Helios Technologies Inc (HLIO) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to this Sun Hydraulics' first-quarter 2004 financial results conference call. Today's call is being recorded. At this time I would like to turn the conference over to the spokesperson for Sun Hydraulics, Mr. Rich Arter. Mr. Arter, please go ahead, sir.

Thank you, Rufus. Good afternoon. With me today are Allen Carlson, Sun's CEO and President; and Dick Dobbyn, Sun's CFO.

Once we have finished our prepared statements, we're going to open the lines for question and answers. But 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 Allen Carlson.

Good afternoon. For the past few years, Sun continued to invest in operational capability and capacity -- taking new products to market and expanding geographically. Our focus was to remain profitable and generate organic growth opportunities while at the same time positioning ourselves to take advantage of the eventual upturn.

In the first quarter, we saw the beginning of a recovery. Sales increased 30 percent, and orders increased 37 percent compared to the first quarter last year.

Order rates increased throughout the quarter and continued through April. The increases were across all business segments and all product lines. We were able to respond quickly to the rapid upturn in business because we kept our workforce intact throughout the protracted downturn.

Customer deliveries have remained on track, and even more importantly, we continued to show increases in productivity. We believe that product costs will continue to decrease, and margins will increase through these additional productivity gains. And will see the effect of manufacturing overhead costs spread over a larger sales base.

Dick will now review the financials.

Thank you, Al. In virtually all measures of financial performance, Sun excelled in the first quarter, and the outlook for the second quarter is even better.

The 30 percent increase in sales yielded net income of 1.4 million or 20 cents per share. This compares with net income of 300,000 or 4 cents per share for the same quarter last year.

Year-to-year comparisons of net sales were as follows. Net sales in the U.S. operation increased 28 percent, driven by a broad-based 26 percent increase in North American shipments, and a doubling of shipments to Japan. Sales in the Korean operation increased 50 percent. The increases in Japan and Korea were largely due to the demand for construction equipment in China.

Total European sales increased 22 percent, led by particularly strong demand in the UK, Sweden, Finland, Germany and Austria.

The 30 percent increase in sales generated a 55 percent increase in gross profit. Gross profit as a percentage of net sales increased to 30 percent in the first quarter compared to 25 percent last year.

The increasing gross profit as a percentage of sales was primarily due to the higher sales volume in each business segment, and a significant productivity increase in the United States operations.

Selling, engineering and administrative expenses increased 12 percent compared to the same quarter last year. The increase was primarily due to higher professional fees, outside services and compensation costs.

Cash from operations for the quarter was 1.2 million compared to 1.7 million for the same quarter last year. The increase in net income was offset by the natural rise in accounts receivable and inventory to meet the increase in sales. Day sales and account receivable were about the same as last year, and inventory turns increased 11 percent.

Capital expenditures were 1 million for the quarter compared to 500,000 last year. However, capital expenditures for the year are projected to be similar to last year at 3.5 million.

We continue to pay a dividend in the quarter as we have every quarter since going public.

I will now turn it back to Al.

Thank you. As Dick said, the outlook for Sun is exciting. Sales for the second quarter are projected to be $24 million. Which would be a 29 percent increase over the second quarter of 2003, and a 12 percent increase over first quarter sales?

Net income per share on that sales level is estimated to be 33 to 37 cents per share. This compares with 12 cents per share for the second quarter of last year.

We're delighted to be busy, and look forward to capitalizing on the positive business climate. We'll continue to focus on productivity, product and market development, and customer satisfaction. Thank you. Rich?

Rufus, I think we would like to open it up to any questions we might have.

(Operator Instructions). Peter Lisnic, Robert W. Baird & Co.

Quick question on the opening commentary. You talked about -- excuse me -- orders -- kind of (indiscernible) increasing throughout the quarter and then continuing through April. I'm just wondering if you could give us a little bit more color as to what the magnitude was -- from January, February to March to April with particular emphasis on -- I guess the February to March transition was probably stronger than you had expected, given that your first -- you know when you came out with your outlook for sales -- the actual results actually beat that outlook. So I am guessing March was stronger than you had thought. But I am also wondering how April is shaping up compared to March?

I'll take that, this is Al. I will take it back to the beginning of the year.

As we closed 2003 and began 2004, the first two or three weeks of 2004 looked to be like an extension of last year. We did not see anything. And we were not expecting anything.

As January progressed -- the last week of January, perhaps maybe the third week of January, we began to sense that there was a pickup. But, one week a year does not make. So we continued to watch it. In February it got stronger, and it just continued to escalate through the quarter.

