Helios Technologies Inc (HLIO) 2011 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Sun Hydraulics Corporation 2011 second-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.

At this time, I would like to now turn to call over to Dennis. Please go ahead, sir.

Good morning. Thank you for joining us for Sun Hydraulics 2011 second-quarter conference call. Participating in today's call are Allen Carlson, Sun's President and CEO who is joining us from China today, and Tricia Fulton, Sun's Chief Financial Officer. Please be aware that any statements made in today's presentations 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. It is now my pleasure to introduce Allen Carlson.

Good morning, and thanks for joining us. We just completed a quarter with 40% sales growth, and are expecting the next quarter to be similar. The top-line increases were driven by market demand as well as new customers, and we are able to drive this growth our bottom line by leveraging our operating capabilities.

For the 24th month in a row, the PMI indicates the economy is expanding, although July PMI demonstrated that the growth is at a slower rate than in previous months. We keep a watchful eye on PMI, as it has proven to be a reliable leading indicator for Sun's business.

Sun has built a reputation of having the best delivery reliability in our industry, and this is a critical part of our growth and market share. We schedule our production to our customers required ship dates and internally measure our performance to these dates. Sun will invest to maintain and enhance its delivery reliability and will not compromise this capability.

The first half of 2011 has been very strong, yielding sales levels higher than any other period in Sun's history. The second half of 2011 is shaping up to be strong as well, with continued demand coming from all geographic regions.

As Dennis mentioned, I am currently in China where it is 9 p.m. Tuesday evening. Our markets here remain robust and are augmented by the addition of new systems integrators and distributors throughout the country. A decade ago, China represented less than 0.5% of Sun's total sales. In 2011, we expect it to represent 7% of our sales.

With regard to where we sell our products, China is now the fourth largest country for sales, right behind the US, Korea and Germany. We are excited about the opportunities we have in this cycle to build our business around the globe and expand our market presence.

I will now turn the call over to Tricia and will rejoin you later for Q&A.

Thanks, Al. In the last few quarters, we have addressed questions regarding how much further we think margins can expand. I'd like to take the opportunity now to discuss that a little further. We focus more on gross margins than operating margins because our FDA costs are relatively fixed due to the way we go to market. We know if we can grow our gross margins, that operating margins will follow.

Q2 gross margins were 40%, up significantly from the Q2 '09 low of 20%. We are currently in what we consider the high-end of our sweet spot for gross margins. We have the right number of people, products are flowing in well from our supply chain, and our manufacturing processes are working smoothly. In other words, operations are humming.

When you are running at full speed, it often begs the question of capacity and our ability to meet demand. In the past, we have indicated that we have capacity to continue to meet the expected demand. But for those of you who have listened previously to our conference calls, you know that Sun's capacity is constantly moving. As we identify and clear constraints by adding machinery, changing processes or bringing in new people, we are able to increase the amount of product we can ship with reliable delivery times. By freeing up our constraints, we are able to maximize our margins.

Let's look now at the numbers for the second quarter. All EPS information reflects the 50% stock dividend announced on June 9. Sales for the quarter were $54.8 million, up 40% compared to Q2 last year. Earnings increased to $0.41 per share from $0.24. Foreign currency accounted for 2.5% of the sales in the quarter, driven primarily by the euro to US dollar exchange. Gross profit as a percentage of sales increased 4 points to 40% compared to 36% for Q2 last year.

Our operating leverage continues to grow with the rising top line. SEA expenses were up 30% to $6.3 million compared to last year. The change was related primarily to retirement benefit accruals which were not used in Q2 last year, as well as salary and variable compensation adjustments.

The provision for income taxes for Q2 was 33%. We expect the Q3 tax rate to be approximately 33.5%. Net cash from operations for the quarter was $8.1 million. Inventory turns increased to 11, and days sales outstanding increased 3 days to 39.

Capital expenditures for 2011 are expected to be $10 million. This is comprised of machinery and small infrastructure projects, primarily in the US. Looking forward to the third quarter, we expect strong sales, tempered only slightly by the return of our normal seasonal pattern.

Sales are estimated to be $53 million and earnings are expected to be in the range of $0.38 to $0.41, again demonstrating our ability to maintain strong margins.

I would now like to open the call for questions.

(Operator Instructions). Chris Weltzer, Robert W. Baird.

Good morning, everybody. Wondering if you could talk through sort of how business trends, orders and shipments progressed sort of through June and into July? Interested in both the US and international markets like the UK and China, where the PMI might have dropped below 50 in July.

Sure. Order rates were relatively steady throughout Q2, with the exception of one large order that's really not expected to repeat that happened in Q2. And looking into Q3, we are seeing order rates remaining flat in the US and Asia, and they're down slightly in Europe. This is related to the one large order.

And this is not unusual, given our usual seasonal pattern from Q2 to Q3, and we believe that orders obviously are still strong, given our Q3 estimate.

Can you give us a little visibility on at least what segment the large order is in, so we could try to -- to help us model the 3Q a little bit better?

It's in the UK.

Okay, got it. Did you guys take any midyear pricing actions, or do you plan on taking any pricing actions before the end of the year?

We actually had a price increase that was effective July 1. It is already included in the Q3 forecast that we have given, and we expect that the impact on Q3 will be about 2%.

2%. Okay, that's very helpful. And I just want to make sure I understood the comments you were making earlier about gross margin. Best I can tell, this is the best gross margin you have ever put up, at least on the history that I have. I take it your comments were meant to say that the leverage going forward probably not so much on the gross margin line, more leveraging the SG&A line at this point?

Yes, I think I would tend to agree with you on that. We definitely are at what we consider the high-end of our margins at the 40%. It is our strongest quarter of the year typically in Q2. But we do still forecast strong margins into Q3, as you can see by the top and bottom-line forecasts that we are giving. I think we are still expecting to be in our sweet spot, high end of that for Q3 as well.

