Helios Technologies Inc (HLIO) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the Sun Hydraulics Corporation 2012 first-quarter conference. As a reminder, today's presentation 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 Ms. Tricia Fulton, Sun's Chief Financial Officer, Corporate Finance. Please go ahead.

Good morning. Thank you for joining us for Sun Hydraulics' 2012 first-quarter conference call. Allen Carlson, Sun's CEO and President, is traveling in Australia and will not be participating in today's call. Al sends his regards, and reports that business is strong in Australia, notably in the mining and energy sectors. Dennis Tichio, who is part of Sun's Finance Group, will be joining me on the call today.

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.

Turning now to the first quarter. Orders rebounded nicely in the first quarter compared to the demand we experienced in Q4. We are seeing the same patterns as others in the industrial sector, with strong North American demand sequentially and year-over-year. European and Asian demand, which softened in the second half of 2011, returned to levels similar to what we saw in Q1 last year.

Our second-quarter estimate reflects consistent demand sequentially, but doesn't demonstrate our normal seasonal pattern of a stronger second quarter. While the North American market is expected to grow from Q1 to Q2, European and Asian markets are expected to be flat in Q2.

As we discussed last quarter, we believe the second half of 2012 will be better than the first half, a mirror image of what we saw in 2011. This scenario is dependent on strengthening in China and some resolution to the economic malaise in Europe. However US PMI numbers, which Sun tracks, reflect strength in the domestic manufacturing economy, and we are encouraged about the remainder of 2012.

Sun has always taken a long-term view of our industry and business. We attempt to make decisions that will benefit all of Sun's stakeholders over time. To this end, we began planning for manufacturing expansion in Sarasota several years ago.

In 1999, 2007, and 2009, we purchased land adjacent to our Tallevast Road facility. Last year, we upgraded our infrastructure to service our existing Tallevast Road facility, and added enough capacity to also serve a new factory. In January of this year we announced our plans to begin site work on this new factory.

In April, we began the construction process. The building in its entirety is expected to be completed in mid-2013 at a total cost of approximately $16 million.

The new facility will add 60,000 square feet of manufacturing space and 18,000 square feet of office. The additional capacity will augment Sun's ongoing growth.

We are optimistic about the future of our business both short and long term. We expect this business cycle expansion to continue and believe that the timing is right to add capacity. Given the cycle of commercial construction, building this facility now seems opportune, given the availability of construction materials and the current cost to build.

Long-term, our goals remain the same -- to deliver differentiated products at superior service levels to our customers when and where they need them, anywhere in the world.

I will now turn the call over to Dennis, and we will be back for Q&A.

Thanks, Tricia. The first quarter ended stronger than we expected, with increased demand in March in both the US and Korea. Throughout the quarter, order rates grew from January to February, and February to March, then softened in April.

While demand from North America remains strong, Asia and Europe are relatively flat, constraining our Q2 forecast. Overall, the first half of 2012 will be strong, and we look to the second half of 2012 gaining strength.

Let's look now at the numbers for the first quarter. All prior-year EPS figures reflect the 50% stock dividend recorded on June 30 of last year.

First-quarter sales were $55.3 million, up 9% over Q1 last year and our largest quarter ever. Earnings were up 8% over last year to $0.41 per share.

First-quarter results were affected by the inclusion of HCT, which was not part of last year's numbers. HCT was acquired in September of last year and develops electronic control solutions for hydraulic systems.

Integrating HCT's electronic controllers with Sun's line elecro-hydraulic valves allows us to satisfy more customer needs with smaller and more compact solutions, making it a strategic acquisition for Sun. HCT accounted for approximately 25% or $1 million of the Q1 year-over-year sales increase.

Earnings were negatively affected by $0.01 per share due to the combination of the operating loss in HCT and currency effect related to the euro and Korean won. Gross profit as a percentage of sales remained at a high level, increasing to 40% for the first quarter compared to 39% for the same period last year.

SEA expenses increased 9% compared to the first quarter last year. The change is related primarily to HCT SEA costs, which were not present in the prior-year period. We will have a few more quarters where HCT costs will continue to influence the year-over-year comparisons.

The provision for income taxes for Q1 was about the same as last year at 32.5%. We expect the Q2 tax rate to be approximately 33%.

Net cash from operations for the quarter was $11.7 million. Inventory turns were 9.3, and days sales outstanding were 36.

Capital expenditures for 2012 are expected to be approximately $13 million, which includes approximately $6 million for the new US factory and $2.5 million for an update of our UK facility. The remaining expenditures consist of purchases of machinery and equipment.

