Helios Technologies Inc (HLIO) 2011 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Sun Hydraulics Corporation 2011 fourth-quarter and year-end 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 turn the conference over to Mr. Rich Arter. Please go ahead, sir.

Thank you, Dana. Good morning and 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. 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.

Thanks, Rich. Good morning, and thank you all for joining us. 2011 proved to be a great year. Sales were up 36% and earnings were up 76%. Most of the growth was achieved in the first three quarters of the year. Even though business tailed off considerably in the fourth quarter, Sun achieved new records for the year in both revenues and earnings. North American sales led the way last year, with Europe and Asia-Pacific close behind. Demand is strong in all major geographic markets heading into 2012.

We're very pleased to announce another shared distribution. The share distribution is an excellent method by which stakeholders can share in Sun's operational success. The total amount distributed this year is $7.7 million, with approximately 60% going to employees and 40% to shareholders. We did many things last year to continue to position Sun for the future. In January, we opened a representative sales office in China. This helped us grow our business there by 49%. We're aggressively adding distributors and systems integrators in the country to gain more coverage. We also added two engineers to our staffs, who each spent more than three months in Sarasota last year to immerse themselves in our products, capabilities, and cultures. Despite an end of the year slowdown in the region, we expect China to regain its growth trajectory in the long-term.

In September, we completed the acquisition of HCT, the electronics control company in which we took a financial position in 2007. HCT's products and capabilities are complimentary to Sun's and will help us compete more effectively and completely. Being a Sun Company will expand HCT's reach geographically. Each company expects to see enhanced opportunities in the marketplace. We added approximately 140 people to our payroll in 2011, 36 of them from HCT. Sun is fortunate to see a steady stream of qualified candidates who want to work for our Company. Part of our work force expansion includes the addition of many new design and manufacturing engineers. The office addition that was recently completed at our University Parkway facility helped make [grow out] some of our new engineering talent. We remain excited about our future prospects and continue to build the organization to grow. Product development continues to yield new and interesting new products. Our service levels remain the best in the industry, and our suppliers and distributors continue to invest and work closely with us to create value for our customers.

Before I turn the call over to Tricia, I would like to make a brief comment on the March PMI number. The actual number came in a bit lower than many of us anticipated, but it remains in positive territory. Despite the monthly volatility, coupled with the fact that more than 50% of our sales are outside the US, we remain convinced that directionally, the US PMI number is a good indicator of Sun's business, and we will continue to monitor. I will now turn the call over to Tricia and will be back for the Q&A at the end.

Thanks, Al. 2011 was a record year for Sun. With sales exceeding $200 million, we were able to gain significant operating leverage. Gross margins for the first three quarters of the year exceeded 39% and were approximately 37% in Q4. The decrease in Q4 was due in large part to the lower sales volumes. With rising sales estimates, we expect to gain some of our operating leverage back in Q1.

I'm happy to report that HCT has been fully integrated on the administrative side, and in January HCT held their first distributor training class at Sun. This provided an opportunity for HCT to showcase their products to Sun and HCT distributor channel partners. As Al mentioned, we expect to see enhanced opportunities in the marketplace for both Sun and HCT. In 2008, the Board introduced the concept of the share distribution as a way to reward employees and shareholders when Sun has a successful year. The share distribution is considered annually by the Board. This year, as part of the share distribution, approximately $4.6 million will be paid in the form of Sun stock into employee retirement plans, and shareholders will receive a cash dividend of $0.12 per share, which will be paid on March 31 to shareholders of record on March 22. We are pleased our results allow us to reward the stakeholders of Sun.

Let's look now at the numbers for the fourth quarter and year. All prior EPS figures reflect the 50% stock dividend recorded on June 30, 2011. For the fourth quarter, sales were up 9% and earnings were down 3% compared to Q4 last year. 2011 earnings were impacted by tax adjustments of approximately $0.03 per share. For the year, sales were $204 million, up 36% compared to last year. North American sales increased 40%, Europe 33%, and Asia-Pacific 30%. Pricing accounted for approximately 3% of the sales in the year. Foreign currency accounted for just over 1% of sales for the year. The currency impact was mostly in the second and third quarters and driven primarily by the euro to US dollar exchange.

Earnings increased to $1.47 per share from $0.84 a year ago. Gross profit as a percentage of sales increased 4 points to 39% for the year compared to 35% for last year. The 2011 revenue levels, coupled with our agile work force, experienced suppliers, and manufacturing processes allow us to gain operating leverage and deliver high margins. SCA expenses were up 12% for the year, or $2.6 million. The change is related primarily to additional retirement benefits associated with the share distribution, marketing costs, and compensation, including new talents in our engineering group. Q4 SCA also includes the addition of HCT. The provision for income taxes for 2011 was 34.6%, which was impacted by reserves and prior-period adjustments in Q4. We expect the Q1 tax rate to be approximately 33%. Net cash from operations for the year was nearly $50 million. Inventory turns remained at 10.6, and days sales outstanding decreased 3 days to 29. Capital expenditures for 2012 are expected to be $10 million, which includes approximately $3 million for site preparation in the US and $2 million for an expansion and update of our UK facility. The remaining expenditures consist of purchases of machinery and equipment.

A 2012 first quarter dividend of $0.09 was declared and will be paid on April 15 to shareholders of record on March 31. Sun has paid a quarterly dividend every quarter since it became a public company in 1997. Most recently, the Board also increased the quarterly cash dividend by 50% in July 2011. Looking ahead to the first quarter, demand has rebounded in all geographic regions. Sales are estimated to be $53 million, up 5% compared to last year. Earnings are estimated to be $0.37 to $0.39 per share compared to $0.38 per share last year. The increased demand and positive PMI numbers are exciting. We expect growth in 2012 and to continue to deliver strong operating results. I would now like to open the call for questions.

