Helios Technologies Inc (HLIO) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Sun Hydraulics Corporation fourth quarter and year-end conference call and webcast. Today's call is being recorded. At this time, I'd like to turn the conference over to Dennis Tichio. Please go ahead, sir.

Good morning. Thank you for joining us for Sun Hydraulics' 2013 fourth quarter and year-end conference call. 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.

Good morning.

Our strong fourth-quarter results provided a positive end to 2013. We are encouraged by the strength of orders throughout Q4 and into Q1. Our year-over-year growth in Q1 and macro-economic indicators, like PMI, lead us to believe that 2014 will be a strong year for Sun. US PMI demonstrated another strong reading yesterday, remaining firmly in the expansion phase.

Historically, Sun follows the PMI by about six months, leading us to believe we should see continued robust business conditions in 2014. So far in 2014, demand is up across all geographic regions. Over the past couple of years, demand has not been in sync geographically. We believe this alignment is a significant indication of the strength of the worldwide capital goods market.

Our performance in 2013 enables us to once again issue a share distribution, which consists of a contribution into employees' retirement plans and a dividend to shareholders. This is in addition to our normal quarterly dividend. We introduced the concept of the share distribution five years ago to allow both employees and shareholders to share in Sun's success and growth.

Beginning today, Sun is exhibiting at IFPE, which is the largest trade show in North America for our industry. The show brings us together not only with other manufacturing companies in hydraulics, but also OEMs who ultimately design and manufacture equipment on which our products are used.

We are introducing several new products at IFPE that will be immediately available for sale to our customers. These products expand our addressable markets and enhance our integrated package capabilities. The result is creative solutions for our customers, which ultimately helps us and them grow.

The most notable of these new products is a line of solenoid valves, which provides outstanding value and performance that is aligned with customer requirements. To give an example, our current solenoid valves are rated to 5000 psi and our new products are rated to 3600 psi.

There are many applications where a high-performance solenoid valves have more power than needed. The new product design fits the Sun interface, and has the same high-quality construction customers have come to expect from Sun. However, the change in design resulting from the lower operating pressures allows us to offer these new products very cost-effectively.

In 2013, we completed our third factory in Sarasota, which brings us to the capacity to double our business over time. This was a significant investment for the future of Sun, specifically in our integrated package business.

We have plans for additional investments in 2014 that will allow Sun to grow and expand our market presence. These include enhancing our marketing efforts in Asia and expanding R&D for new product development.

M&A is another area we hope to become more assertive in 2014. While we have made a few small acquisitions over the last couple of years, we believe this is a viable option for growth that could benefit Sun long term.

We have enjoyed great success over many years, and we anticipate continued growth going forward. Our investment plans will help to further expand our presence in the market and to bring us more market share.

Over the last decade, we have focused on growing our business and improving operational efficiencies that have resulted in strong financial performance. Process improvements will remain an ongoing effort, as will continued focus on investments that will help us achieve both profitable and sustainable growth.

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

Thanks, Al.

As Al mentioned, we recently completed our third factory in Sarasota. This represents a $20 million investment, which will foster the growth of our integrated package business and provide the capacity to meet future customer demand.

The new building adds approximately $1 million to our annual fixed overhead costs. The planned investments in Asia and new product developments that were mentioned are expected to total at least $1 million in 2014.

We expect to incur these expenditures evenly throughout the year. While the cost of these efforts will be reflected in 2014, the benefits will influence Sun for many years to come.

Let's look now at the numbers for the fourth quarter and the year. For the fourth quarter, sales were up 13%, driven by growth in all geographic markets. Earnings per share were up 23% compared to Q4 last year.

For the year, sales were $205 million, up slightly compared to last year. Sales were driven by international demand. Sales to Asia Pacific were up 7% and Europe up 2%. Sales to the Americas decreased 3%.

In 2013, pricing accounted for approximately 2% of sales, and foreign currency had a positive impact on sales of approximately $1 million for the year. Earnings increased to $1.45 per share, from $1.44 a year ago. Gross profit as a percentage of sales remained strong at 40% for the year.

