Helios Technologies Inc (HLIO) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Sun Hydraulics Corporation 2013 Third Quarter Conference Call and webcast. Today's call is being recorded. At this time, I'd like to turn the conference over to Rich Arter. Please go ahead, sir.

Thank you, Kathy. Good morning and thank you for joining us on today's call. We're holding this call from Chicago where later this morning we will be presenting at the Baird Industrial Conference. Allen Carlson, Sun's CEO and President, and Tricia Fulton, Sun's CFO 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. Good morning. The third quarter brought further signs of better times to come. Sun sales were up compared to the prior year with increases in Asia Pacific and Europe. Global PMIs, led by the strong US number, continued to show positive signs and China's economy began to show signs of settling in at a nice growth level. All of these signals indicate to us a favorable economic condition moving into 2014.

As mentioned in yesterday's press release, our third Sarasota facility is open for business and the relocation of our Kansas operation is nearly complete. We have 24 machining centers moved in and producing manifolds for our integrated packages. By consolidating all of our US integrated package design and manufacturing under one roof, we will see numerous benefits in productivity and customer service, for example, improved communication, enhanced workflow and logistics, consolidated shipping, and maintaining superior delivered performance. But most importantly, the new facility will provide room for growth for the foreseeable future.

Our fourth quarter forecast has moved -- is more in keeping with our traditional seasonal patterns. We continue to see more stability in the business cycle and yearly business patterns. We expect to see strong momentum moving into the first quarter.

I'll now turn the call over to Tricia to talk about the quarter's results.

Thanks, Al. We are encouraged by the year-over-year growth in sales in the third quarter. As Al mentioned, the strength in the quarter was related to demand from Asia Pacific and Europe. Asian demand was led by Korea and China. Korean market growth is driven by demand in industries which weakened in the second half of last year, such as excavators. In China, you may recall that we divested of our joint venture in 2011 and concurrently opened a representative office. Our former JV became our first distributor in this region with the goal of our representative office to locate additional channels to market and promote Sun products. Today, we have 5 distributors and over 20 system integrators supplying Sun products to this important and growing market.

In Europe, the general economic downturn appears to be behind us. During the downturn, we continued to invest in our business and added new customers throughout the region. We are well positioned for this market's recovery.

From a market perspective, we are growing in spite of a downturn in the mining and resource industries. Mining and resources, which have been a drag on Sun's global sales, are important sectors. As this industry comes back online, we expect further improvements in these markets.

Let's look now at the numbers for the third quarter. Sales were up 1% with earnings down 6% compared to Q3 last year. Geographically, sales to the Americas were down 5%. Asia Pacific sales were up 12% and European sales were up 5%. Foreign currency added approximately $300,000 to sales. Earnings were negatively impacted by two items, the relocation of our Kansas operations and higher taxes, each of which reduced earnings by approximately $0.01.

Gross profit as a percentage of sales was strong in the third quarter at 40%, consistent with the prior year. Pricing changes effective October 1st of this year are expected to have a positive impact on margins next quarter of about 0.5%.

SG&A expenses increased 5%. The change is related to increases in compensation due to stock compensation and currency effects. The current period also includes costs associated with Seungwon, the company we acquired last year in Korea, which were not present in the prior year.

The provision for income taxes in the third quarter was approximately 35%, which is higher than we had experienced in the first half of the year. The increase is due to provision to return true ups as well as adjustments to income tax reserves. We expect the rate in Q4 to be in line with the first half of the year.

Net cash from operations was $37 million. Inventory turns remained high at over 9 and days sales outstanding were 34.

A quarterly dividend of $0.09 per share for the third quarter was paid on October 15th to shareholders of record on September 30th.

Capital expenditures for 2013 are expected to be $17 million. This includes approximately $10 million for the completion of the new Sarasota facility and $1 million for the expansion and update of our UK facility. The remaining expenditures are for purchases of machinery and equipment.

Looking ahead to the fourth quarter, demand remains strong. Q4 sales are estimated to be $48 million with earnings estimated to be $0.33 to $0.35 per share. This estimate includes one-time costs of approximately $0.01 per share for the completion of the Kansas relocation.

I would now like to open the call for questions.

Thank you. (Operator Instructions) Brian Rafn, Morgan Dempsey Capital Management

Give me a sense of what -- as you bring up the third plant in Sarasota, which is -- what is that 803 Tallevast Road?

