Helios Technologies Inc (HLIO) 2005 Q1 法說會逐字稿

Good day and welcome everyone to the Sun Hydraulics first-quarter 2005 financial results conference call. Today's call is being recorded. At this time, I would like to turn the call over to Investor Relations spokesperson, Mr. Rich Arter. Please go ahead, sir.

Thank you, Peter. Good afternoon. Thank you for joining us to listen to Sun Hydraulics first-quarter 2005 financial results conference call. With me are Dick Dobbyn, Sun's CFO and Tricia Fulton, Corporate Finance. Allen Carlson, Sun's President and CEO, is traveling and unable to participate in this call. Once we have finished our prepared statements, we will open the lines for questions and answers.

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

Thank you, Rich. Good afternoon, everyone. 2004 was an excellent year for Sun in all respects, and 2005 is shaping up to be even better. Orders continued to be strong, and demand is up in all our markets. Orders for the first quarter were 31 million, a 25% increase over the first quarter of last year. April orders were 10 million, a 23% increase over last year. We believe second-quarter sales will be higher than the first, despite fewer working days, and we expect to maintain our on-time delivery performance.

We believe Sun's strong financial condition and long-term success are largely due to our philosophy of maintaining balance in our business, both externally and internally. As stated in our just released Annual Report, balancing the interest of our customers, shareholders, employees, distributors and suppliers will remain at the heart of our efforts.

Our primary focus continues to be on marketing efforts and investments to grow and increase market share. Our financial performance and second-quarter outlook will now be discussed by Tricia. Thank you.

Thanks, Dick. First-quarter net sales were up 36% to 29 million compared to Q1 last year. Net income was 3.5 million compared to 1.5 million in 2004. And basic and diluted earnings per share increased to $0.49 and $0.48 respectively versus $0.20 for last year.

Continued strength in the North American manufacturing sector helped increase North American sales by 44% with shipments within the U.S. up 40 1% and Canadian shipments up 71%. European sales increased 43% to almost 9 million. Sales to France were up 89%, Germany 31% and the U.K. 13%. We also saw significant increases in Sweden, Finland, Italy and The Netherlands.

Asian sales increased 14% to 4 million, led by domestic sales in Korea and China. Gross profits were up 55% to 10 million compared to 6.5 million in Q1 last year. Gross profit, as a percentage of net sales, increased to 34% compared to 30%. This increase was primarily due to higher sales volume. We had a moderate and selective sales price increase in January of this year. This, coupled with improved productivity, offset the increased material costs for parts and raw materials.

Selling, engineering and administrative expenses in Q1 were just over 4 million, a slight increase compared to 2004. The increase was due primarily to higher audit fees, including Sarbanes-Oxley 404 compliance.

The Company declared quarterly dividends of $0.075 to shareholders of record on March 31st, which were paid on April 15th. Net sales from operations was 1.7 million, up 500,000 from last year. While net income increased 2 million, it was offset by working capital changes related to the increased volume. Day sales outstanding remain level at 39, and inventory turns improved from 9 to 10.

Looking forward. As order rates remain strong through Q1 and into April, sales for the second quarter are projected to be 30 million, a 13% increase over the second quarter of 2004. Non-recurring refinancing costs and increased marketing expenses totaling $500,000 are anticipated for the second quarter. Refinancing costs related to the replacement of our current debt structure by taking advantage of our strong balance sheet to establish a long-term flexible Credit Facility. We are also moving cash from our overseas operations back to the U.S. Marketing expense increases included tradeshow costs and further development of the design capability on our website. Net income per share for the second quarter is expected to be $0.45 to $0.48. Thank you. Rich?

Okay, Peter. Now, that we're done with that, we would like to open it up to questions and answers.

(OPERATOR INSTRUCTIONS). Scott Macke, Robert W. Baird.

I may have missed towards the end there -- you said the cost for the debt refinancing and the incremental marketing would be 500,000 combined?

Yes.

Do you have a breakout between the two?

I think we are just going to go with the total of the 500,000.

And if I do my math correctly, that is something like $0.04 per share?

Yes. It's about 50/50 in the breakout of between the two.

And this relates to -- in terms of the debt, there's a -- what a 5 million -- excuse me $11 million facility for 5 years. It's at LIBOR plus 190 points?

Yes.

What would the new interest rate be?

We are still talking to the banks right now. And we're talking to several banks, so we cannot really say that right now. We do not have a commitment letter signed by anyone. But we are looking at just doing one long-term, longer-term facility that would be a revolving line of credit.

Next question -- you talked about the order trend in April being 10 million. How did that compare to March?

