Helios Technologies Inc (HLIO) 2003 Q4 法說會逐字稿

Good day and welcome, everyone, to this Sun Hydraulics fourth-quarter 2003 financial results conference call. Today's call is being recorded. At this time, I would like to turn the call over to the Investor Relations spokesperson, Mr. Richard Arter. Please go ahead, sir.

Thank you, Peter. Good afternoon. Thank you for joining us to listen to Sun Hydraulics' 2003 fourth-quarter and year-end earnings release conference call.

With me are Dick Dobbyn, Sun's CFO, and Trisha Fulton (ph), Sun's Manager of Corporate Finance. One of our usual suspects is not with us today. Allen Carlson, Sun's President, expresses his regrets on not being able to participate in this call.

We would also like to take this time to extend our congratulations to the family of Pete (indiscernible) and the birth of their second child.

Once we have finished our prepared statements, we will then respond to questions from the analysts and questions we've received via e-mail.

Before we begin, please be aware that any statements in today's presentation that are not historical facts are considered forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934. For more information on forward-looking statements, please see yesterday's press release.

I would now like to introduce Dick Dobbyn, Sun's CFO.

Good afternoon. One of the most encouraging aspects of 2003 was that our sales increased despite a trend of declining sales in the hydraulics industry.

The U.S. operations sales strength we saw in the second half of last year is continuing on an accelerated basis so far this year. This, combined with the positive signals given off by economic indicators, lead us to believe Sun will have a very good year.

As our sales climb this year, operating margins will increase significantly. This is because we anticipate our manufacturing overhead, marketing engineering and administrative costs will be relatively static. I also believe that considering increases in demand will allow Sun to capitalize on recent productivity improvements and result in lower per-unit manufacturing costs.

Trisha (ph) will now discuss the financial results.

I would first luck to comment on the results of the fourth quarter of 2003, compared to the fourth quarter of 2002. Net sales were 17.6 million, a 14 percent increase. Net income increased to 600,000, compared to 400,000, and basic and diluted earnings per share increased to 9 cents compared to 6 cents.

Looking at the results for the year, net sales for 2003 were 70.8 million, a 10 percent increase over 2002. Net income increased 22 percent to 2.2 million. Basic and diluted earnings per share were 33 cents, compared to 28 and 27 cents per basic and diluted earnings per share of 2002.

The 10 percent increase in sales breaks out by business segment as follows -- net sales in the United States operation increased 4 percent as shipments to Asia increased 13 percent, Canada increased 5 percent and domestic shipments increased 2 percent. Net sales in the United Kingdom operation increased 11 percent, mainly due to currency translations. German operation net sales increased 40 percent with a true volume increase of 16 percent and a 24 percent increase related to currency translation. Korean operations increased 16 percent with approximately 8 percent due to the effect of currency and 8 percent in increased shipments, which were stimulated by Korean customers selling into China.

Gross profit increased 16 percent to 18.5 million in 2003. Gross profit as a percentage of net sales increased to 26 percent in 2003, compared to 25 percent in 2002. The increase in gross profit as a percentage of net sales was due to the increase in total net sales and transaction-based exchange gains in Germany and Korea. These increases were offset by startup costs for the Midwest operation and operational problems stemming from business system difficulties in the United Kingdom.

Selling, engineering and administrative expenses were 14.8 million, a 2.3 million or 18 percent increase compared to 12.5 million in 2002. Approximately half, or 1.1 million, of this increase was related to discretionary spending for specific projects, including a software write-off in the UK and the expansion of capabilities program for our Web site. Approximately 400,000 of the increase was related to currency translation. The balance of the increase was primarily due to market-related costs in France and Germany.

The Company paid a 4 cent per share dividend in each quarter of 2003 for a total of 16 cents for the year. In addition, a special dividend of $2 per share was paid on August 18, 2003.

Net cash generated from operations for the year was 9.3 million; a 1.8 million increase was compared to 7.5 million in 2002. Capital expenditures for the year were 3.1 million. Cash on hand increased 1.3 million, debt increased 8.6 million to 18.2 million, and 14.4 million was paid to shareholders in dividends.

Going to the outlook, sales for the first quarter are projected to be 19.5 million, which would be a 19 percent increase over the first quarter of 2003. The Company anticipates that the majority of the increase will occur in the United States operations. Thank you. Rich?

Peter, I think we would like to take some of the calls from the analysts now.

Thank you. Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). There appear to be phone questions -- actually, we just had somebody queue up. Michael Braig with A.G. Edwards.