A share distribution dividend of $0.12 per share was paid on March 31 to shareholders of record on March 22. Additionally, a quarterly dividend of $0.09 per share for the first quarter was paid on April 15 to shareholders of record on March 31. Sun is proud to have paid a dividend every quarter since going public in 1997.

Looking ahead to the second quarter, demand is expected to continue to be strong in North America and relatively flat in Europe and Asia. Sales are estimated to be $56 million, up 2% over Q2 2011 sales. This estimate is positively affected by the addition of HCT sales and negatively affected by currency rates, which essentially offset each other.

Earnings are estimated to be $0.41 to $0.43 per share, compared to $0.41 per share last year. At this time we would now like to open the call up for questions.

(Operator Instructions) Mig Dobre, Robert W. Baird.

Good morning, guys. Thank you for taking my question. So, first and foremost I guess a bit of clarification around guidance. Obviously you guys already commented on the seasonality and the normal uptick, which is not reflected in your guidance this quarter. I guess I am wondering; how should we think about the trends that you are actually seeing in Asia and in Europe? How have order rates progressed through the quarter and into this one?

And I am wondering. As, I am reading your press release, I am getting that you guys are guiding towards a bit of a stabilizing environment, and that just now seems to be what I am understanding when looking at the guidance itself and at the numbers sequentially. How I should I think about that?

Yes, looking at the orders, I think in Dennis's prepared remarks he commented that order rates throughout the quarter grew. So January grew -- or February was higher than January, and March was higher than February. We did see a small decline in the April orders, but it is difficult to tell when you only have a few weeks in there to look at.

I do think that the second half -- or first half is going to be relatively strong if you look at the combination of our Q1 and Q2 estimates. But we do expect to see some growth in that, in the second half of 2012, which really throughout the year is not a normal seasonal pattern for us.

It is difficult to tell because we don't have a lot of visibility what those order rates are going to do going forward from here. We really only have about four weeks in our book-to-ship cycle, so it is difficult to project beyond that. But macroeconomically our feeling is that the second half will be better than the first.

So, looking at last quarter's comments in which you expected China demand to improve in the second half of 2012, some of your peer companies were out I think with slightly more bearish comments, expecting that improvement to really move perhaps towards 2013. Are you still sticking with your initial thoughts and outlook in that regard?

Yes, at this point, we are sticking with what our initial thoughts were. We haven't really seen too much to change that. And with the increase sequentially that we saw in Asia Q4 into Q1, we believe that we could still see that same pattern.

One last one for me. How should we think about the additional capacity coming into the new facility versus the current capacity that you already have available? I guess a different way to ask this is -- the new facility, what sort of additional volume of sales would that be able to support, as we are thinking about your growth going forward?

By the time we bring that capacity on of the new building fully in mid-2013, that capacity will help us grow to the next level, just as -- if you look at when we brought other buildings on in the past. The last building that we built was in 1997, so we're looking at a 15-year time period of growth.

And with a compound annual growth rate around 20%, we believe that building could take us well into the future and really to the next level, possibly even doubling the business that we saw in 2011.

Thank you.

(Operator Instructions) Jon Braatz, Kansas City Capital.

Good morning, Tricia. A little -- a couple questions on the working capital. Your inventories [in the gold mine] are up a little bit. I think the last two quarters your inventory growth exceeded your sales growth. Are you -- can you talk a little bit about your inventory levels and your comfort with the inventory position at this point?

Yes. We believe we have the right amount of inventory on hand to continue to deliver product to the customer when they need it. There is a fine line, I believe, between on-time delivery and the lowest-possible inventory levels, and I think our production people are very comfortable with the inventory that we have right now.

That is obviously something that we look at on a very consistent basis. We in Finance, when we are looking at the numbers side of it, are conferring with the production people and making sure that everybody is on the same page going forward with regard to inventory. But delivery really is the primary driver of why we would have more inventory on hand.

Okay, okay. Margins in the German operation were probably the weakest. Is there anything you can do to tweak that margin? Or is this something that you just want to leave alone as you -- business will come back. Is there anything you want to do in the interim in a weaker environment?

We really don't try to manage that too much. A lot of it is affected by currency and the weakness of the euro to the dollar. They are buying all of their goods from the US in US dollars, so we do see some effect in the currency related to that.

We take the benefits on the upside when the euro was strong, and we take some hits on the downside. But we have not gone to the length of creating elaborate hedging contracts to try to correct that (multiple speakers).

Okay. Thank you, Tricia.

Kristine Kubacki, Avondale Partners.