Well, we have 5 weeks in March, and we only have 4 weeks in April. So you can't really compare apples-to-apples. But the weekly order rate was about the same between March and April. But we did see it decrease. Throughout April, the order growth was slowing.

First, I want to step back into March. When you issued your prior -- excuse me, your first-quarter sales guidance, we did that -- if I remember correctly -- right at the start of March. So you had a pretty good feel for January and February sales. Did March end up exceeding your expectations then by the amount by which your first-quarter sales exceeded your sales forecast?

Yes, by a little bit. And orders were a little bit higher than we had thought, and some of them fall into that quarter because our orders outlook is such short-term.

Okay, when you say the orders outlook is short-term, how short-term? Or what sort of visibility do you have?

Only a few weeks. Our deliveries are about 4 weeks, but our visibility is even less than that.

1 more question, and then I will hop back in queue. I also understand that you pool your distributors for inventory levels -- and was curious if you have done that recently. If so, what sort of trends you have seen in distributor inventory levels?

We have not done that recently. We will be doing it shortly. But we don't expect any big differences.

When you say you don't expect any big differences, is there something particular that you're talking about? How do you gauge that sort of inventory level?

Well, we gauge it specifically by them reporting it. But since they haven't reported it and we don't know of anyone that is stocking up or not stocking, our tendency would be to believe that it is going to stay about level.

(OPERATOR INSTRUCTIONS). Brian Rafn, Morgan Dempsey Capital Management.

A question for you on the ramp up. Your comments that '05 looks more robust than '04, even with the modest accelerating in orders at the end of April. Relative to capacity utilization, we talked about this on the fourth-quarter conference call, I think you guys have some adjacent land at Manatee. And you have made something -- discussion about you had some plans to add capacity or an expansion to the factory. When and kind of like -- I am sensing when is the timing of a decision like that? Is that a '06 decision? Are you looking through '05? Do we have enough spare operating capacity? Or are we at the point where we're looking at expanding?

Brian, we are in good shape as far as capacity in the short and intermediate-term goal. We have been able to bring some good people on the past quarter. And overtime is far from being excessive in total at this point. And we are continuing to move non-critical pots and products outside. So at this point, we don't think that we will have to activate any of those plans to build a new building for some time.

So that's more of a 3 to 5 year plan or 1 to 3 or--?

No, it's just depending on what happens. So we are watching it every month. And the plans are there. And there is no plan to do anything with the plans until we --

I got you.

You know what I mean? Until we see the need.

Can you talk about you guys -- and I want to get this right -- the cartridge markets is a little over 1 billion in cartridge valves. And you guys are approximately 9% of the cartridge market. Can you talk about maybe inroads in cartridge hydraulic valves versus conventional? And if there are any inroads taking place? Or are the market shares relative to the last 5 years about the same between conventional and cartridge?

I don't think we can -- we have any raw hard data on that. But our sense is that we are making more and more inroads into the conventional valves market.

What can you talk about maybe the mix of just within the cartridge valve market, you list in your presentation -- yourself, Hydraforce, Integrated and Sterling. Some of those are private. Can you kind of give us a sense competitively what the other competitors are doing? Are there any companies that might possibly be private and in the process of being sold or having financial problems? Kind of getting a sense as to where you guys are in accumulating market share on the cartridge side.

You asked two or three questions with that one. Let me back, and see if I got your question right. One of them was -- do we know of any private companies that might be up for sale that we are competing with? Is that--?

Right, right exactly. Because I think Integrated and Sterling -- some of the cartridge competitors that you have are not public companies. Therefore, the information -- unless you're an insider -- is probably rather obscure -- and just looking at kind of what the competitive structure is on the cartridge side.

We cannot gauge Sun's quarterly sales to the sales of our competitors. I think you were getting at -- how do we know if we are getting market share?

Right, exactly.

All right then. We just know that generally speaking, certain areas of the business are -- they are not inside for us like our Custom Valvepaks are rising at very large increases rates. And when we compare that to the National Fluid Power Association's numbers, of which our competitors are part of that base, we know that in that area where we -- well, we don't know. We are quite confident that we are gaining share. And then particularly in like Germany, where the total market is not really going through the roof, and we are doing very well. That by deduction, we say okay, we are getting more market share.

Can you kind of talk -- give us a little update how the electrohydraulics valves and maybe the stainless-steel valves out of the U.K. facility are doing as we enter into the '05 year?

I really don't want to get specifically into that, mainly just because the information is proprietary. But generally speaking, the solenoid valve continues to bring in more custom valve packages for us. And the stainless, we are just trickling it out into the marketplace at this point.