And I think the peak of the quarter might have been the first or second week of March.

But looking at April -- April, I believe, is even stronger than March. I don't have the precise numbers at my fingertips. But it's at least equal to if not stronger than March. So it seems to be continuing to grow.

Okay. And so -- equal to or stronger -- I guess meeting on average daily order rate basis.

Right. Yes. Exactly.

Okay. So I guess the crux of my question is that -- the top line is coming back. But if I look at what you're forecasting for the second quarter, 33 to 37, and just, you know, without getting into a lot of the math, that's an incremental net income margin of around 25 percent -- which suggests pretty strong operating, or year-over-year incremental operating margin assumptions.

And I'm guessing that has something to do with all these productivity enhancements or investments that you have made and that you have started to see in the US.

Can you just talk about what kinds of benefits you're getting? I don't know if you quantify anything. But what kind of benefits you're getting? What you have actually done and what we should expect going forward? How much of this has altered the business model? Or is this what you can pin your kind of your hopes on in terms of looking at a 40 to 50 percent incremental going forward? Is that was driving that? I guess (indiscernible) my question.

All right. I'll take it again -- this is Al. If you go back to our 2002 annual report, we began to provide some information in that report about the things that we were doing to improve our productivity and throughput and to get ready for this upturn.

But since that report, which is now a little over a year-old, we've done some more things. For example, assembly and subassembly automation equipment, today, for example -- a large percentage of our products are identified through the use of labors -- lasers and robots, loading and unloading what used to be done manually with stamping equipment.

Process changes internally, such as environmentally friendly aqueous parts cleaning as opposed to vapor degreasing that we used two or three years ago.

We've redesigned some of our products. So some of it comes from product engineering -- such as the use of engineered plastics to speed assembly and improved design integrity of the product. We have partnered with key suppliers to improve parts flow and reduce parts handling and to also increase capacity. Productivity gains also come from some of our support functions -- such as in the shipping and packaging area -- where we are using more robotic equipment, where we are using bar coding to improve parts flow and improve the quality and make less mistakes in the packaging area.

We are using more integrated software in the shop floor to provide real-time information to the folks that are producing products. So, it's all of these things and probably a lot more that are leading to these productivity gains that we're seeing.

Okay. And are there certain metrics or quantifications that you can look at that tell you kind of what the benefit is of these initiatives? Meaning -- can you tell throughput is up? Can you tell that you have more capacity and you won't have to add equipment or plan for X amount of years? What kind of metrics do you look at to tell you -- what this is bringing to the bottom line, I guess?

It's difficult to quantify it as you go. You get a much better picture as you take sequential snapshots in time -- whether those snapshots are quarter-to-quarter or year-to-year, but as you go, it's very difficult to put a number on each of these productivity improvements and there are literally hundreds of them going on all the time. We just keep going working away at it.

I don't know if there is something in the model that -- from the financials that can give you a clue. I will turn it over to Dick, and perhaps he's got some input.

No, that is exactly right, Al. We don't have a business model out two years that says -- as a result of all this activities our direct label will now be 32 percent less than that.

What we do is we see it each quarter at a time. And, yes, we're seeing our percentage of direct labor and our percentage of related variable costs of direct labor (ph) dropping significantly as a percentage of sales. And I'm talking about the US operation now, where all the cartridges are made.

Okay. So let me ask the question I guess an alternate way, and that would be, how far along are you kind of in the productivity improvement phase? And, is there opportunity to expand it outside of just the US operations?

Well, it's not really a phase. It's what we do. And if you're asking -- do we have other programs, yes, we have some other programs, some of them quite significant, that should yield results in the future.

As it relates to overseas, our overseas operations are primarily distribution, marketing and support -- technical support operations. And, so the major thrust of productivity improvements comes in the US operation.

However, add two things to that, Dick. Going back to your original question, how deep is the well in these productivity gains -- is there more that you're working on? And is more being exposed? And the answer is -- yes to both.

I see opportunities that we're working on and exposing all the time. So, this will continue for some time. It's a learning -- it's a learning experience. And sometimes a productivity gain leads to two or three other productivity gains you did not even anticipate.

Overseas, and in some of our sales in technical areas, we're also continuing to make productivity gains -- but they are in a different way. We're doing more with our engineering folks. Because of the tools that they are using. ProE Software, for example, that does 3-D modeling is a productivity gain that our engineering people use.

