Helios Technologies Inc (HLIO) 2011 Q1 法說會逐字稿

Good morning everyone and welcome to the Sun Hydraulics Corporation 2011 first quarter earnings conference call. Today's conference is being recorded. After today's prepared remarks there will be a question-and-answer session. Instructions will be given at that time. I would now like to turn the conference over to Mr Richard Arter. Please go ahead, sir.

Thank you, Kelly. Good morning and thank you for joining us today. Allen Carlson, Sun's President and Chief Executive Officer 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. For more information on forward-looking statements, please see yesterday's press release. We will take questions once we have completed our prepared remarks.

Before we begin, I would like to announce that Sun's 2010 annual report and proxy were mailed last week. Also, I would like to remind everyone that Sun Hydraulics annual meeting of shareholders will be held on Tuesday, June 7 in Sarasota, Florida, at 10.00 AM -- June 8 -- Monday, June 6, excuse me. I'm sorry for that. My apologies. Monday, June 6 in Sarasota, Florida at 10.00 AM. It is now my pleasure to introduce Allen Carlson.

Good morning and thank you, Rich. Business continued to expand in the first quarter. Quarters increased significantly in January and we have remained at this higher level through April. First quarter sales were just slightly below our peak of the last cycle and we expect to exceed this level in the second quarter. PMI, the best leading indicator we have identified for our business, continues to show strength and expand. This indicates to us business should remain strong throughout 2011.

Right now the capital goods manufacturing industries are active and firing on all cylinders. We are seeing strength in all geographic markets, all segments and enjoying new business from diverse areas. We are able to address the growth we anticipate working from our current footprint. We have capacity to carry us through the business levels we expect in 2011. If demand continues to grow into 2012 we recognize that additional capacity may be required.

We have participated in both the IFPE Conexpo show in Las Vegas and the Hanover Fair in Germany this spring and we are encouraged by the energy and enthusiasm at both shows. We formally announced the introduction of our Series 4 PLUS products at these shows. These new products extend our performance range in the same footprint as existing products. We expect they will compete very effectively with existing industrial-based products and provide a lower cost alternative in many instances.

We are excited about what the future holds. All indications point to continued expansion of the business cycle and we know we are taking market share in this up term. Our top priority remains, as it has always been, making quality products with a reliable delivery. At this time, I will turn the call over to Tricia and then rejoin for questions.

Thanks, Al. We are extremely pleased with the strength of our margins, so far in the cycle. We have been able to satisfy the rapid increase in demand with some additions to head count and without adding much in the way of fixed costs. We are working some overtime and the agility we have developed in our workforce provides great flexibility in moving personnel around to meet production needs.

At this time last year, we still had employees on furloughs and salary cuts. We were carrying our fixed costs with 60% less revenue. Our operating leverage from fixed overhead has been key to our financial gains in the up turn. We have begun adding some people in our manufacturing areas and are bringing on new shifts to augment our current capacity. There is still room to bring on more people, especially in our second and third shifts.

Turning now to the numbers, for the quarter sales were $50.7 million, up 60% compared to Q1 last year. Earnings increased to $0.57 per share from $0.20. Foreign currency had virtually no effect on the quarter. Gross profit as a percentage of sales increased 7 points to 39% compared to 32% for Q1 last year. Our operating leverage continues to grow with the incremental sales increase. SEA expenses were up 17% to $6 million, compared to last year. The changes related primarily to retirement benefit accruals which were not used in Q1 last year, as well as salary and variable compensation adjustments.

The provision for income taxes for Q1 was 32.2%. We expect the Q2 tax rate to be approximately 33%. Net cash from operations for Q1 was $14 million. Inventory turns increased to 10.3 and day sales outstanding improved to 36. Last quarter we were unable to accurately predict the capital expenditures for the year because we saw demand increasing very quickly. We were uncertain if demand levels would hold and what projects would be necessary for the year. Continued demand levels throughout Q1 and into Q2 have provided some clarity for projects going forward and we now expect to spend $10 million in capital in 2011. This is comprised of machinery and equipment, primarily in the US, as well as small infrastructure projects in the US and the UK.

Looking forward to the second quarter, we expect strong sales and continued operating leverage. Sales are estimated to be $53 million. Earnings are expected to be in the range of $0.57 to $0.60. I would now like to open the call for questions.

Our question-and-answer session will be conducted electronically. (Operator Instructions) We will go ahead and take our first question from Robert McCarthy with Robert W Baird.

I might ask two. Congratulations on a terrific quarter. Could you maybe talk a little bit about the time line to make a decision on adding some incremental capacity? Is that something that we might see happening -- begin yet this year?

Thank you, Rob, for that question. How we run our business, I think, maybe is a worthwhile discussion because it enters into how we make these decisions. We are constantly looking at our capacity based on constraints. And when we identify a constraint, we attack it. Typically we are attacking three, four, five constraints at any one time that are bottlenecks to capacity. We have not, in the last decade, recognized bricks and mortar as a constraint to capacity. And when we look at it today, in fact, I just had a meeting with our manufacturing people last week and reviewed the projects that are going relative to constraints, facility footprint is not currently a constraint.

