Helios Technologies Inc (HLIO) 2005 Q2 法說會逐字稿

Good day and welcome, everyone, to this Sun Hydraulics second-quarter 2005 financial results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Richard Arter. Please go ahead.

Good afternoon and thanks for joining us to listen to Sun Hydraulics' second-quarter 2005 financial results conference call. With me are Dick Dobbin, Sun's CFO, and Tricia Fulton, Corporate Finance. Allen Carlson will not be able to join us for today's 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. Business conditions in the second quarter helped to produce strong sales and record earnings. Our earnings continue to be bolstered by the high-level of productivity throughout the Company. Revenues continue to grow, being driven by our delivery performance, the Sun website, our global distributors, sales of valve packages and electrically actuated cartridges. In June, we secured an equity position in WhiteOak Controls, which designs and produces complementary electronic control products. We're working together with WhiteOak to develop electronic products that will enhance our next generation of valve package offerings.

We're pleased that our performance has resulted in our inclusion in this year's Russell 2000 Index. This helps improve the visibility of Sun Hydraulics as an attractive long-term investment for the investment community. Our financial performance and third-quarter outlook will now be discussed by Tricia. Thank you.

Thanks, Dick. Second-quarter net sales were up 17% to 31 million compared to Q2 last year. Net income was 3.5 million compared to 2.6 million in 2004; and basic and diluted earnings per share increased to $0.33 and $0.32 respectively versus $0.25 for last year. All EPS information reflects the 50% stock dividend issued to shareholders of record as of June 30 and paid on July 15.

Growth continued in the North American manufacturing sector with sales up 18%. Shipments within the U.S. were up 18% and Canadian shipments were up 28%. European sales increased 20% to 8.7 million. Sales in Germany were up 21%, France 8%, and the UK 5%. We also saw significant increases in Finland, Italy, Ireland, and the Netherlands. Asian sales increased 21% to 4.5 million, led by domestic sales in Korea and China.

Gross profit was up 20% to just over 10 million compared to 8.4 million in Q2 last year. Gross profit as a percentage of net sales increased to 33% compared to 32%. Gross profit increases related to higher sales volume were offset by increased material costs of parts and raw materials, mainly in the U.S.

Sales, engineering, and administrative expenses in Q2 were 4.5 million, an 8% increase over 2004. The increase was due primarily to higher audit fees, including Sarbanes-Oxley 404 compliance, personnel-related expenses, and costs for a biannual European trade show. As Dick stated we made an equity investment in WhiteOak Controls by acquiring 40% of the company for an acquisition price of 400,000. The majority of the investment will be capitalized as developed technology and will be amortized over a period of 10 years.

The Company announced a 50% stock dividend to shareholders of record on June 30, payable on July 15. For every two shares of Sun stock owned, shareholders received one additional share. A cash dividend of $0.05 per share was also issued on the new total shares outstanding after the stock dividend.

Net cash from operations was 8.5 million, up 2.5 million from last year. The increase was primarily due to the increase in net income. Days Sales Outstanding increased slightly from 33 to 34, compared to Q2 last year; and inventory turns remained steady at 11.

Looking forward, sales for the third quarter are projected to be 28 million, a 20% increase over Q3 last year. Net income per share is expected to be $0.24 to $0.27, compared to $0.18 in Q3 last year. Sun's business is seasonal. We generally see increased sales during the second quarter of the year, largely as a result of the order patterns of our customers. Therefore our second-quarter net sales, income from operations, and net income historically are the highest of any quarter during the year, with the third quarter looking similar to the first.

We are in the process of finalizing new loan documents related to refinancing of our existing debt. Our strong balance sheet allows the new credit facility of 35 million to give us long-term flexibility coupled with a favorable rate structure and covenants. Nonrecurring financing costs of 200,000 related to our current debt will be written off in Q3 when the new facility is in place. We anticipate that we will pay down a substantial portion of the debt in the U.S. when we close on the new line of credit.

We are accelerating capital expenditures for the year from 5 to 7 million to increase capacity in anticipation of continued future growth. Thank you. Rich?

Okay, Steve, if you would we would like to open the lines for questions now.

(OPERATOR INSTRUCTIONS) Michael Chandra, Robert W. Baird.