Our marketing people -- extensive use of the Web to broadcast information -- a huge productivity gain. So, the gains are not just on the shop floor. They're in the office and they are in places like China and Korea and Germany and England and France, etc.

Okay. Great. Appreciate the answers. Thanks, guys.

(Operator Instructions).

Rufus, I'm going to come in here with one of the questions we've received via e-mail. And after we answer this one, maybe you could see if there's another question from one of lines. This is a question from Brett Biely (ph), Rutabaga Capital. Would you please comment on currency and how much it helped or hurt the results? Dick, would you like to respond to that?

Yes. The 30 percent increase in sales from the first quarter this year to the first quarter last year, adjusted for currency, would be a 27 percent increase. So the real volume growth is 27 percent, and 3 percent of the 30 percent related to currency. On the effect on gross profit, for transaction gain, it's about 220,000 pretax.

Great. Thanks, Dick. (indiscernible) again see if there's another call or another question from one of the callers. Rufus?

Follow-up question, we return to Peter Lisnic, Robert W. Baird.

I'm back. Dick, I guess -- just another question, I think I've asked this in the past. But I was kind of surprised to see UK unprofitable again. Is it kind of the same story there? I guess, when do we expect kind of the numbers to turn positive there?

As long as the currency stays where it is now, we expect that they will get positive and stay positive. The currency staying where it is, and increased volume, is what I mean.

During the quarter, they were adversely affected in their cost of sales by the fact that they buy in U.S. currency, and they also sell a lot in U.S. currency. So, I'm assuming that with the current rates going forward, that would not be the case.

Okay, so turning profitable second quarter, going forward kind of deal?

Yep.

And I just wanted to I guess follow-up on another question on that kind of you know -- first quarter and April order or demand strength.

We'd seen a lot of it or heard a lot of it out of the OEMs -- Cat (ph) for example. I'm just wondering if you have seen anything out of the distributors, whether they have started to expand their inventories levels? We've seen a little bit -- Parker was indicating they were getting some indications from the field that their distributors are building inventory a little bit better, which would suggest that we got a little bit of a broadening out in the recovery. Just wondering you've kind of heard from your distributor field?

We pole our distributors quarterly. And so, the last pole where we calculate the inventory in the field that our distributors have, was the end of March. So, the information is relatively new. At that time, distributor inventory was still going down.

Down year-over-year or sequentially?

Year-over-year, sequentially -- it's going down. It has been going down for three or four years.

The reason it's going down is that our distributors understand they can get product when they want it. And there's less need for them to carry buffer stock. And if they do carry buffer stock it perhaps isn't the two or three week supply. It might be a two or three-day supply.

So, our gains in getting products through the shop floor are not only leading to productivity gains that we're seeing, our distributors are able to spend less of their money on inventory, and more of their money on a sales effort.

Okay. Which I would assume would in theory help your share position relative to competitors, if that is the case?

Absolutely. That's why we do it.

Okay. All right, fair enough. Or, I guess, a corollary to that question would be -- have you seen anything on your end in terms of material shortages -- where you're not able to get supplies of steel or aluminum or whatever it might be -- any shortages there? And what are you seeing in terms of pricing from the material side?

This is Al. I will take that question.

We're not seeing any shortages on material. We use refined bar stock and aluminum. We have supply agreements in place that allow our suppliers to understand our needs, and get it to us when we need it. Our suppliers who consume raw materials are pretty much in the same situation.

So, supply of raw materials is not a problem. Raw material cost is not that significant in our overall cost structure. However, the purchase parts that we consume or buy are subject material price increases and we're seeing some pressure in this area but the data has been minimal. And we have worked with both of our suppliers -- our suppliers on the outside and our internal operations that supply parts to improve productivity, which offsets the material price increases.

So, I guess in summary, there is pressure there. But we're working hard to minimize it.

Okay. Thank you very much.

We have no further questions on our roster at this time.

Okay. Then I'm going to ask a couple more questions that came in via e-mail from Brett Biely. Question number two of Brett's would be -- the international markets picked up nicely. Could you give us some color on the demand drivers and the outlook by a major market?

This is Al, I will take that question. The overall demand is basically up by product -- just whatever product line we have, by geographic market everywhere. So the good news is, it's a broad -- very broad based recovery. And if we were to put our finger on maybe one area -- but there are literally hundreds or if not thousands of areas that are up. But the one area that you can see, as Dick said, is the demand for product in China is fueling an extraordinary increase in Japan and Korean shipments.

A final question from Brett Biely, and maybe we will direct this one to Dick. What is the current average order size?