Yes.

What are you guys running shift and how does that production in that third plant look versus some of the others relative to number of employees, shifts, weekend, overtime?

Okay, well first of all that facility is just coming on stream. During the quarter, we started with essentially no manufacturing equipment in there and as we closed the quarter and as of today, we have about 24 machining centers operational. Those machining centers are capable of running lights out. So during the evening shift, the operators will load them up with whatever needs to be produced and produce parts in a lights out mode. We can do the same over the weekends if we need to. We have multiple machines being run by one operator. So it's very, very difficult to say here's a particular shift. The machines just operate as necessary. I would say right now the spindles on average are probably turning I'm going to say 16, 17 hours out of a 24-hour day, because that's what we need. If we needed to flex and get more production, we could run them longer. We have essentially no past due. We've managed this very well in the transition from relocation. Things are very smooth operationally.

Okay, as you guys look at shifting some of your iron ductile manifolds and some of your aluminum manifolds from Kansas out to Sarasota, what do you guys capture from the standpoint of supply chain logistics, expediting, cause you're not sending cartridges back to Kansas and then back. Now that you've got it consolidated in Sarasota, what do you pick up in just in time from the standpoint of logistics to get the actual design from quote to spec to fabrication shipped out to the customer?

Sure, we save probably three to five days in the supply chain in an expedited mode. If we weren't expediting it, we'd probably be even longer than that, maybe 10 days. So there's a huge shortening of the supply chain in doing this. Then, of course, we have the engineers who are designing the product right there on site. So if something comes up that needs to be changed, the engineer that did the design work is co-joined with the manufacturing community, which is also a huge plus. So all-in-all, it's good for us and good for our customers.

Yes, okay. How do you guys -- I'll just ask one more and get back in line. How do you guys look at your CapEx, the D&A going out into 2014? You guys kind of started out with kind of a $13 million, $14 million. We're ending the year on a $17 million budget. So it's creeped up a little bit. What, as you see maybe the next couple years, do you see CapEx going back to D&A or do you still see an accelerated rate of spending?

We believe that CapEx is going to go back to a fairly normal level beginning in '14, which we consider to be about $8 million to $10 million a year. With regard to the depreciation, the majority of that $17 million is really in buildings, which are depreciated over a very long period. So we don't expect big changes in the level of depreciation expense over the next few years either.

Okay, thanks, guys.

(Operator Instructions) Brian Rafn, Morgan Dempsey Capital Management

Okay, I'll keep going.

Brian, are you downstairs?

Yes, I am. I will see you in a little bit, so the expedited orders for -- I'm just getting a sense for the quarter, what versus what might be normal? As you see business kind of ramp up a little bit, what were they in the third quarter? As a percentage of total?

Yes, we see about 15%. That's been average for the last decade, which doesn't seem to change much, good times or bad times. We run about 15% of our incoming orders expedite because either our distributors don't have it in inventory or customers want it faster than they can get it. So, it's 15%.

Okay, what -- as you, I think you guys have talked about the electronic hydraulic, some of these the WhiteOak and High Country cartridges with the -- going to the electronic controllers on being about 20% of your business. How do you see that ramping up as a percentage of the mix? Somebody there was an announcement a few quarters back that some day it might be as much as 50%. Is that incrementally growing steadily year after year or is it leaps and bounds?

It's incrementally growing. Every time we sell a piece of electronic hardware, it's bringing other products with it. So, if you add a dollar of electronic hardware from WhiteOak or High Country Tek, it's probably adding $5 worth of hydraulic hardware. So they ramp up together.

Okay and what is the headcount that you've added with the third plant? I mean how many from an employee hire say the last transfers from Kansas and what have you guys been doing for hire the staff the third plant?

We had a handful of employees who moved from our Kansas facility to Florida, about five. So we're actually down at this point on overall employees because we had another 20 or 15 or so in Kansas that did not move with us. So we're actually down a little bit at this point. We're able to absorb some of the labor time that was being spent in Kansas with other employees that we have in Florida.

Okay, what do you, as guys look out again kind of the thought being kind of a modest kind of tepid, sluggish expansion? You guys have made comments about certainly mining and infrastructure, which I think are all very valid. How do you see hiring and employee headcount? You guys always talk about going after and looking and fixing bottlenecks and that type of thing. The next couple of years, what do you see kind of headcount? What are you hiring? Is it engineering demands, expediters? Is it labor guys on the line, machine tool guys? Where do you see your bottlenecks from a human labor standpoint?