Good afternoon. I wonder if you have any comments on the progress or the trends of your efforts on manifold production and the startup efforts there to get increased volume not only in manifolds but also the accompanying cartridge valves that are working through the joint venture in Kansas City, I believe.

We are still kind of in a start-up mode with that, Mike, but we are seeing some earlier signs of getting prototype custom manifolds to the customers. It's really too soon to tell if they'll have a positive financial impact. In fact, it's negative so far -- but we think that that project is going to work and is going to stimulate our custom manifolds business, particularly in the U.S. (indiscernible) valve cartridges (ph).

I couldn't help but hear (indiscernible) -- negative contribution thus far -- is it a significant drag?

It's about -- last year, pretax was about 250,000.

Okay, thank you.

(OPERATOR INSTRUCTIONS). There are no further phone questions.

I will tell you what, we will break in with some of the e-mail questions, Peter, but if any more analyst questions come in after we ask these or in between asking these, please bring them in.

The first e-mail question -- would you review any impact that foreign exchange had in the quarter?

As we mentioned in the press release, sales for the fourth quarter, adjusted for the effect of currency, were up 10 percent versus the reported increase of 14 percent. We estimate that transaction-based gains net to approximately 200,000 of pretax income.

Thanks, Trisha. The second question -- you mentioned that your cost base is pretty fixed. Would you talk about what sort of contribution margins should be generated on a dollar of incremental sales?

Our contribution margin currently runs about 35 to 40 percent but as volume increases, we expect it will trend to 40 percent-plus.

Thank you. Would there be any more calls from the analysts at this time, Peter?

(OPERATOR INSTRUCTIONS). Nobody is signaling at this time.

We will follow with another of the e-mail questions. You mentioned, in the press release, that some sales have increased despite declining sales in the hydraulics industry. Could you comment on how you have done this?

I think there are several reasons why we outperformed the industry. In recent years, our strategic focus has been on the marketing and sales of valve packages. That is a combination of a custom-designed manifold and our standard -- combined with our standard cartridge valves. We measure these types of sales and saw a significant increase in 2003. The introduction of our new a electrohydraulics valves has helped stimulate our growth in this area also.

Another reason is that we believe having our complete product offering available 24-7 at the fingertips of our customers around the world via our Web site has helped a lot.

Another major reason is Sun's ability to execute. By that, I mean getting the product to the customer when they want it. Over the past few years, we've greatly improved our book-to-ship cycle, including short-notice deliveries.

Finally, going forward, a couple of things that will help us stay ahead of the industry, as I mentioned to Mike, that the operations in Kansas and France are showing early promise.

There were a couple of follow-up questions to that question, the first of which is, are you gaining share? Are cartridge valves gaining share?

Yes, we believe we are gaining total share (indiscernible) total product line (inaudible) cartridge valves. Basically, it's for the same reasons that we mentioned as to why we think we have been performing ahead of the industry.

The final follow-up question there is do you see distributors building inventory in advance of an economic recovery?

We saw a tiny, little increase in distributor inventories in the U.S. at the end of the fourth quarter compared to the third. We do not see any indication at all that distributions are building inventory.

Thank you, Dick. Again, Pete, I'd like to see if either of the analysts had any questions at this time.

(OPERATOR INSTRUCTIONS). We have no questions.

Okay. One final e-mail question here -- is there a particular reason the strength is mostly in the U.S.? Would you comment on the outlook for other markets as well?

Since our largest single geographic market is the domestic U.S. and it has been down for three years, and we are seeing a 30 percent increase in orders January in February of this year compared to last year, that's why we say that the majority of the increase is in the U.S. operations.

I might add that the increase we're seeing is broad-based geographically; each region is going up.

Thank you, Dick.

I don't think I answered the second part of the question regarding the overseas -- (multiple speakers).

The second part of question was, would you comment on the outlook for other markets as well?

We are also seeing continued strength in Germany and Korea and in total -- for the total company, for January and February, our orders are up 30 percent over January and February last year.

Thank you, Dick. Peter, we would like to open it up one more time to see if there's any analyst questions.

(OPERATOR INSTRUCTIONS).

I'd like to ask a question (indiscernible) listening but it's rhetorical. I just hope wife and new baby are doing great. You're probably listening in from the bassinette, I don't know. Thanks for tuning in.

There appear to be no questions.

Thank you very much for joining us. That concludes today's conference call. Thank you.

Thank you for your participation. You may now disconnect.