The current average order size -- I will use the U.S. operation where we're shipping all the cartridges from. Using numbers for the quarter is 2,500. $2,500 per order.

Thank you Dick. Before you go on, I would just like to just clarify the distributor inventory -- I didn't have an absolute number. I knew it was down. But I have been advised that the distributor inventory from the fourth quarter is down 4 percent in the first quarter. So, that's the absolute number. Would there be any more questions in the queue, Rufus?

And with a follow-up question we return to Peter Lisnic, Robert W. Baird.

I won't go away.

We're glad to have you, Peter.

Thanks, but at least somebody does. The last question I have -- excuse me -- is -- we talk about some of the new products and you have had press releases on some of the new products that you have had out there. Is there anything, in the past quarter or so, that you have kind of come out with product-wise? Or even customer-wise that is new and that you're excited about and would like to talk about?

There is. In fact, for the past couple of years we have been talking about our range of electrohydraulic products and our ability to take those electrohydraulic products and put them in packages and create solutions for customers.

I just came back from a tradeshow in Germany -- probably the world's largest show of construction equipment -- a show called Boma (ph) -- and Caterpillar had on display a piece of equipment -- a hydraulic excavator -- that was filled with some of our latest products and packages that were put on their midsize excavators. That is very novel solution to improving productivity, fuel consumption. And this was an example of where some of our new products, taken into packages and in particular the electrohydraulic products, are leading us into new markets and with new customers.

So, that was exciting for us. And Cat had a great following at the show. And actually, I believe, the last number I heard sold at the show -- six machines with this package on it.

Okay. Great. And just forgive my ignorance -- but what are the electrohydraulic package replace on that excavator? Was there -- is this a share gain or is it market penetration I guess -- if you could distinguish between the two?

Market penetration for us. The valves that were on previous generation -- they weren't produced by us. And what the upgraded machine does is not only improves the efficiency of the machine, but it allows the machine to go into like a regeneration mode. Where it takes the energy from functions like let's say breaking. That goes back into the machine to provide propulsion or lifting. It allows them to save 40 percent -- approximately 40 percent of the fuel, for example, on that machine. Which is big numbers on a midsize excavator.

Future machines that they will be incorporating this with can use smaller components, smaller engines and they extend the reliability, because the equipment is not being worked as hard as they are able to go into a re-gen mode with their hydraulic system.

Okay. So I got, I guess, at least a couple more follow-ups on that. Because that sounds really interesting and exciting.

And, you know, they have only, I guess, put on this midsize excavator. Have they talked to you about, you know, the larger size or smaller size excavators?

And the follow-up to that would be -- what about the rest of their construction equipment portfolio? Is there an opportunity to use this -- because I'm assuming a 40 percent fuel savings is just as good on excavator as it is on a wheel loader. So I got to believe there is more demand outside of just midsize excavators out of Cat. Can you say anything about that?

I really cannot. We have had discussions with Cat on a number of issues, and I think it would be inappropriate for us to release their future products at a Sun webcast.

So -- I would leave it up to them. But they did announce this particular vehicle. It was on display. You could an see the components. You can talk to the engineers who were developing this next-generation product.

I guess I would just leave this by saying -- we were excited to be a part of it. And the people at Cat were very excited.

Okay. Last follow-up. Can you give me a sense as to what the content would be on a midsize excavator for this electrohydraulic solution or package?

The content on these early machines -- and I will say -- these were not production machines -- they were either prototype or pilot production machines, somewhere in the middle there. There were a total of seven packages per machine manufactured by us. A number of valves, probably somewheres around 15 to 20 valves. And the content on these particular machines -- the dollar content -- I could give you the number, but it's meaningless. Because, as I said, they were prototype and pilot production. But, it's essentially -- it's a Caterpillar machine controlled with Sun cartridge components. Completely.

Okay. All right. Thank you very much.

And ladies and gentlemen, we have no further questions on our roster at this time. Therefore, Mr. Arter, I will turn the conference back over to you for any closing remarks.

Thank you, Rufus. A recording of this Web-cast will continue to be available at the Investor Relations area of Sun's website at www.sunhydraulics.com. And I would also like to remind people that Sun's annual meeting of shareholders will be held in Sarasota, Florida, on Saturday June 12 at 10 AM. Further information on that is also available on the Web site.

With that, I would like to thank you all for joining in.

And, Ladies and gentlemen, this does conclude today's Sun Hydraulics first-quarter 2004 financial results conference call. We do appreciate your participation and you may disconnect at this time.