Helios Technologies Inc (HLIO) 2008 Q1 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Sun Hydraulics first quarter 2008 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's now my pleasure to introduce your host, Mr. Rich Arter, investor relations spokesperson for Sun Hydraulics. Thank you, you may begin.

Thank you, Joe. Good afternoon. Thank you for joining us today. Participating in today's call are Sun's Chief Financial Officer, Tricia Fulton, and [Dennis Pechio] of our corporate finance group. Allen Carlson is traveling Europe today -- or this weekend, actually, and will not be able to participate in the call. 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 21 E of the Securities Exchange Act of 1934. For more information on forward-looking statements, please see yesterday's press release. We're going to take questions once we have completed our prepared remarks.

It is now my pleasure to introduce Tricia Fulton.

Good afternoon. The first quarter was very busy, as our results indicate. Revenues overall were up 20% compared to 2007 and all geographic markets showed significant increases. Sales to Asia-Pacific were most significant, up 41% over last year. Sales to Europe and North America were strong as well, up 20 % and 11%. We expect all markets to remain busy throughout the second quarter. We're frequently asked what's driving the increase in our business, which now covers five years of double-digit growth. We have consistently stated that our performance is due in large part to five things; service and delivery reliability, electrically actuated and other new cartridge products, integrated packages, our global presence, and the Sun website. While these remain our success drivers, I think it is important to point out that Sun's products are enabling devices. They allow machinery designers to do things in different ways. The breadth and scope of Sun's product lines, both in terms of different sizes and functions, provides designers with a large arsenal of potential solutions. Ultimately, we believe this is instrumental to our global market share increase.

I would like to conclude by talking a little bit about the announcement of the shared distribution in yesterday's press release. This concept of sharing between Sun employees and shareholders in the Company's success is consistent with Sun 's history and culture. We've always been able to attract top talent and Sun's workforce is loyal and dedicated to satisfying our customers. On the shareholder side we believe we have been able to attract quality investors interested Sun's long-term sustainable success. For us it's very natural to unite these two constituencies with the shared distribution.

Dennis will now comment on the details of the quarter before we take questions.

Thanks, Tricia. All comparison will be for the same period last year. As Tricia mentioned, sales were up 20% to $49 million, as international growth continued in the first quarter coupled with a rebound in North American sales. Foreign currency fluctuations accounted for 1.5% of sales or $750,000. Net income rose 33% to $7.7 million. Basic and diluted earnings per share were $0.46, an increase of 31%. The ESOP contribution had an impact of approximately $0.03 per share on first quarter earnings, which was partially offset by proceeds from an insurance claim equal to approximately $0.01 per share. Neither of these items was included in the Q1 forecast given on March 4 . Gross profit increased 23% to $17 million. Gross profit as a percentage of sales continued to be strong, up a point to 35%. Margin increases were achieved through productivity gains, absorption of fixed-overhead costs, and a price increase in January 2008, which contributed approximately 1% to sales. Additionally our German operation has more material costs due to purchases made in U.S. dollars. These improvements were partially offset by increases in pension expense related to the additional ESOP contribution and group health insurance.

SG&A increased $700,000 to $6 million. The increase was driven primarily by compensation and fringe benefit costs, including pension expense and group health insurance. Our effective tax rate was 32.9% compared to 34.4%. The lower rate was due to the decreased statutory tax rate in our German operation of 9%. We expect that this tax rate will remain steady throughout the year. Net cash from operations was $7.4 million, up $200,000 from last year. The increase was due to higher net income of $1.9 million, offset by working capital changes. Day sales outstanding were 46 and inventory turns were 10.6. The increase in DSO is due to a higher percentage of international sales, coupled with a large sales month in March which will be collected in Q2. Capital expenditures for the quarter were $2.4 million and our estimate for the year is $13 million. First quarter purchases were primarily for new machinery and equipment in the U.S.

A quarterly cash dividend of $0.09 was declared in the first quarter and paid in April. The additional share distribution dividend of $0.09 announced yesterday will be paid at the end of May. Second quarter demand is expected to remain strong. Sales are estimated to be approximately $51 million and earnings per share are estimated to be in the range of $0.50 to $0.52. This represents an increase of approximately 18% in sales and 42% in earnings per share over last year.