I'm going to pick up that question just following up with Tricia. We're down about 15 people with the relocation from Kansas to Sarasota. But I would say we're right where we want to be. Part of the intention of consolidating those two plants was to pick up gains in productivity. Those gains in productivity have represent about 15% -- about 15 employees that we're able to run the same amount of output without. So that's been helpful.

When I look at the next couple, two to three years, I think we're -- the front office we're staffed very, very well. We've hired a lot of young engineers, both product engineers and manufacturing engineers. We're well equipped in just about all areas in the front office. Our production employees will be increased as demand increases. We have a very good labor pool in Sarasota for adding production people. We got a number of training programs to improve the quality of our workforce. We've taken advantage of some of the state grants for manufacturing. We're in very good shape from a human resource standpoint.

Allen, what do, just for us for those of us that don't live in Sarasota, what's kind of your local employment -- what's unemployment? How would you describe kind of your local economy in Sarasota for business?

Pretty typical I think of all of Florida and probably much of the US. Unemployment rate is about 8%. Has been stuck at that number for quite some time. I don't expect it's going to change. So I mean we have an abundance of people who want to work, good employees. There's no shortage of talent. There may be training issues where we have to provide some training on some of these employees and that's why we hire them sort of on a gradual basis and bring them in one at a time so that we get them up to speed. We would never hire 15 employees to start on the same day.

Yes, okay, what with the third plant, what is that kind of drive your overall capacity in sales for Sun Hydraulics?

This reminds me of a question you asked me about a decade ago. But I think a decade ago when we were about $100 million business, you kept asking, you're going to need more capacity, more capacity and I said I think we can handle it with the bricks and mortar we've got by this concept of theory of constraints. You mentioned it earlier that we -- our approach is to identify constraints and then go fix them. We're able to get to about $205 million with our current bricks and mortar through that process. We will continue the theory of constraints process because it works very, very well for us.

To answer your question, I think we have bricks and mortar for $350 million in sales.

Okay, I'll ask one more and then get back. When you guys -- now that you have the consolidation of the manifold production, and correct me if I'm wrong, does that now allow you guys to maintain manifold design completely internally or are you still doing any machining and outsourcing?

We, of course, design all the manifolds in house for our own consumption, whether they're iron or aluminum. We do that in multiple locations as well for around the world. Like for example in Europe, we have a facility that manufactures manifolds and designs them as well. So but Sarasota is the largest machining center and design. The manufacturing of these manifolds, the high volume, simple manifolds with long lead time, typically catalog products, we found over the years that we could outsource those to a number of suppliers in the I would say the Midwest and East Coast. Even in Florida, there are a few. So I would say today the mix is probably about 50/50. We buy half and we make half. The ones that we make are the more complicated ones, the shorter lead times. They're really stacked with a lot of cartridges and very dense packages. We couldn't possibly find anybody to make some of those more complicated ones. But the easy ones, we outsource.

Okay and so the thought process then is not from a capacity, you will continue to outsource. You know it kind of gives you a margin of safety flex wise relative to production. That there's no plan to bring in the simple designs in house?

No way.

Okay. All right, guys. Thanks much.

(Operator Instructions) It does appear we have no other questions. I'd like to turn the conference back over to the speakers for any additional or closing comments.

Al, would you like to make a final comment?

Sure. There were a number of questions today about our new facility at 803 Tallevast and that facility is coming on stream. I would say two-thirds of it is currently running. We'll finish the one-third during the fourth quarter. But I'd like to make the point that that facility machines manifolds either in aluminum or ductile iron. It machines very complicated ones. We call them five axis machining centers, which means that we can make compound angle holes and get a lot of density in the manifolds that we design and produce. It differentiates us in the marketplace. But these manifolds are a path to customization and our integrated packages. It's really a component that goes into an integrated package. It's the integrated package that we're taking to the market with the manifolds produced in a highly differentiated mode in our new facility in Sarasota.

Thank you for your questions and your interest in Sun Hydraulics.

We'll talk to you all next spring. Thank you, Kathy.

You're welcome. Again, ladies and gentlemen, that does conclude today's conference call. We'd like to thank you again for your participation.