Helios Technologies Inc (HLIO) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Sun Hydraulics second quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Rich Arter, Investor Relations spokesperson for Sun Hydraulics. Thank you, Mr. Arter. You may begin.

Thank you, operator. Good afternoon and thanks for joining us today. With me are Sun CEO and President, Allen Carlson, and Tricia Fulton, Sun's Chief Financial Officer. 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 and Exchange Act of 1934. For more information on forward-looking statements, please see yesterday's press release. We will be happy to take questions once we have completed our prepared remarks, and with that it is my pleasure to introduce Allen Carlson.

Thank you, rich, and good afternoon. Strong demand for Sun products drove top and bottom-line double-digit growth in the second quarter. While the national fluid power association reported a decline in hydraulic shipments compared to the second quarter of 2006, demand for Sun's products was up 18% overall and 6% in North America for the same period. We continue to believe that this translates into market share gains for Sun. Our business segments around the world contributed to the success in the second quarter. Asian and European sales were particularly strong, adding 78% of the incremental revenue. Our future growth is contingent on our ability to reach existing and potential customers around the world. While new and emerging markets contribute to current growth, they will play an even greater role in the future as Sun expands.

Last week, we announced the opening of a sales office in Bangalore, India. While we have been represented by distribution in this market for many years, we believe there are additional opportunities for Indian OEMs to use our products. We will work with existing distribution and identify new distributors and OEM contacts in the region to increase Sun's sales into this market. We believe there are many opportunities available for Sun, not only in India but also in other expanding marks around the globe. Sun is part of the global capital goods industry, which is cyclical. We believe this is a great time in the cycle to engage in strategic activities that will benefit the future growth of our company. I would now like to turn the call over to Tricia to provide some more detail on the quarter. Tricia.

Thanks, Al. All comparisons will be to the same period last year and all EPS information reflects the 50% stock dividend announced June 19th. Growth continued across all business segments in the second quarter with net sales up 18% to $43.4 million. Europe and Asia led the way with sales increases of 27% and 38% respectively. North American sales increased 6%. Incremental sales allowed additional profits to flow to the bottom line with earnings up 38% to $6 million. Basic and diluted earnings per share ended the quarter at $0.36, an increase of 38%. Gross profit increased 27% to $14.3 million. Gross profit as a percentage of sales continued to be strong, up 2.5 points to 33%.

Incremental sales increases coupled with a 2006 mid-year price increase aided absorption of fixed costs. SG&A increased $700,000 to $5.4 million. This increase was driven primarily by higher compensation costs related to variable compensation awards, as well as marketing and professional fees. Our effective tax rate was 34.2% compared to 33.6%. The higher rate was primarily due to the relative levels of income and different tax rates and effects among the countries in which we sell our products. The expect that this tax rate will remain steady throughout the year. Net cash from operations was $12.5 million, up $4.4 million from last year. The increase is due to higher net income of $3.3 million coupled with working capital changes. Day sales outstanding were 37, and inventory turns were 10.5. We continue to look for ways to drive further working capital improvements.

Year-to-date capital expenditures were $6.9 million and our estimate for the year is $11 million. Second quarter purchases were primarily for new machinery and equipment in the U.S. A 50% stock dividend and a quarterly cash dividend of $0.09 cents a share were declared in the second quarter and paid in July. The cash dividend was paid on the new total shares outstanding after the stock dividend, representing a 35% increase in the cash dividend. We expect third quarter demand to remain strong. Sales are estimated to be approximately $40 million and earnings per share are estimated to be in the range of $0.30 to $0.32 cents. This represents an increase of approximately 10% in sales and 29% in earnings per share over last year. Thank you. We will now open the call for Q&A. Rich.

Operator, if could you check and see if there's any questioners in the queue, we'd be happy to take questions.

Thank you. Ladies and gentlemen, at this point, we will conduct a question-and-answer session. Our first question comes from the line of [Chris Weltzer] with Robert W. Baird.

Good afternoon. I was wondering if you could give us the currency impact on revenue growth for the quarter.

It was approximately 3%. Oh, I'm sorry, it was $600,000.

$600,000, okay. Then on India, could you maybe talk a little bit more about Mr. Reddy's role and what sort of OEMs you will be targeting and what sort of time frame we should expect a meaningful contribution from this effort?

Sure. This is Al. Our Indian start-up is something that's been in the planning for almost a year. Mr. Reddy is currently employed by our distributor in Dubai. I think the press release said that. And we have known him for quite sometime, as he's applied our product, and we've gotten to know him over the years. It was about a year agency that he expressed an interest to relocate back to his home in the Bangalore region and he approached us about an opportunity for himself to relocate to India and begin exploring the market for further opportunities for Sun products. Fundamentally all customers in India who use hydraulics, especially higher end hydraulics, are a potential market. Our avenue to India has been solely at this point through a distributor and we expect there's more opportunities by having somebody focused and oftentimes perhaps even channeling the interest back to an existing distributor or perhaps some new distributors that we appoint to further expand the market and to grow the channel through India. As you all know, India is a very rapidly growing market, not only for tech services but -- and engineering services, but also for heavy-duty manufacturing as they put infrastructure in place. We expect to benefit from that.