Thank you. We will now open the call for Q&A. Rich?

Okay. Joe, can we take our first question from the dial-in people?

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from Chris Weltzer with Robert W. Baird. Please go ahead with your question.

Good afternoon, guys.

Hello, Chris.

Great quarter. A question on steel costs. Given the run up we've seen, have you seen suppliers start to push through price increases or maybe put in place surcharges? And then sort of related, any plans for any mid-year price increases?

Year to date we have not seen many material cost increases for our purchased parts, which make up 98% of the total parts that we use. However, we continue to look for productivity improvements that we ta can make along the way to offset any variable costs that will continue to rise, including materials. We currently have no plans for a price increase. That has not been discussed at this point.

Can you just remind us about what percent of COGS is material cost?

35% to 37%.

Okay, thank you. And then I just want to double check and make sure 100% I understand the dividend issue. The $0.09 per share shared distribution dividend is in addition to your normal $0.09 per share quarterly dividend?

Yes.

Okay. And then quick detailed question. The ESOP contribution costs, are those all in 1Q or will there be further cost in 2Q?

They're all in Q1 at this point for the additional ESOP contribution that was announced yesterday.

And then last one and I'll hop back in queue. Can you just give us an update on what you saw in the way of order trends, maybe in April and early May and if there's any meaningful difference international versus domestic?

The order trends that we have seen in April are consistent with what we saw in the first quarter. We are not seeing too much change in the distribution between U.S. and foreign, although there may be a little bit of an uptick in the foreign over the U.S. domestics that we saw in the first quarter, which was unusually high.

Got you, thank you.

The next question is from Brian Rafn with Morgan Dempsey. Please go ahead with your question.

Good afternoon, everybody.

Hello, Brian.

Question for you. You talked about a price increase, I think you said of 1% in January, and then you said 1.5% foreign currency translation. Would the net of the top-line sales be then unit volume and mix?

Yes.

Okay, okay Your CapEx funding for this year will be? For the budget?

We're estimating $13 million for CapEx for the year. We expect $2.5 million in the first quarter. That's primarily for machinery and equipment, primarily in the U.S.

Okay. Specifically the type of tooling you put in for a specific line, can you give us some color as to what you're buying?

We're buying a lot of different types of machinery, CNC- type machinery, grinders, [coning], it's across the board pretty much.

Okay.

Anything that we can increase capacity with.

Right, and I guess that's the issue. You're looking at capacity. The issue's volume wise or is it throughput, rigidity, I get a sense of efficiency and I -- or is it both?

When we look at capacity we really look more at where we have constraints within our shop systems and where we're being held up being able to get products out the door. We have a few areas that were identified toward the end of last year that are being fixed at this point with the new machinery that's being ordered and it's really not any different than what we've been doing in the past with regards to capacity.

Sure, sure. Tricia, how many shifts are you guys running now?

We're running the same shifts that we were at the end of 2007. We have two ten-hour shifts that run primarily, but in addition to that we have some departments that run better on five eight-hour shifts and we also have a weekend shift where they work 12 hours Friday, Saturday, and Sunday so that we can utilize and maximize the capacity of equipment by using it throughout the weekend.

Is the weekend, Tricia, kind of a flex thing depending on where you are constraint wise in production or timing?

It really is focused more on a departmental basis where we know that we have constraints.

Okay. Anything on overtime as far as --?

We're working approximately eight hours a week overtime, between five and ten. Most people are working 40 to 50 hours a week.

40 to 50, okay. Anything as far as headcount, hirings, training, anything staffing wise?

We're still hiring. In this area there have been a lot of manufacturing companies that have shut down or laid people off and we're seeing very qualified people come through the door and it's always been our policy, if we have someone that is a qualified person, we go ahead and hire them at that point. We are still doing hiring. We obviously have natural attrition and with our sales volumes the way it is we can use the help, but our overall headcounts are staying fairly steady and have been for the last three to four months.