From your comments in the first quarter call, you mentioned that the April weekly order rates were slowing slightly relative to March. Did that continue in May or June, or did it pick up as the quarter progressed?

It picked up a little bit going forward into May; slowed down a little in June. But they are all about the same. We aren't really seeing a big increase or decrease in the order rates.

Okay. Is it the mobile that continues to be stronger than industrial, I take it?

We don't really -- we can't really see that. We don't have a view at the end-user.

I see. How about -- you're almost two weeks into August. How were July and the first part of August doing, compared to the second quarter?

The July order rates are flat to June, and also to the Q1 order rates.

Okay. How about so far in August?

About the same. We have just a couple weeks in there.

Okay. We mentioned also during last call that you were possibly going to take a poll of some of your distributors to see how inventory levels were doing. Did you guys go ahead with that? If so, what were the results?

Yes, we did go ahead with that; and inventories at the distributor level are flat.

They're flat? Okay. In regards to your WhiteOak equity investment, is that normal for you guys to take an equity investment in companies you're interested in acquiring their technology? Or is that a new method?

I think it is really a new approach for us. The only other equity position we have is on a joint venture in China. That was really to get product into China, not for technology or production capability. So I would say this is kind of a first for us.

Okay. I noticed you got that onto your website. Is that part of the agreement that you sell their product through the website and they in turn help you develop some new technology for your products?

We do not have an agreement that that's specific. But we're going to help WhiteOak get their products to the market in a variety of different ways.

Okay, through your distributor network, I guess, as well then?

Sure.

Okay. That's good for me for now.

Brian Rafn, Morgan Dempsey capital.

Question for you on the -- you had made in your statement that you were accelerating CapEx from 5 million to 7. Machinery, buildout at Manatee, what specifically is this? Brick and mortar? Give us a sense as to what that is going to fund.

It's machinery and equipment in actually all of our locations. But there is a large part of it that is in the U.S. that we have accelerated for machinery in both of the locations here in Sarasota.

Okay. Relative to -- what are you guys running now, as we are here in August, relative to your labor rates? How many shifts are you running? Are you working Saturdays? Kind of give us a -- is it a standard hourly shift and what kind of percentage of overtime are you running?

We are running -- our base is four 10-hour days. I would say we have got a large number of people now working on Fridays. We have also gone to a weekend shift, in other words a short shift from Friday to Sunday, where you work 12 hours a day. That has given us a boost in capacity also. We're trying it out, and it is working pretty well.

That's, you said, a 12-hour day, Dick, on Friday to Sunday?

Yes.

You guys are running just one 4-to-8 10-hour shift? You are not running a second shift during the week?

We run a second shift during the week. But it is not by any means fully staffed. I want to clarify that the three 12-hour day is just in certain departments.

Just in certain departments? Okay. Could you give us a sense -- I know you are not going to give us the number -- but what kind has been your dynamic relative to commodity prices, as we are kind of entering here the third quarter? Have they flattened? Are they up a percentage? Where are we year-over-year?

We are anticipating that we are kind of done with seeing the price increases of the steel and aluminum. So we think it is going to be flat during the fourth quarter.

Okay. Can you give us a sense as to what your Sarbanes-Oxley 404 fees were? Can you break those out at all? Or maybe give us a sense as to what they might be for the year?

We are anticipating for the year they will be about 500,000 in total. We have them spread over the year, 125,000 a quarter.

Okay. You also talked about in the past, relative to having your customers be much more proactive in using your website for engineering specifications, how is that whole process going, as far as using the website as kind of a distribution channel?

It is a gold mine for us. It really solves a difficult marketing problem for us, because it allows us to reach all markets. The configuration process is going quite well, where customers can come in and configure standard products, cartridges and manifolds on the Web. Get pricing. Get documentation. Get drawings that they can use. Step (ph) files even to use in their own cav (ph) systems.

Okay. That's good for me. Thanks, guys.

Tim Fersallis, (ph) Oberweis.

Can you just give me an idea what the orders were for the quarter? I don't know if I missed that in your opening remarks.

We generally don't comment on the orders because our delivery cycle is so short, Tim. It is like four to six weeks. So basically our orders are our sales, except when we are coming out of a quarter, as we commented what July looks like. But other than that we don't. There is never much of a disparity between the orders and the sales.

Thank you.

(OPERATOR INSTRUCTIONS) Michael Chandra, Robert W. Baird.