Good morning. My question is -- and I'm just trying to make sure I understand. You are talking about the seasonally, going against the seasonal norms in the second half. I know you guys see a pretty broad swath of end markets there.

I was wondering, one, are you seeing anything that gives you confidence that you are already -- that we will see that kind of going against the seasonal piece maybe in China and Europe?

And then can you give us what the take is on some of the end markets? What is weaker than what you would have expected, or maybe what is stronger than you would have expected especially in those two end markets?

In the end markets it's a very difficult question for us to answer, because of our route to market. We don't have a good handle on where all of our products are going at any given time because we are as a manufacturer a little further down the food chain.

We are not seeing any specific end markets that are not doing well. Al did comment, since he is in Australia, that he is seeing the mining and energy sectors there remaining very strong. And I would guess that in all markets there is probably a different end-use market that is stronger than others.

In Korea, I know we have a lot of excavator business there, and we have seen some pickup there at least in Q1 as well as in the special vehicle market. But because we are so diversified, those have very small effects on the total outcome of Sun.

Turning to your seasonality question, I think we have had a lot of trouble over the last three years of really looking at our normal -- quote unquote -- normal seasonality, if you will. 2009 obviously wasn't that; 2010 wasn't that.

We saw some variations in 2011 that we didn't fully understand, especially toward the end in Q4 and now the pickup. I think it is just difficult to read. I don't know that we are in a normal pattern given the global economic situations that we're in.

Okay. Then just make sure I understand; did you say that sequentially month-to-month you have seen an uptick in North America through the first quarter, and then even into April?

Yes.

Yes.

Okay. Fair enough. Thank you very much.

Doris, we received a couple e-mailed questions and we will go ahead and answer those at this time.

Since you are expanding manufacturing, can we assume you are close to full utilization in your plants today?

Well, capacity as we've discussed many times is something that is constantly changing for us, and we manage our business to the constraints that we see within our production areas at any given time, so that we can eliminate that constraint and free up that capacity. We are not currently at full capacity, but we believe that now is the right time to build for the future growth of Sun. And if we wait till we're at full capacity, really bringing on a new building -- it's too late at that point.

Should we expect some leverage and margin expansion particularly as orders seem to be moving higher?

Yes. At the higher sales volumes, especially if you look at what we experienced in Q1, we continue to operate at a very high level with respect to margins, leveraging our assets and our fixed costs. Heading into Q2, we expect those margins to be very similar.

Will site work be capitalized and therefore not too much of a hit on EPS?

Yes. All building costs including site work will be capitalized.

How many shifts is Sun currently running in the US?

We have several shifts that we are running now. We have two 10-hour shifts in most areas, four days a week, with overtime available on the fifth day. And in other areas we are running three 8-hour shifts. We also have a few people on a weekend shift.

So these varying shifts allow us to really take a look at those manufacturing constraints that we talked about later and move resources there.

The last e-mailed question was relating to currency. Is currency and issue for Sun? Should we anticipate a drag due to a higher dollar and hence higher prices for US-made products, making Sun products a competitive disadvantage?

Yes, currency has had an impact on our financial statements. Part of that was in our prepared remarks.

As a result of our international locations buying in US dollars, if the dollar strengthens their cost of goods sold goes up. But there are also a lot of products that are sold directly to distributors and integrators around the world out of our US operations in US dollars. So the strengthening dollar can make our products more expensive, at least short term in those international markets.

We don't anticipate any significant drag in demand, however, due to a strengthening dollar. The depth and breadth of our product line, coupled with our performance and our ability to deliver, really creates demand for Sun's products. We believe the slowdown in Europe and Asia is primarily related to the general economic slowdown in those regions and not related to pricing or the strength of the US dollar.

We will go ahead in turn it back over to the callers. Any other questions?

There are currently no other questions in the queue. (Operator Instructions) Mig Dobre, Robert W. Baird.

Yes, thank you. Just a quick modeling question. Can you guys detail the currency impact in the quarter?

Sure. It was 1% I think, on the top line and about $0.01 on the bottom line, related to both the currency -- the $0.01 I think it was in Dennis's prepared remarks, was related to the combination of the HCT loss as well as currency, was $0.01.

Great, thank you.

At this time there are no further questions in the queue. Ms. Fulton, I will turn the call back to you.

Thank you, Doris. I would like to remind everyone that Sun's annual reports and proxies were mailed on or about April 20. Please make sure to vote.

Sun's annual meeting will be held Monday, June 4, at 10 a.m. at our Tallevast Road facility in Sarasota. Thank you for joining today's call, and we look forward to speaking with you next quarter.

Ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.