Helios Technologies Inc (HLIO) 2009 Q2 法說會逐字稿

Good day everyone and welcome to the Sun Hydraulics Corporation second quarter 2009 earnings call. Today's call is being recorded. At this time, I would like to turn the conference ever to Mr. Richard Arter. Please go ahead, sir.

Thank you Dana. Thanks for joining us. Allen Carlson, Sun's President and CEO; and Tricia Fulton, Sun's Chief Financial Officer, are participating in today's 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 21E of the Securities Exchange Act of 1934. For more information on forward-looking statements, please see yesterday's press release.

We will take questions once we have completed our prepared remarks.

It is now my pleasure to introduce Allen Carlson.

Good morning. As we expected, the second quarter proved to be challenging. However, we are encouraged by the stable demand levels that we think signals a bottom of the cycle. PMI has historically been a leading indicator to Sun's order pattern and has increased the past seven straight months. July's four-point jump announced yesterday sends a very strong signal that the recovery is at hand. We expect our order rates to accelerate in the second half of 2009 and continue into 2010.

Our distributors throughout the world continue to bring their inventory levels in line with demand. Sun's North American distributors have dropped inventory levels by 18% since the beginning of the year.

Some products are not readily available from distributor inventory and are requested from Sun to be shipped as expedited orders. These products are often needed by the distributor in less than a week to fulfill a standing customer order. Expedited order delivery has been strong throughout the downturn.

During the past business cycle, we often referred to our delivery reliability as one of the key drivers to Sun's success. Our focus remains on supplying products to customers when they are needed, even when lead times are as short as one day.

We entered this downturn in a very good financial position and have maintained profitability through the first half of the year, despite sales being down 53%. Strong cash flow allows us to continue investing for the future. Over the past eight months, we have installed equipment to increase capacity and quality in bottleneck areas and purchased land for future expansion.

Most importantly, our highly skilled Sarasota workforce has remained intact. More than 100 production employees have used these times to improve their manufacturing skills by participating in the Manufacturing Fundamentals and Essentials training program offered by the state of Florida. The program develops employability skills and provides training in production processes, maintenance, quality assurance, and safety. This not only provides a huge personal benefit to the employee, but leaves Sun with a more agile and skilled workforce.

Productive and engaged employees are the reason Sun is successful. And we know that keeping our workforce intact through a downturn, no matter how difficult, is critical to being responsive and gaining market share during the recovery.

In June, all production employees began a rotating two-week-on/one-week-off furlough program. This allows us to balance our capacity to current demand. We keep our most important asset, which is our people, while maintaining the flexibility and readiness we want going forward as demand changes.

We will continue to monitor the economic signals and prepare for the upturn in the business cycle. We are engaged in product and process development activities that will yield positive results as the economy expands.

Distributor and employee education continues in anticipation of the better times ahead. We believe we have weathered the worst of this economic storm, and once again, we're in a very good position to take advantage of the market upturn.

Thanks for listening. Now Trisha will provide the detail on the quarter.

Good morning. Thank you, Al. Our results were what we expected in the second quarter. Sales were $21.6 million, and we are operating slightly below breakeven with a loss of $0.03.

Forecasting income when we are operating near breakeven becomes more difficult as minor events can have a big impact. This is why we have not used a firm range of numbers in our earnings forecast over the last few quarters.

Despite sales being down more than 53% for the year, we are operating at breakeven, and we have done that while continuing to make investments and not compromising our workforce readiness.

As Al mentioned, our expedited order activity has been strong. Even with our reduced work schedules, we, together with our worldwide distribution networks, continue to provide products whenever and wherever our customers need them. Our delivery capability continues to differentiate us from our competitors.

Our ability to continue investing for the future throughout this recession is a product of our strong financial foundation. As most of you already know, Sun has a clean balance sheet and good cash flow. We took the opportunity when the cycle was booming to pay down all of our death and accumulate cash. This allows us to continue investing in the business.

Sun generated free cash flow through the first half of the year. This, coupled with our available cash, leaves us in a great position to take advantage of other opportunities that may arise from a challenging economic environment like we are in today.

We believe we have seen the bottom of this economic downturn. Data from PMI, the National Fluid Power Association, and the Association [for] Equipment Manufacturers all suggest that the worst is behind us.

I will now turn to the comparisons of 2009 to 2008.

Second-quarter sales were down 58%, and earnings were down 106%. Foreign currency accounted for 5% of the second quarter decrease.

For the second half, sales were down 53%, and earnings were at breakeven.

In the quarter, North American sales declined 61% while Europe and Asia both dropped 56%.

It is our expectation, and I think this is shared by many of you, that Asia and North America will lead the recovery and Europe will lag. Europe held on a little longer at the beginning of the recession and will likely lag six to nine months on the recovery.

Second-quarter gross profit decreased 78% to $4.2 million. As a percentage of sales, gross profit was down 17.5 points to 19.%.