I'm going to ask you one more on the commodity side. Without giving me magnitudes, can you give us a sense of direction in your cost structure relative to steel pricing? And not maybe magnitudes or numbers -- I know you guys are hesitative of that -- but are we plateauing (sic)? Is it decelerating? Is it flattening? Can you give us a sense in '05?

Right now, we feel that it has kind of plateaued (sic).

And then, just can you give us a sense of kind of your Sarbanes-Oxley 404 costs this year, option expensing and maybe what you're seeing in freight surcharges for fuel?

I don't know about the freight surcharges for fuel. Obviously, they are some. It has not leapt out at us in the numbers. And you know, I think I will go take a look. But the Sarbanes-Oxley costs, we are estimating incremental outside costs of approximately $0.5 million.

(OPERATOR INSTRUCTIONS). Michael Brigg (ph), Private Investor.

First of all, question on the revolver, extension or the credit extension. Do you intend to pay any debt down as a part of that move?

Yes, we're bringing some money back from our European -- or actually all of our foreign subsidiaries right now are in the process of that. And that will be part of going through the refinancing. We will pay down as much of the debt as we can with money that we are able to bring back from there. We are trying to work through some tax issues, figure out how much we can bring back, but probably somewhere between 4 and 5 million.

And can you comment at all on the tax rate, considering that the pattern for the last 2 years has been for a declining tax rate, as the quarters proceed?

Right now, we anticipate there could be a decrease coming forth from the American Jobs Creation Act, as we go through the year. But it's going to be minimal for the first year. We would not anticipate that it would be any more than 1% decrease.

And finally in the past, occasionally, you have indicated at least the relative size of large customers. Have you at all indicated recently the approximate size of your large diesel engine customer?

We have not indicated that, Mike. And at this point, I don't feel comfortable doing that, except that it is growing.

Is there anything I could do to increase your discomfort to a level where you might offer that information?

If you can place an order for about 20,000 cartridge valves, that might help.

I don't need them; thank you.

Scott Macke.

In terms of capacity, you made a comment about overtime. And if I recall correctly from the last conference call, the fact that you had people working overtime is new, is that correct?

It is new to the past year.

To the past year.

Yes.

When you say that, how many quarters have you had shifts that were running overtime?

We started in the second quarter. And it has been steadily increasing. In the first quarter, we actually shipped 30% more without any additional overtime to speak of. We work on a 4 day/10 hour-a-day work week. So we have comfortable room for expansion on Fridays to start with and then perhaps Saturdays.

So for us non-manufacturing or the financial types anyway, then there's capacity available on Fridays and then potentially on Saturdays? Do I understand that correctly?

Exactly.

And then beyond that, then that's when you would start talking about perhaps a new manufacturing space in Florida?

Well, we also can -- the second shift is not a full shift. So we can work like the devil to fill up the second shift. And then also, we can outsource some of the activities that we have.

And when you talk about the second shift not being a full shift, that's in terms of just the number of employees you have working that shift?

Correct.

How full is that shift?

It's about a third of the regular shifts.

And then in terms -- I guess maybe another way to ask this question about the additional space in Florida -- from whatever point in time that you would ultimately decide to go ahead with that space, if you were to do so -- how long would it take from making that decision to opening up the additional space to actually having that space coming online?

That is really a tough one, Scott.

I mean just in a broad sense, is this something that would take a year? Is this something that would take over--?

No, we are talking a year, probably at least.

Brian Rafn.

Could you guys put a number on -- you mentioned a modest price increase in January. Can you give us a sense -- I'm sure that is not uniform across all products. But can you give us a sense of the magnitude of that?

We don't want to get too deep in some of the numbers. That's relatively proprietary. But we did mention last time that the modest sales increase in January would be more than enough to cover the material cost increases we have seen and expected to see in the first quarter.

Can you kind of give us a sense -- your strategy going forward relative to capturing market share competitively? Is it strictly driving units? Is it a quality, durability of the product, reliability? Is it price discounting? Is it speed of delivery? What kind of is your thesis going forward in this fairly difficult competitive market landscape?

A lot of it going forward is a lot of what we have done to get here. And that is the quality and the performance of the valve itself and the broad offering that we give to a hydraulic engineer. We believe that in the past year or so, we have gained and perhaps will gain even more market share as a result of our excellent on-time delivery performance -- where others are perhaps struggling at this time to keep up with the demand.

The new products continues to be a driver for us. And we intend to keep expanding the solenoid, thus expanding the capability to make even more varied custom valve packages. In our website, as we mentioned, we are spending some money on right now. We view as just a fantastic marketing tool to get in the hands of the end user, not only just to look up to Sun to what's available and what it might cost them but also to actually get in there and fiddle around and build some things.