Okay. And then on the electronic actuated, those cartridges are doing trend to budget, better, less than? Can you give us a sense seasonally what they're doing for the first quarter?

We don't budget like that. We forecast on a much more high level than looking especially down to the product line level. We really only look at operational units when we're doing our forecasting. But yes, the electrically actuated products are ramping up at this point. If you'll remember our definition of new products are anything that was introduced in the last five years and those still fall into that category so they're still in the process of being ramped up to what the maximum production would be on those, or the maximum demand for them would be. But we're definitely seeing increases there as they're beginning to be put into systems that are pulling through a lot of other cartridges with them. They're one of the enabling devices that I talked about in the scripted part in the beginning that they're pulling through other items with them because they now enable us to be able to complete full systems.

Okay. Could you get a sense -- I used to twist Dick Dobin's arm on what percentage of sales will be derived from new products, say, in that -- within five years. Have you guys ever followed up on that or ever done a calculation?

Yes, we do follow that and it ranges anywhere from 15% to 20% , pretty consistently every month for those products that fall into the category of being introduced in the last five years.

Okay, and then one final one. On integrated packages, any -- Tricia, any trend differences the first quarter versus the first quarter year over year, or is there any seasonality to that or has the --?

There's really no seasonality to it that we've seen. They continue to be up over the prior period -- period over period and that's consistent with Q1 over what we saw throughout 2007, as well. They're about 20% of our business at this point.

Okay. And has that, Tricia, been 20% for the last couple of years or is it 20% up from 17% last year and 15% the year before? I'm just getting a sense of what the delta is on the mix.

The 20% is an increase over what we saw last year, but it's small like what you're talking, maybe a percent or two each year.

Okay, okay. Real good job, I'll get back in queue. Thanks.

Thank you.

Our next question is from Joe Mondelo with Sidoti & Company. Please go ahead with your question.

Hey, guys.

Hello, Joe.

Just got one question. Could you just talk a little bit about the High Country Tech -- Technology and what the status is on that and when it's going to be introduced into the product line and when it's going to affect the -- or hit the financial statements?

At this point High Country Tech is still running as its own separate company. We are learning about them. They are learning about us. They were here last week to have the engineering minds at work meet to see where we can make some synergies work. They will continue to operate on their own. It will not be something that's sold through Sun Hydraulics. Our customers will go to them directly. Our distributors and our customers and other customers, as well, will go to HCT separately from Sun. We're not ever going to be a sales outlet for that at this point. As far as the financial statements go, they are still an equity method combination so there really is no material effect to the financial statements from HCT at this point.

Okay, thanks a lot, guys.

Thank you.

(OPERATOR INSTRUCTIONS) The next question is from James Carnett from Fredric E. Russell Management. Please go ahead with your question.

Good afternoon and thanks for taking my call.

Hello, James.

I just wanted to know, what's the one thing or two things that Sun Hydraulics is doing that's keeping you guys on top? In other words, as we look forward, what do you think is the main thing that's giving you a competitive advantage in the marketplace?

We have our -- our five points that I talked about earlier that really are driving the growth. I think the most significant of those has been our delivery, reliability over the last five years. We have many competitors who are not able to deliver and because we can, we have had opportunities that they could not participate in because of timing of delivery of product and I would say that that's probably the most important. But you've also heard a few questions today about the electrically actuated products and what they do is allow us to bid on complete systems that in the past we were not able to bid on because we did not have those products available, so we may have sold them other cartridges for that system but we didn't sell the complete system and now we're able to do that, so we're seeing a little bit different customer base.

Okay, thank you very much.

The next question is from Chris Weltzer with Robert W. Baird. Please go ahead with your question.

Hello, again.

Hi, Chris.

Just a question about the -- the rebound in the growth rates in North America is a little surprising to me given the deteriorating economic situation. Could you give us a little color there, were there any unusually large orders or new customers or anything like that that influenced the comparison?