SGA expenses were up 2% for the year. The changes related to increases in compensation, which are due to stock compensation, and amounts related to San Juan that were not present in the prior year. The provision for income taxes for 2013 was 34%. We expect the rate for Q1 to be approximately 33%.

Net cash from operations was $47 million. Inventory turns were 9, and day sales outstanding were 28.

Capital expenditures for 2014 are expected to be $10 million. This includes approximately $2 million for improvements to our high-volume cartridge valve factory. The remaining expenditures consist of purchases of machinery and equipment. We're happy to once again share the success of Sun with our employees and shareholders in the form of a share distribution.

Employees will receive a contribution into their retirement plans in the form of Sun stock equal to 10% of wages. Shareholders will receive a share distribution dividend of $0.09 per share, which will be paid on March 31 to shareholders of record on March 15.

This brings our annual yield based on our 2013 average stock price to 1.4%. Additionally, a first-quarter dividend of $0.09 was declared and will be paid on April 15 to shareholders of record on March 31. Looking ahead to the first quarter, demand is signaling year-over-year growth in all markets. Q1 sales are estimated to be $55 million, with earnings estimated to be $0.41 to $0.43 per share.

I would now like to open the call for questions.

Thank you.

(Operator Instructions)

Mig Dobre, Robert W. Baird.

Good morning Allen, Tricia, this is Joe Grabowski filling in for Mig this morning.

Hello, Joe.

Hi. Congratulations on a really strong quarter and a strong year. I wanted to start off by asking about Q1 guidance. Obviously we are about two-thirds of the way through the quarter, so I am sure you have pretty good visibility into the quarter. With the revenue guidance, you're calling for an 8% year-over-year increase compared to the 13% year-over-year increase in Q4. Was just wondering if there was maybe something unusual that made Q4 a little stronger, or maybe some factors that are making Q1 a little softer? Just talk about that a little bit?

I don't think that Q1 is softer, but I do think we had a really strong Q4. If you look historically at the difference between our Q3 and Q4 numbers, especially over the last three years, you see a pretty significant difference between Q3 and Q4. But this year our Q3 and Q4 were very similar. Came out with a really strong fourth quarter, and we're pleased with what we're seeing into Q1 for 2014, as well.

Anything you attribute that -- I'm sorry. Was just wondering if there was anything you contributed the strength in Q4 to?

No, nothing specific; but again, looking geographically, we saw really good gains in Q4 in all geographic regions. This is really the first time in a while that we have seen geographic expansion across the board. We think it has lended itself to that explanation in that everything is coming into sync now.

That makes sense. You mentioned the geographic breakdown for the year. Would you happen to have it for the quarter?

With regard to?

Between Asia and Europe and the Americas for the quarter?

For fourth quarter?

Yes.

Yes. In the Americas we were up quarter over -- Q3 to Q4 up 7%. Pardon? Oh, I'm sorry, Q4 to Q4 we were up 7% in the Americas, 29% Asia-Pacific, and 16% Europe. As you can see, it was a really strong growth across the board. Asia led that, but strong in all of our major three geographic markets.

Sure. Okay great. And then as far as the --

I'd like to add one thing that I'm almost afraid to throw it on the table, but I will anyway. Because I don't really have exact numbers to tell you. But I do know that the weather conditions in the first quarter -- I have talked to a number of our customers and a number of our distributors -- and they've commented that it has had a negative impact on orders.

Additionally, the PMI drop that occurred in January is attributable by most economists related to the weather conditions in the US. So Q1 slightly down compared to Q4, and maybe what other people think. I think a piece of it -- and I don't know how big that piece is is related to weather conditions.

Trust me, we live in Milwaukee, I am not surprised to hear you say that. It is March 4, and it snowed last night. The weather is not letting up. That's not surprising. But then on the flip side, the EPS guidance for the quarter for Q1, I thought was really strong. When I plug in the 33% tax rate that you mentioned on the call, I get a 29.5% operating margin in Q1 compared to about 25% in Q4, and a really strong incremental margin for Q1.

Maybe talk a little bit about the EPS guidance for Q1, and maybe how price cost is trending, or anything else that might be helping the EPS guidance for the quarter?