Also, our geographic -- we are quite global, considering the size of the Company. And we continue to do things on that front, including at looking at what we might do next in China and that sort of thing.

Can you put some numerical quantification of your on-time delivery cycle? Are you meeting 98% of the orders within a 4-week period? Or is it kind of where you're at duration wise?

Yes, I would be proud to give you those numbers. We measure against the customer request date. And understand that the customer request date of 3 days doesn't bother us because our pricing structure compensates for the scrambling we have to do. And we do all our darndest to meet it. But our on-time delivery performance runs an average of 90% plus. And the majority of the 10% that is not on time clears in 1 week to a 1.5 week.

Is that diminished at all, as you have obviously ramped up the operating leverage in the business volumes?

Well, I will be honest with you. We have seen a few bumps, where a supplier might have been pressed to the wall. And it might jump up for a week. But then we go in, break the bottleneck, and it flows again. So it's not as easy as it was 2 years ago. But generally, we are still on those numbers.

Can you talk to about -- you mentioned new products as one of your areas to build the business. Do you have any sense of measuring the number of new products you have launched in the last 3 to 5 years and what percentage of that would constitute topline revenue?

We just started tracking that. And so we don't have a good history on it. So I really am reluctant to get those numbers out.

Is that a number you would divulge in the future? Or will that be at the CIA headquarters at Langley?

Well actually, we're going to set up a post in Afghanistan.

Brian, if I could chime in a bit. Many of the new products are so complementary to the overall product line that their impact -- there's a true pool through impact on the rest of the products. And I think that measure is reflected in the topline sales growth.

Yes, it is just difficult for us to measure that when you are saying that one specific product goes into that one custom valvepak, and it brings with it 14 other cartridges. That is our problem.

Excellent job guys. Keep it up. Thanks.

Scott Macke.

You can't get rid of me. And I apologize for not saying so sooner, congratulations on an excellent quarter.

Where do I want to follow-up with? One, talking about international sales -- and earlier, you gave the example of Germany, where plus or minus in a flat market then sales in the first quarter were up 36%. How much of international growth overall is attributable to just what I will call organic growth? And how much is attributable to adding new distributors?

I do not think we have really added -- I do not think adding new distributors has been a major, major factor. So then I would say, it's mostly organic growth.

And certainly looking back -- let's call it over the last 5 quarters or so -- then, the rate of growth in that United States segment has outpaced that internationally. Is that a trend that you expect to continue, both in terms of your second-quarter forecast and maybe thinking more long term or in general -- 2005 as well?

In the first quarter, we had about the same increase in North America -- in Europe as we did in North America. The year-to-year comparison with Asia shows a percentage increase. Was it 13 or 15?

14.

14%. So I think we're going to say a relatively same mix with Europe and the U.S and with Asia -- with a nice increase but not to the levels that we saw last year.

And to what would you attribute that disparity between say the Asian growth rate and the European growth rate?

Well, I don't think there is any question that the machines coming out of Japan and Korea going into China are in less demand -- going into China that that demand or growth rate has slowed.

That would make sense. And then just in terms of that United States segment, if I noted correctly, then a certain portion of the sales recorded in the United States segment actually go to international customers as well, is that correct? Or maybe (multiple speakers)

Yes, the operation segment does go to Asia and some other parts of the world, even some to Europe. Now, when we talked about a 43% growth in North America, we're talking about only sales in North America.

Okay, so if I look at that -- that United States segment for the first quarter, I believe the growth rate was 40% year-over-year. And you are telling me that the growth rate to just North America out of that segment was 43%? Do I understand that correctly?

Yes, that also includes the 70 something percent increase to Canada -- 71%.

That is included --

So Canada and the U.S. are in that 43% increase year-to-year.

And then in terms of price and cost -- if I understand correctly -- in general, the strategy has been to hold the line more or less on price. Well that continue to be the strategy going forward?

I can't really say that we have said okay, that is going to be our strategy going forward. So I really cannot answer that. But I will ask Al when he gets back. We haven't had a lot of discussions about it; let me put it that way.

And then I will hop back in queue in case somebody else wants to ask -- but do have a couple follow-up housekeeping items. Let me hop back in queue right now though.

Brian Rafn.

Question -- you mentioned on the capacity side that you talked about. You have an ability to outsource some of your production. I would take that is machining cartridges or something. Has that at all, the outsourcing and not controlling that in-house proprietary, been a detriment to quality or your cycle time deliveries?

Now, it is not a detriment at all. And what we tend to outsource in the case of finished product would be a relatively simple manifolds. And then in terms of parts, there are parts unrelated to our finishing -- the parts that have either not gone -- that have not gone through our finishing processes. But we keep everything in-house as relates to all the finishing -- lapping, grinding, honing. Because that is where we need the quality, and we get it. It would be the parts prior to that.