As we look forward into next year as we continue to grow, some speculation that, that may become an issue. We recognize, also, that from the time we add bricks and mortar -- decided to do it, to the time we can actually use it, we are about 10 to 12 months away from that. Having said all this as well, we have positioned ourselves quite well for the day when that decision has to come as we have acquired property in the area over the last decade. In fact, we have more than one parcel that we could use, if we chose to. So, to answer your question, Rob, it's based upon constraints that we see going forward and recognizing that from the time we set out to go, it's about a year's process. We have not made that decision at this time.

But, based on your commentary, Allen, it sounds like that is a decision that you could be faced with making in the short term?

We constantly are planning for that. We have facility layouts that we have looked at, not just in the last few months, but we have some that date back three, four years as to what it will look like. It's all about anticipation and preparation. And when the time comes when we are ready to go, we will have anticipated it and we will be prepared.

Do you have any significant broader bottlenecks or do most of your bottlenecks really come down to individual parts or series of parts.

Yes, it's individual parts and series of parts. Currently on bottleneck it has been suppliers. We work very closely today with suppliers. Obviously, we didn't have these issues two or three years ago with our supplier base. We are still -- I want to remind everybody, we are still shipping product on time. We are not dealing with problems that we have to deal with this afternoon because we are not shipping products on time.

Right. Right.

By the way, shipping products on time is what is driving our growth right now.

Yes. And it wasn't perfectly clear to me from Tricia's comments, you are running what now, shift-wise? A full one and a partial second or --

I would say we are -- first, again, let me back up. Sun has a very flexible policy toward its workforce. We don't punch a clock at 8 in the morning and they punch out at 5 and the second shift comes in at 5.10. That's not the way we run our business. We have overlapping shifts all over the place. We have different areas. We flex where we need to. People move back and forth across lines, both in terms of where they work in the factory, as well as the times they work in the factory. Part of our success and managing our constraints is a very flexible workforce that shifts and flex where they need to go.

That clouds the issue when answering a question like yours, how many shifts do you have? Generally speaking, I would say we are probably 85%, 95% full on the day shift, whatever the day shift is. And we are probably 30%, 40% full on the night shift, whatever the night shift is.

Okay.

Just by looking at the parking lot would be my judge. We haven't even implemented a weekend shift which we had implemented in 2008 at the peak to get more capacity out of the asset. Our whole approach in running our business is by constraints, yes, but it's also utilization of the assets that we have. Return or capital employed. We manage our constraints and flex our workforce to get the maximum out of our installed capacity.

Right. So, based on -- if I try to synthesize all of that, Allen, it sounds to me like you could, hypothetically, handle as much as, say, 20%, 25% improvement in demand simply by adding people and hours.

I believe that.

Terrific. And can you speak to business trends since the end of the first quarter? Are things continuing to go up?

Things are continuing to go up in a lot of ways. I think it's going up because of our ability to ship products, our capacity. I think it's going up because of new products we have launched. We are beginning to see some seasonality come back into play.

I don't know what the second half of the year is going to look like compared -- I'm not sure it will be first half times two. It might be because I think there is some seasonality that is coming into play. And, perhaps, it has more to do with shortages of other supply in the industry. Customers can't use cartridge valves if they can't get engines or tires or pumps or whatever, I think maybe the throttle on this is going to be the supply of products and we are going to have to work hard at identifying new markets and new customers because the riding the tide, if you would with the expansion will take us so far, but I think the ceiling is going to be hit with some of our customers because of supply of other product.

Okay. Thank you. That's very helpful. I'll let somebody else go.

(Operator Instructions) We will take our next question is from Kristine Kubacki with Avondale Partners.

I had a question talking about taking the market share, I thought that was a little bit intriguing. I was wondering if you could expound on that a little bit and talk a little bit about it? Do you think that the market share growth or what you are seeing, is it growth into new markets because you mentioned diverse markets or is it further penetration in existing markets with existing customers? And who do you think you are taking market share from if that's the case?

Well, I think it comes in both areas. I think some of our new products are taking markets that were traditionally heavy iron industrial products. So, I think that's a piece of it. I think another piece is that, yes, we are taking market from some of the cartridge valve market. I think we are growing in that market arena as well. Who we are taking it from, I probably suspect who they might be, but I don't think that's wise to talk about it on a conference call.

Fair enough. Then I know I'm splitting hairs here, but looking a little bit at your guidance, where you expect revenues to come in and then if I back-of-the-envelope calculate through the operating margin and with the implied tax rate, I get to something that looks like the incrementals are bumping down a little bit quarter-to-quarter. Just doesn't look like quite the operating leverage that you saw in the first quarter. Is it something that you are being conservative or is there something in terms of input costs or something that was unusual in the first quarter that is not going to reoccur in terms of operating leverage in the second quarter?