Just a couple housekeeping questions. What did currency contribute to second-quarter sales?

About 250,000.

Okay. How do you guys internally handle forecasting currency? With the dollar strengthening relative to the euro and pound, how do you guys treat that?

Actually I think I just gave you the wrong answer on the sales. You asked what the effect on sales was?

Yes, currency effect on sales.

It was about 3% difference with and without the currency effect.

Still a benefit in the quarter?

Yes. What was your other question, I'm sorry?

How do you guys internally forecast interest rates? How do you bake it into your numbers?

You mean exchange rates?

Exchange rates, excuse me. Yes.

We basically don't.

Okay, you just take, say, the July exchange rate and use that for your forecast?

Yes.

Right, we kind of assume that it is going to be what it is when we forecast.

I see. Also, for the next two quarters, so you see growth in your international segments outpacing the U.S. or vice versa? Where do you see the growth coming from? And what is driving growth in either region?

I think for the third quarter, which we are forecasting, we don't dare go out further than that at the moment. Basically we are pretty strong across the board, just like the second quarter.

Strong across the board? Okay.

There is just less of it, because the second quarter is always the biggest quarter for us everywhere.

I see. Okay, thank you.

Brian Rafn, Morgan Dempsey Capital.

Question for you, Dick. Are you guys seeing -- and I know you kind of look at this anecdotally -- are you getting any sense -- your end markets certainly are very fragmented between mobile and industrial. Do you get any sense from markets that are either accelerating or deteriorating?

I can talk about accelerating, but not on the basis of anecdotal, because it is just hearsay. But in this case the hearsay seems to be backed up by some kind of macro statistics. That is that obviously the PMI, the Purchasing Managers Index, is up again this month. That is good. The past month, that is good. Capacity utilization improving; and durable goods orders improving. Within that, the whole construction equipment business is improving quite a bit; and also, energy related and mining are quite strong.

Okay. Relative to your addition of machinery equipment in your CapEx program, in addition to what you guys have added, certainly the shifts you talked about on Friday to Saturday -- where would you kind of be, and I know this is a real tough calculation, where would you kind of be running capacity utilization wise? Or if you can't answer that, what might the incremental capacity be when you add that machinery plus with the shifts running on Friday to Saturday?

I am not sure we can pinpoint it. We can talk generally about capacity. But to pinpoint exactly what those machines will do for us is like a percentage of something. I don't think we can do that. We are working hard. We are working a lot of overtime. But we are in no way out of capacity. We have got -- we're bringing people in; we can start sending more out. We are sweating a bit, but we are certainly not totally clogged up. So I think we are handling it pretty well.

It's a good problem, so that is -- relative to your hiring, what has kind of been your pace? You had great leverage on your SG&A line. What are you guys seeing as far as hires? Is the talent pool out there in Sarasota, or is it getting more difficult? Is the labor more elastic to higher prices? Are you having to pay more? Kind of give us a sense.

I think we are able at this time to get pretty good people and pay a competitive wage. Our stick is to have very good benefits, encouraging people to stay for the long term. So I think we are doing okay. We don't se a shortage; we don't see a skyrocketing demand for wages and that sort of thing (ph).

You guys, obviously, with your culture your retention has been pretty high. You don't see people coming to you guys to pick off your talented or your educated labor?

No, we don't see that at all.

Dick, what are you seeing relative to healthcare rates as you guys -- I am trying to remember if you were self-insured or if you have an insurance carrier with your health plan.

We have -- we're self-insured; I am talking now just in the U.S. We entered into a two-year contract. So basically we are having pretty good experience, and we are probably doing better than what I hear from other people. It is not a big jump for us (multiple speakers) .

Relative to your top line sales growth, what has been the pricing environment, your ability to pass on pricing? Obviously you have a lot of custom sets. Is it more still primarily a unit volume market driving sales?

Yes. We put in a rather modest price increase in January. and we haven't had done anything else since. So we really don't know what would happen if we did increase prices. But so far we are doing fine.

Okay, thanks guys.

Having no further questions, I would like to turn the conference back over to management for any additional or closing comments.

We would like to thank you all for listening, those of you out there who are listening, and also the people that joined in on the question-and-answer portion of the call. Thanks for joining us, and we will see you next quarter.

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