And then you talked about your website. Is the thought on the website in an engineering sense in creating an interest and then showing a product line. And you mentioned something about the ability to build a composite design or something. Does the website at some point become a direct sales function? Or is it strictly just a specification function type by engineering tool?

At this point, I am going to ask Rich to give us the answer because he's kind of heading up that whole task force with the website.

Brian, we built the website to be -- its fundamental focus is the delivery of information. It's really made for engineers. We have always had difficulty communicating the breadth of our product to all the markets around the world that we serve. And the Web has just turned into the perfect way to do that.

Some of the tools we're working on is allowing people to go through more of a configuration process to marry cartridges and manifolds together and get composite information on those products. We do provide the price, and we provide everything else.

Right now, there is no plan to go to online ordering. But the ability to configure products is there now, and it's going to get even better in the future. Those are some of the projects we're working on right now.

And then just one final one on the labor pool. As you build business, you talked about the ability to start perhaps on a Friday or add Saturday -- adding some volume capacity to the second shift. Do you see without building a new building, without getting into that, do you see looking at raising headcount, as we get into the back half of the year?

Right now we are continuing to hire. Because we do have a certain amount of attrition built in with people that prefer to go back to Ohio or whatever. So we are continuing to hire. And the way that we attract people is basically is our working environment and a fair pay and excellent benefits.

Would you characterize going into '05 here, Dick, that you are growing beyond just the net retirement, net attrition that you are actually adding headcount?

We really can only see out 4 to 6 weeks. So we can't really say what our needs are going to be at that point.

But if the demands were such and we had a follow through end of the year, Florida would give you the opportunity you would feel comfortable that you could (multiple speakers)?

We think there's still plenty of room and plenty of good people out there to join the Company if we need them, no question.

Scott Macke.

Housekeeping questions. First off, I was curious -- the share count and tax rate that were billed into your second-quarter forecast?

The second-quarter tax rate is flat to the first. And the share count is the same as well. We didn't forecast any increase.

With respect to the tax rate then, I know we've talked a couple times about the Jobs Creation Act -- maybe shaving 100 points off that tax rate. If I've got this information correctly, then last year, we were talking about a 33% tax rate for the full year. Are we talking about 100 points lower based on that 33% tax rate? Or are we talking about 100 points lower than this 37% tax rate in the first quarter?

It is actually 100 points lower than the tax rate that we have in the U.S., which is running just over 37%. But because we are having all these incomes from the different countries -- Germany has a very high tax rate, and their income is very good. The rate tends to go up because Germany and the U.S. are putting a lot of money into the profit pool. And they are in the highest tax jurisdiction. But the 100 points just shaves off the U.S. side.

Thank you for the clarification. And then when you talked about repatriating some earnings -- bringing some cash back -- if I understand correctly, you have tax credits that will offset the 5% tax on those earnings repatriated?

Yes, for any money we bring back from the U.K. and Germany, we already have previously taxed income that will cover that. We did bring back some money from Korea. And there was a small amount, about 400,000, that will be taxed at normal tax rate, less any tax credits that we generate from 2004 tax returns.

But when we talk about this potential for I believe the number was something 4 to 5 million that might be brought back in the future. Then, the tax credits will in general cover that?

Yes.

What did currency contribute to first-quarter sales?

It was only a 2% difference. It's up 36% overall and 34% without the currency effect, so it was very minimal.

Is that spread I guess roughly equally through the segments? Or does that have a tendency to manifest itself in certain segments more than others?

It was a little bit higher in Korea and Germany. It was flat in the U.K.

And then we talked about these marketing expenses in the second quarter. I believe you mentioned tradeshows and website. Are those things that we can expect to continue in the future, meaning that would expect increased level of work or cost on the website going forward and perhaps increased participation in tradeshows? Or are these things that will happen in the second quarter and then sort of dissipate going forward?

The tradeshow expenses are a one-shot thing. We had a big tradeshow in Europe that we participated in that was in April. The cost for the website are probably going to be ongoing. We are still looking at them to determine what can be capitalized and what needs to be expensed of them. But there will probably be some smaller amount of ongoing related to that.

And there appear to be no further questions at this time.

Well, we would like to thank you all for joining us and listening. I would like to remind all the shareholders that our annual meeting of shareholders will be on Saturday, June 11th at 10 a.m., here in Sarasota, Florida at our Tallevast Road facility. Thank you for joining us.

This does conclude today's conference. Thank you for your participation. You may now disconnect.