Sure. The first thing that I want to make sure that you have factored in there is our price increase that went through October 1. We do pick up margin pretty quickly from that. But we also, as we historically have done, we pick up margin very quickly on incremental sales increases. We're looking at a $6 million or more top-line increase that flows very nicely to the bottom line. We pick up a lot of income there that flows back through.

Your assumptions on the operating margin seem to be aligned with what we are looking at, as well. I think you're on target there, but we haven't seen at this point cost escalation, but we do get some more top-line revenue out of it.

Sure. That make sense. On the October 1 price increase, did it maybe not have a full impact on the quarter? Is there a little bit of a -- on the fourth quarter? Is there a little bit of a lag between when the price increase goes through and maybe when you receive all the gross-margin benefit?

Absolutely. Our distributors have the opportunity to place orders that don't include the price increase for a period of time. So we don't get the full impact at any point in the first quarter that it takes effect. But we do expect to see that in the fourth quarter -- or in the first quarter.

Right, so the full impact now flowing through in the first quarter?

Yes.

You mentioned the distributors. Al mentioned the distributors, mentioned the weather a little bit. But have they mentioned any end markets in particular that might have drove the 13% increase in the fourth quarter? Any end markets that are maybe accelerating a little more than others?

I don't think there's anything specific. Our business is kind of like the tide comes in and the tide goes out. I think the tide just rose in the fourth quarter.

Okay, all right. My last question, maybe an update on the Sarasota -- the third Sarasota plant. How balanced -- how production is being balanced between the three plants. How many shifts are you running, weekends over time, any color you could give there?

The new plant began production in September, and we phased out the Kansas operation from September, October timeframe. Right now the Kansas facility is completely closed. All of the production for integrated packages, both aluminum and ductile, is out of the third factory in Sarasota.

I would say that third factory is probably about 50% utilized at this time. That will continue to grow. Our other factories, the 1500 University facility has had no impact because of this. The 701 Tallevast next door to the new factory, it's being refurbished for additional products, and that factory is probably at about half utilization right now.

Okay, all right. Great, guys. Thanks for taking my questions. Best of luck in 2014.

Thank you.

(Operator Instructions)

Jon Braatz with Kansas City Capital.

A couple questions. Tricia, you mentioned -- could you go over those costs that you were talking about that will filter through 2014? I didn't get a chance to hear the full costs.

Sure. Let me get to the page and make sure I'm giving those to you correctly. The new building annual costs are anticipated to be about $1 million of overhead related to that. That will obviously be an ongoing cost. In 2014, we are also expecting another $1 million worth of additional costs related to investments in our Asia marketing and new product development.

Okay. Is that incrementally an entirely new $1 million?

For Asia and new product development, or for the building?

Yes, in total. In Asia and the marketing.

Yes, that's a total cost for those two initiatives. Right now it is a 2014 cost, but I would anticipate that we will see those Asia marketing efforts for several years.

Okay. Then going back to the margins, for 2014. Obviously the margins are going to be pretty strong in the first quarter. If you would ex out the benefit from the price increase, will we see leverage in both the gross margin and the SG&A line as you go through the quarter? Will we also see -- I guess, will we see leveraging of the SG&A line?

Yes, that is a fixed cost for us. We don't have a direct sales force. We sell primarily through distribution, so that is not a cost that changes a lot with sales volume. We are able to leverage those operating expenses very nicely with incremental revenue increases. There's also a piece of the gross margin which is fixed. It's a pretty large piece that is fixed, so we leveraged that very nicely as well.

Okay. Lastly, you can play geopolitical analyst. Obviously there is some tension over in Eastern Europe. Any sense from your European customers, European distributors and markets, how sensitive they are to the events over in Eastern Europe, and if it worsens do they cut back immediately or sit on their hands? Any sense of that at this time?

I think it's too new to be able to predict. This all happened in the last week or so. At this point in time, I don't think it has raised any concerns, any attention. Obviously if it drags on or it gets -- deepens -- there's going to be issues. But at this time it's like business as usual.

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

(Operator Instructions)

With no further questions, I would like to turn the call back over to Dennis Tichio for any additional and closing remarks.

Great. We want to thank you for joining us on today's call. We look forward to speaking with you again after our first-quarter release in early May. Thank you.

This does conclude today's conference. Thank you for your participation.