(Operator Instructions) Mig Dobre, Robert W Baird.

First question for me, guys, I'm trying to get a little more color on growth progression through the quarter and the way growth has progressed into the first quarter, as you are putting together your outlook and guidance for the quarter. Any color there?

Sure. In January, we saw an increase in orders off of our run rates from Q4, which increased, again, in February and are continuing at that rate throughout March. So, throughout the quarter, we've seen an increase in the order rates, and we've flattened that out at this point.

Is there -- are there any particular end markets or geographies that you're really seeing as incrementally positive here, or is this more of a general?

I think it's a general increase overall. North America maybe is up a little more than Europe and Asia at this point, but they are all pretty close.

Okay. Then looking at China, you guys have commented about a slowdown at the end of the year. So there's two things I'm wondering. First, year to date in 2012, how would you quantify the run rate there after adjusting for the new year impact? Secondarily, how would you quantify the exposure to the Chinese construction equipment market, and I'm imagining that part of the slowdown there has been the slowing of activity in that regard. Can you give us any color?

This is Al. What we saw in China was a pretty strong 2010 accelerating in the first half of 2011, and the Chinese government in early 2011 became fearful of inflationary impacts, especially as it relates to food and housing. So they tightened up the monetary policy early 2011 to cool off the economy. That had an effect in the latter half of 2011.

But by -- towards end of year, they realized that the inflationary problems that they were concerned about pretty much diminished. Things got back to normal in terms of inflation on core --- on food products, particularly, and they began loosening the monetary policy, which they are continuing to do as we speak. So I think what we'll see is in the latter half of 2012, the Chinese economy will accelerate. I think the GDP in China right now is somewhere around 7.5% or 8%. For them, that's a cool economy. They would like to see it accelerated. I think 2012 will kind of be like a reverse image of 2011.

Yes, and that makes sense. That very much is in line with what a lot of OEMs have forecasted for China. I guess I'm wondering, is there anything you guys can comment on as far as your exposure to the construction equipment market there?

Yes, we have a very, very broad market around the world. We're not reliant on any one business segment. Obviously construction equipment is a core business for us, but there's other pieces of mobile equipment perhaps that are even more significant than construction equipment. When you talk about construction equipment, it really depends upon what type of construction equipment. Road construction, for example, is pretty significant. Building infrastructure like bridges is significant. But heavy earth moving equipment is not significant. So, we are very, very diverse, and it's difficult to see what's going on in one business segment having a major impact in Sun. It's highly unlikely.

I'll jump back in the queue. Thank you.

(Operator Instructions) Jon Braatz, Kansas City Capital.

In January, you announced a $16 million expansion at your facility in Sarasota. Will we be seeing some costs from that expansion that are unabsorbed this year or next year? How do you look at the costs of that expansion?

Okay. Let me try to answer that, and then Tricia can jump in with perhaps a little bit more detail. We purchased land for -- ultimately for an expansion, I don't know, probably four or five years ago. We continue to be looking at our capacity and needs going forward. We have announced a plan, if you would, going forward that includes about a $16 million expansion. However, what we've done really is just permitted for that and doing some site preparation work at this time.

We have not pressed the go button, for example, on moving forward with that expansion. I liken it to teeing the ball up, to be ready when we do need it. But we are not actually doing construction. Why did we announce it, if that's the case? Well, because when we start permitting, it becomes public. So to avoid getting all kinds of questions from the local press and media, we just announced future expansion plans. But there are no hard numbers and dates as to when that will actually take place and when it will impact our financials.

From a cash perspective, we've included about $3 million in our fixed asset forecast for the site preparation work, but there's no additional money in that forecast to move forward with the building at this point.

Okay. So the question would be, if business continues and sales continue to grow, let's say 10% to 15% or whatever -- would you envision that you would have to begin to push that button, so to speak, latter half of this year? How does your capacity utilization rate, if you want to call it that, begin to look if we see a modest growth this year -- 10%, 15%, something like that?

Okay. I think the question really is, or the answer is, to the question really is, what do we need to do versus what do we want to do.

Okay.

They are two different things. What do we need to do? We're probably in pretty good shape for quite some time in terms of capacity utilization. In fact, we don't even measure capacity utilization. We measure our capacity capability by what constraints are in front of us. If I looked at the -- at the outlook right now, constraints -- a building is not a constraint to us continuing to ship.

Having said that, let's talk about what do we want to do. There's a time when -- an ideal time to build additional bricks and mortar, and you don't want to do that at the top of a cycle. You want to do that at the bottom of a cycle. It's like building a home. You don't want to do it when every plumber and carpenter and electrician in the area is employed, and you can't find people. We're looking also at the local landscape in terms of when is really a good time to build it, not that we need it, but it's just a good time to do it. So, those two things are coming into play. No decisions have been made at this time.

I don't know this, because I don't live in Florida, but I would think that maybe Florida's real estate market and construction market is rather depressed at this point?

Yes, it is. It's a great time to buy property, to build buildings. There's an abundance of work for us. You're probably going to be able to build a facility for 15% or 20% less than you would two or three years from now. So it's a matter of timing this as opposed to do we need to do it? No, but we may want to.

Okay, okay. All right. Thank you very much.

At this time, there are no further questions in the queue. (Operator Instructions) Mr. Arter, it appears there are no further questions.

Great. Thank you, Dana. Thank you all for joining us and listening in, and those of you that asked questions. We'll be back in March with our first-quarter conference call. Thank you.