Declining revenue is the primary driver of the decrease in gross profit, as some overhead expenses continue at all revenue levels and are not absorbed as easily. However, these decreases were offset by lower material costs, a elimination of overtime premiums, and lower retirement benefit expense, which totaled $1.3 million. We also enjoyed a one-time reduction in health insurance costs of $400,000 for the quarter compared to last year.

Our fixed cost structure impacts margins at lower self levels, but as sales begin to improve, margins will also improve.

We recognized the benefit of approximately $130,000 from the rolling furlough program in the second quarter, and profitability will continue to benefit in the third quarter. Our third-quarter outlook includes an $800,000 benefit related to the furlough program.

SGA expenses were down 16% over Q2 last year. We have made a concerted effort to reduce discretionary spending such as project consulting fees, outside services, and travel. One of the largest contributors to the reduction in SG&A is compensation, resulting primarily from salary freezes and reductions which began in January.

Foreign currency played a bigger role in Q2 with our UK operating unit taking a charge of $300,000 for transaction losses related to US dollar items held on their balance sheet.

Sun's second quarter tax rate applied to the pretax loss was 40.6%. While this is significantly higher than our Q2 2008 tax rate of 33.2%, the rate is the result of the taxable income and losses in the respective taxing jurisdictions where Sun conducts business, particularly the tax benefit recognized in the US.

Net cash from operations through the second quarter was $5.5 million.

Inventory and accounts receivable continued to decline, creating operating cash flow. Inventory turns for the quarter were 8.3, and DSO was 44. As in the past, we are not experiencing any receivable problems. Cash flow remains strong as we are able to generate free cash flow even at the lower current business levels.

Capital expenditures for the year were $3.5 million and include a $1.7 million for land. This additional land combined with our existing facility creates 27 contiguous acres which will allow us to add additional capacity when we determine that expansion is required.

In the second quarter Sun paid its normal quarterly dividend of $0.09 a share as well as the special share distribution of $0.09. Sun's Board is pleased to be able to continue paying dividends to our shareholders. The share distribution is another benefit of our strong financial position.

Turning to our third-quarter estimates, we expect Q3 revenues to be in the range of $22 million to $23 million with earnings around breakeven. We believe we are on the verge of a market recovery, and we are well positioned to capitalize on the opportunities that presents.

Think you. We will now open the call for Q&A.

(Operator Instructions). Jon Braatz, Kansas City Capital.

Good morning Allen, Tricia. Couple of questions. Number one, a lot of industrial companies that have been reporting recently, they talk about all the cost reduction initiatives, and granted, most of those are personnel costs. But have you been able to -- and obviously you don't do that, but have you been able to identify any sort of permanent cost savings such that when we emerge from this cycle, that -- this down cycle, that maybe you will be able to achieve higher operating margins than you did in the past, given a certain level of revenue?

We constantly monitor this during the good times and the bad times. As a result, there's not a lot of room during these times to cut costs that wouldn't impact the ongoing business. So our objective is always to be looking at our costs and to understand what we can do better, be more productive, and be more efficient doing.

Okay. And then secondly, Allen, there's been some talk about some more extended shutdowns during the summer months, both in the Europe and maybe even here in North America, that's typically the case. Are you seeing or hearing anything to that -- in that regard from your customers or your customers' customers?

No, it's pretty much as usual. Especially in Europe. (multiple speakers) the northern part of Europe takes the July month off, and the southern part of Europe takes the August month off.

In the America, sure, there has been some extended shutdowns during the July 4 holiday, for example. But on the other hand, we have some companies that essentially closed their doors in February, March, April, and are now bringing employees back.

My belief is those actions are probably all of a wash.

Okay.

We normally see during the summer months, this time of year, a reduction in incoming orders compared to our peak. This year, that's not the case. July was very strong with us compared to the earlier months. Now granted, the earlier months were very weak. But we are not seeing a historic slow summer months that we have seen in previous years, which is a very encouraging sign as well.

(multiple speakers) you are referring on a sequential basis?

Yes.

Okay. Very good. Thank you very much.

(Operator Instructions). It appears we have no further questions at this time.

That's great. Thank you Dana. Do you want to make some concluding remarks, Al?

Sure. Thank you for your continued investment and interest in Sun Hydraulics. As we have discussed, the first half of 2009 has been very difficult. However, these are the times when good companies become even better by not dwelling on the current environment but rather by focusing on ways to improve.

I'm very encouraged by the increased momentum of the positive leading indicators. However, I am reminded that less bad news is not necessarily good news, and we continue to have much more work in front of us.

The management actions we have taken and our financial strength allows us to adjust as needed to the current business conditions, yet allowing us to continue to invest in ways that will make us an even better company. This translates into products and services that are a better value for our customers, a company that returns an above-average return on capital employed, and a company that is an attractive investment to existing and future shareholders.

Thank you.

That does conclude today's presentation. We thank you for your participation.

Thank you Dana.