Looking at margins, gross margin for the quarter were at 39%. We know the sweet spot in the margins is mid to high 30s and we are operating there now. We believe these margins are sustainable, at least in the short term, at these revenue levels that we are seeing in Q1 and Q2. As demand has grown, as we have talked about, we have made investments in people, and processes, and equipment. Sometimes those can have some short-term effects on your margins. We do expect that our margins will remain in the high 30s, which is probably 37%, 39%.

Okay. That like I said I was splitting hairs there. Then in terms of you mentioned the supply chain issues, kind of in the macro sense. Is there anything specific to your supply chain that is causing you any worry or is it just more on the outside that is impacting the overall industrial kind of supply chain that you are more worried about?

We are not losing any sleep over our supply chain. Are there issues that we are dealing with on a daily basis, are we busier managing the supply chain than we were at the bottom of the cycle, yes, of course. There are no show stoppers. We are very close to our supplier base. Myself included. We are working with our suppliers to make sure that there is clear visibility. All of our suppliers, by the way, have a screen on their shop floor, a live screen, a live shot if you would, of our shipments. When we ship a product and they have a part that goes into the product, they know that immediately that we've sold one and they need to replace one. It's kind of the Wal-Mart model in terms of visibility of need. We are very tight with our suppliers, they have good information and they are very much apart of who we are and how we operate. There is no show stoppers there.

The comments I made earlier, I think there is a lot of -- there is a lot of work going on in the marketplace with our customers looking at alternative sources for engines, for tires, for castings. I think they are also scrambling. But at this point, I don't see any show stoppers in that area either. My uncertainty is that I'm not as close to that supply base as they are. We watch it very closely.

Then I guess a follow-up question to that would be then on the level of inventory, as you look across at your distributors, have you seen inventory levels start to rebound or is it still lean out there, but it is manageable and you think it will reset to a lower base in terms of inventory levels?

In terms of whole dollars, we have seen small increases, actually, in our total distributor inventory, but we believe that the turns are much higher than they have been over the last few years and that even though they have a little bit more of our inventory, they are turning it much more quickly.

Okay. That's helpful. Thank you very much.

(Operator Instructions) We will take a follow-up question from Robert McCarthy with Robert W Baird.

Thank you. Tricia, you commented on S&A expenses being a little elevated in the first quarter and specifically incentive comp playing a role there. Do we -- have we reached -- to borrow a word, reset the expense at this level because of these various factors or can we look for a sequential decline in the second quarter?

I think we probably are going to see a sequential decline Q1 to Q2 in the SG&A costs. The variable compensation adjustments are actually related to deferred compensation plans for our Board of Directors that are tied to our stock price. So, we do see some variability either up or down in those periodically, but because of the jump in the stock price from Q4 to Q1, we did see a bigger hit there than we normally do. But I would expect in Q2 that we will see a decline in the overall SG&A cost.

Depends on what our stock price does.

I was getting ready to observe that you might want to revisit that assumption.

Well, we don't make any assumptions about what that will be when we do our forecasting, similar to the way we look at foreign currency. We assume no effect because we don't want to try to guess one way or the other. But there is potential for that, obviously, given what the stock looks like it's doing.

The other thing, Rob on SG&A expense, we are comparing Q1 '11 versus Q1 '10. And Q1 '10, we were still throttling back on anything that was an expense that could be pushed out, not necessarily eliminated, but pushed out. Some of that push out that we put in place in '09 and early '10 is actually pushed out and happening right now. So, some of the SG&A expense, perhaps you might think of it as catch up as well for things that we pushed out in '09.

In the quarter, Tricia, you showed -- I think the number is $340,000 of other income. You don't usually have anything on that line.

That was related to the divestiture of our joint venture in China.

So, it's a one time element?

Yes.

Can you quantify how much of that is --

The majority of that $340,000 is related to the JV divestiture.

Then last one, I'm curious about pricing. You talked about some pressure on the supply chain. Recognizing it's not doing anything to your deliveries, it nevertheless creates a favorable price environment for the supplier. Have you guys been doing anything on the pricing front since you last acted, I think it was in September?

Yes, our last adjustment, Rob, was June 30, 2010. You are right, we are seeing pressures on prices. We are also seeing pressures on freight in two ways, the cost of freight, plus also, we are expediting more product, getting it in here on shorter lead times. There is some expedited freight costs in there as well. Right now we are taking a very good look at our pricing and what our pricing actions need to be 2011, but no decisions have been made.

That something is possible clearly. Okay, that is all I had. Thank you very much.

(Operator Instructions) There are no further questions in queue.

Yes, well, I would like to conclude this conference call. As I previously said, we are encouraged by our first quarter performance and we look forward to continued growth throughout 2011 and into 2012. Rich said earlier, the annual report and proxy were mailed last week. Many of you should probably have received them by now. I know I received mine.

2010 shows signs of strength and demand throughout the recovery. That is posted in our annual report from last year. Adding to that, 2011 continues to build on this and we look forward to a very strong year. I would like to thank the investment community for their continued interest in SNHY and we will be back here next quarter. Have a good day.

And that does conclude today's conference. We thank you for your participation.