Okay. And where would this -- any incremental business from India show up geographically in your results?

Depends on the product and the timing. As the press release stated, it could show up as products coming out of Germany or the U.K. If the products are in inventory and if they're common vanilla product, that's likely. If the happens to be aluminum manifold assemblies it would probably come out of our U.S. or Korean operation. So it's going to be very much product driven.

And do you have any idea what percent of your revenue now comes from India?

It's so many decimal places behind the decimal point, it doesn't matter.

Fair enough. And in Germany, you had sort of a slowdown in revenue growth and operating margins. I think we're actually down a touch year-over-year. Was there anything particular happening in that quarter that would help explain that?

We don't have anything particular in the quarter that affected the gross margins or the operating income in Germany, but we did see a small decrease sequentially in their sales as well as their sales quarter-to-quarter. Sequentially we have some U.S. dollars sales that they are making. They make sales in both U.S. dollars and euros, so there has been a small effect from that, along with, as their volumes go up, the discounts to some of their larger OEMs also go up.

So this is something that continues on for the rest of the year? It isn't a one-time issue?

Correct.

Okay. I'll hop back in queue. Thank you.

Thanks, Chris.

Thank you, ladies and gentlemen. (OPERATOR INSTRUCTIONS) One moment, please, while we poll for further questions. Thank you. Our next question comes from th line of Chris Weltzer with Robert W. Baird.

Sorry. I guess I'm the only one asking questions today. Could you give us an update on what you saw in the way of order trends in July and early August?

The order trends that we've seen in July have been slightly higher than what we saw in June, but pretty much in line with what we saw in the beginning of Q2 in April and May.

Okay. Are you seeing any sort of divergence between international and domestic?

Yes, we are. The international seems to be continuing to outpace the growth that we're seeing, continued growth in the North American orders.

Okay. Can you talk about what you're seeing in the way of raw material cost increases now and next quarter and whether you think you may need another price increase later in the year?

I'll take that. I think if we look at our price increases, we saw a pretty large escalation a year ago at this time, which triggered a price increase, a mid-year price increase for us, I believe it was in August of last year. Since that time, it would appear that the pricing pressures have moderated. There are certain commodities perhaps that might be a little stronger than others, but overall I think our material price increases are flat to slightly up, perhaps, which is good news. We've seen that moderation in pricing pressure.

Okay. That's helpful. And I know you're continuing to add machine tools, but I'd appreciate if you could sort of talk about where you think you are as far as ultimate capacity utilization and maybe when adding roofline would be a necessity.

We're constantly assessing that. Our approach to manufacturing is through looking at our constraints. We see our constraints changing from quarter to quarter, perhaps even week to week as we look forward. Right now we're -- and for the last year or two, have been adding five-axis machining centers basically in three locations. The good news is that our five-axis machining centers when we had a them, they're much more efficient, more capability, more capacity than some of the previous machining centers. And in fact oftentimes we can replace two machining centers with one new one. The benefit of that is that we gain productivity but we also gain floor space. So while you might think that after three years or four years of significant growth that we've had, that bricks and mortar might be in order, we actually still have room for added capacity. Bricks and mortar are not immediately required, but it's something that we're constantly looking at.

That's very helpful. Last one, in the past you've talked about your superior turnaround and shorter lead times enabling you to gain share as competitors where maybe capacity constrained. But with several North American markets now decidedly negative, residential construction related equipment, heavy-duty truck, et cetera, do you see competitors starting to have more available capacity?

No, because it's more of a global market than it used to be, so if the U.S. market -- by the way, the U.S. market for our products is still growing and it may be for others as well. So I'm not sure that the availability of product is less significant today than it was a year ago. Additionally, it's not just the raw capacity, it's having the right product. And what's happened in some cases with competition is to fill the channel, they added huge inventory of finished goods, and it's probably the wrong finished goods inventory, and so now they're either remanufacturing what they made six months ago or having to make it from the scratch, or they're trying to, as I said, try to rework. So the agility and flexibility of our manufacturing is still key to our growth.

And are you generally able to keep this business, to retain this business once you -- that you win maybe because of a capacity constraint somewhere else?

Yes, our customers have long memories.

Excellent. Thank you, guys.

Thanks, Chris.

Thank you. (OPERATOR INSTRUCTIONS) One moment while we poll for any further questions. Mr. Arter, there are no further questions at this time.

Okay, great. Thanks, Rich. We'd like to thank you all for joining us today on the call. We look forward to talking to you again next quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.