -- they're not sending things to their customers if that's kind of the question.

[Hendi Susanto, analyst]

And then for your internal inventories, I think Bel Fuse has been lowering down and freeing up working capital. How much further should we think about Bel Fuse lowering its internal inventories?

[Daniel Bernstein, executive]

Yes. I would say we could probably address that a little bit more with a little healthier sales environment, right? So it's one of those things that we're -- we tend to focus a little bit on the turns side of things. We're not quite where we would like to be yet. But -- so that's something we're influencing and trying to influence. I think we've done a pretty decent job at it, a little bit easier to manage and do that in a more healthier sales environment, which we're not in. So maybe in short, we would like it to be better, and we're trying to get to that better and it will be a little bit, I think, easier to manage in a healthy environment.

[Hendi Susanto, analyst]

And then Dan and Farouq, I want to ask whether you have any insight into this. There is some conversation that there's sequential improvement in China in automotive and industrial and then IoT. Like what are the current trends that you are seeing in China?

[Daniel Bernstein, executive]

Remember, we do sell some stuff in China, but generally, that's not our main customer base, right? And I think that's one of the, I'd say, quite frankly, good things given just the pricing environment, the high level of user competition, it tends to be more higher volume type business or medium volume. So it's not kind of our -- we pick our spots, we're picky and choosy, but we're -- but I would say those are not kind of things that we overthink about.

[Hendi Susanto, analyst]

And then I missed -- I may miss this, the sales of eMobility in Q2, may I ask for that number?

[Lynn Hutkin, executive]

Sure. So eMobility sales in Q2 were $4 million.

[Hendi Susanto, analyst]

$4 million. And then I assume there is no expedite fee. Is that correct?

[Lynn Hutkin, executive]

There was no expedite fee this quarter, correct?

[Operator]

The next question is from Bobby Brooks.

[Robert Brooks, analyst]

I just want to jump back on and kind of square something away. So in the press release, you guys said at an industry conference in May, it was indicated that the consensus view that it was indicated that the worst was behind us. Is that in terms of kind of the -- just on the distribution? Or is that more broadly distribution and networking? And I guess like obviously, those are kind of 2 of the biggest end markets that you guys serve. But do you guys mostly serve the networking end market through distribution? I just want to kind of make sure I understand that dynamic clearly.

[Daniel Bernstein, executive]

Yes. No, most of our -- a good portion of our networking business is direct. I would say probably 75% is direct to the customer for networking. But overall, when you throw in smaller networking companies, industrial companies, then they go through distribution. So overall distribution represents about 30% of our sales, Lynn?

[Lynn Hutkin, executive]

Yes.

[Farouq Tuweiq, executive]

And I think maybe to the other part of your question, Bobby, the conference reference was really -- that was a distribution, call it, focused conference that happens once a year. So that specific comment about our conference was on the distribution side.

[Operator]

The next question is from Jim Ricchiuti from Needham Income.

[James Ricchiuti, analyst]

Farouq, thanks for the guidance on gross margins. I wonder if you could maybe help us a little bit with the OpEx, which has moved around a little bit. We saw a nice uptick in R&D in the quarter. Should we assume that these R&D levels are more normalized and any sense as to on the SG&A side? I assume at these lower levels of revenues are probably not a significant uptick there. Is that a fair way to think about OpEx?

[Farouq Tuweiq, executive]

Yes, I think that's pretty fair. I mean the -- roughly around the -- call that $6 million, $5 million, $6 million R&D is kind of where we think it is. Remember, more R&D goes into power and connectivity side of the business. In terms of SG&A, there is some variability in that as it relates to some outside commissions that we pay and some other co-items.

So we tend to think about it around 25%. I would say we are looking to see ways that we can influence SG&A as we just kind of think about the world that we're in. So that's something we are focused on, if you will, and looking at what's in the order of the possible there. But largely, we kind of guide towards flattish or kind of -- or range bound, we should say.

[Operator]

There are no further questions at this time. I would like to turn the floor back over to Dan Bernstein for closing comments.

[Daniel Bernstein, executive]

Just thank you for joining our call, and we're looking forward to speaking to you in October. Thank you very much.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.