There was nothing specific that we saw and we were a little bit surprised by it as well being up as much as it was. We have not seen it be quite as high in April as it was in Q1. We're still seeing growth in that area; however over what we saw last year, but not as high as what we saw in Q1. But there's nothing specific we can point to as far as a customer or an order that lead that number to be higher. Because of the diversity of our customer base we don't tend to see one big order come through that really has a lot of effect on performance within a quarter.

Got you, that's very helpful. And then I'm just wondering, it's been several quarters now, wondering if you could give us an update on where you guys are on your efforts in the Indian market.

Yes. We have a sales person now in India, as we announced, I believe, last September. At this point, we're planting seeds there and looking at what the long-term proposition of the market opportunities in India will be for us. We're having some good leads come out of that at this point and we expect that that will continue to see what those opportunities are in that emerging market for us.

Got you. And then just a really quick technical question. It looks like the interest income and miscellaneous income numbers from the first quarter of '07 may have been -- the allocation may have been changed between what goes in which number. If you could just clarify that a little bit?

Yes. Hey, Chris, this is Dennis. Interest income is now being reported net whereas in the past -- in '07 it was interest expense on that line item, and the interest income piece was sitting down in miscellaneous income. Now we're reporting interest on a net basis, which is interest income for both '07 and '08.

Got you. Thank you very much, guys.

Thank you.

Our next question is from Brian Rafn with Morgan Dempsey . Please state your question.

Question on the -- you guys talked in your five points service and delivery. Tricia, do you have a measurement as to what orders are delivered on time within the customers' parameters? 91%, 93%, I'm just getting a sense as to what the track was for the first quarter.

We measure delivery within seven days of the request date and we're sitting at about 98%.

98%, okay. Allen spoke and somebody queried him last -- I think it was last quarter talking about orders that are 911, we need it now, there's a different price differential. Do you guys track the mix of those higher-premium, higher-dollar rush orders in any one quarter and can you get a sense as to what this quarter was vis-a-vis year over year or last year?

We actually track those on a weekly basis looking at what expedites were pulled into that week at the customer's requests and those range anywhere from 10% to 20% of the orders that fall into that week, and there's probably a 10% to 15% or -- around a 15% price premium that's paid for those expedited orders.

Okay. And you're not seeing any difference in those expedited orders in the first quarter versus -- we're trying to get a sense of what the depth of the strength of the market is.

Overall, no, we did not see a big difference in Q1; however we did see the end of March -- the last couple of weeks of March had an inordinate number of expedites.

Okay, okay. I asked this before, you have certainly a fragmented end market. Are you getting any sense of anecdotal conversations or anything that we're seeing more demand from your wholesale distributors from agriculture or construction equipment versus automotive, do you get any sense -- and I know you guys have said that that's -- there's not a lot of transparency there.

Yes, you're right. There isn't a lot and because we sell through distribution we really just can't see -- don't have a lot of visibility on the end market. Clearly, all of the resource and energy industries are busy. We all hear that. We hear it from our distributors, but we can't point to any specific customer or sectors that really have lead to any of our specific growth.

Okay.

And because our customer base is very diversified, going into a lot of different capital goods, there's really no one industry that's a very large percentage of our business.

Right, okay. On the oil and gas side relative to utilities for your factory on Sarasota, can you get a sense -- because you mentioned that the delta change in -- for cold roll steel and iron duct and on castings and that hasn't changed that dramatically in the first quarter. Have you had an impact in your utilities side?

Not that we've noticed.

Okay. Healthcare benefits for the year? Refresh my memory. You guys self insure with an umbrella or do you have an insurance carrier?

We're self insured for health insurance. We obviously have reinsurance above a specific point on an individual claim and on the aggregate basis to protect us on the upside, but for the most part we're self funded.

Okay, do you guys have any type of premium co-pay for your employees or does the Company pay everything?

The Company pays everything.

That's very nice. I hope they -- that's superb. Thank you again.

Thank you.

At this time I'm showing no further questions in queue. I'd like to turn the call back to management for closing remarks.

Thanks, Joe. We'd like to thank everybody for joining us on the call today and we look forward to talking with you next quarter. Thank you.

Ladies and gentlemen, this does conclude the teleconference. You may disconnect your lines at this time. Thank you for your participation.