Okay. Then Allen, I was just wondering, since you are on the ground now in China, I mean obviously it's a source of a lot of consternation here in the US. Can you just give us any color, your thoughts on what the demand looks like? Maybe -- I understand you're winning new customers and things like that, and that's helping you grow faster than the market. But your thoughts on how the market itself is doing.

Sure. I think there's a number of factors that come into play, and a lot of what you read in the press in the US probably has more to do with what's going on in the Asian stock markets than what it has to do with real demand for products.

The GDP growth in the first half in China was about 9.5%, and the Chinese government starting late last year and early into this year believes that 9.5% is too high and going to lead to inflation. And they're beginning to see signs of inflation -- not beginning, they have signs of inflation, particularly in food and some of the commodities.

So the Chinese government put into effect interest hikes, things that they could control to sort of cool the economy. Much different than in the US where the US government is trying to stimulate the economy, they are trying to actually cool it here. And they're predicting the second half of the year to be about 8.5%, 1% less GDP than the first half.

PMI did tick below 50 for July, but the latest numbers -- excuse me, for June. The latest numbers for July indicate that it has gone back up above 50, particularly the industrial Shanghai area, which is where I have my numbers which came out today, by the way.

So overall, the Chinese economy continues to be quite strong, and there is a huge demand for Western products and we are capitalizing on that demand. This is my fifth visit to China in the last year, working with our sales and marketing people here on the ground and expanding our base of business. As you know, late last year we concluded the sale of our JV which was opened in '98, and we opened up our own office, our own sales office in the Shanghai area. And we are already seeing significant dividends in terms of increased market share and presence as a result of that action.

Thanks, guys.

Tom Hayes, Piper Jaffray.

Great, thank you. Congratulations on the quarter. I guess shifting gears a little bit on your comments, if you look at the strong growth you are experiencing -- and I know your end markets are typically very diverse. I was just wondering maybe you could provide some color on what your seeing across some of your end markets. Is there anything that is performing particularly well, and maybe is there something that's starting to fall off a little bit?

We are seeing some of the traditional markets start to come back a little bit, aerial work platforms which has typically been a very strong market for us took a hit first in the downturn and has been very slow to come back. But we are starting to see activity pick up there.

We are also hearing a lot of activity in the mining areas, both within the US and internationally. Conventional and alternative energy businesses are also busy. Those are not as much or as big of a percentage of our business, but it's always good to hear those types of businesses picking up as well.

We are seeing some opportunities in new markets as well, things that we really haven't been involved in before. And I think a lot of that was the result of some of the work that we did during the downturn.

Okay. Shifting gears a little bit to the balance sheet. You ended the quarter with about $50 million in cash. Just wondering if you could just remind us as far as how you prioritize the use of cash outside your normal dividend.

Well, we have a couple things that are pretty normal uses of cash for us, and that obviously are the dividends which we increased by 50% when we did the stock dividend. So we are seeing higher normal dividends as a result of that, as well as the annual share distribution that is contemplated by the Board. And this year in May was another $0.11 per share, as well as our capital investments.

Okay. Kind of talking the capital investments, I was just wondering -- and I know you kind of addressed it on the call last quarter -- but as far as approaching capacity additions, has that changed any given the little bit of softness we are seeing in the PMI? Are your end markets still indicating enough positive outlook that you are still thinking about -- or just your general outlook on capacity expansions?

I don't think our general outlook on capacity expansions has really changed at all. We discussed a little bit in the prepared remarks about capacity and the fact that we still feel like we have available capacity in the buildings and operations that we have. We know that we could bring on even additional capacity by adding or expanding some shifts and going through some more productivity gains.

So I don't really think that our model on expansion and capacity has changed at all from the last call. We don't have a lot of visibility out beyond what we are seeing in Q3, so for us to make any assumptions beyond that are difficult at this point.

Great. Just lastly as far as the 3Q guidance and the gross margin standpoint, just working through the model right now, is it safe to assume that there is some sequential decline off the 40% gross margin in the third quarter?

There is a little bit of that, not much, a percent maybe or so that we are going to see that doesn't get absorbed quite as quickly on the fixed cost side with the slightly lower revenue.

Great, thank you.

I would just like to add to that. For us to be able to predict margins within 1 percentage point is very, very difficult. It depends upon the mix of the products; it depends on some of our productivity gains. Obviously, the top line impacts it. So there is a lot of factors that come into the margins. And if I remember right, it wasn't too many years ago when we were at 35%, 36% margins. And everybody's comments was you are not going to be able to get much more out of it than that.

And we continue to make gains in productivity that assist us, and now we are up in the high 30s%, hitting 40% for one quarter. So I think it's difficult to look at our margins and try to be too granular as to what they might be going forward.

Al is absolutely right. Mix comes into play not only with the products but also the geographies of where the sales are happening.

Great, thank you.

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

Good morning, Allen and Tricia. Question, when you look back historically and you relate your business to the PMI index and it tracks -- and obviously, it is an important indicator. What type of leg might you have seen in the past as the index turns down a little bit, or just softens slightly and levels off, let's say at 50, 51 or whatever? What kind of leg do you see in your business? Does it take six months, nine months maybe, to see a little bit of softness?

It really depends on each cycle. I mean we have PMI information going back tracking to our orders 20 years, and it is somewhat remarkable how we can track to that PMI on a lagging basis. In any of the given cycles that we have data on, it's anywhere from 4 to 12 months.

Okay. Thank you, Tricia.

(Operator Instructions). At this time, we have no further questions.

Okay, thank you for joining us for today's call, and we look forward to talking to you next quarter.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. You may now disconnect.