Helios Technologies Inc (HLIO) 2015 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 like to turn the conference over to David Lamb. Please go ahead, sir.

Good morning. Thank you for joining us for Sun Hydraulics' 2015 fourth-quarter and year-end conference call. Allen Carlson, Sun's President and CEO; Wolfgang Dangle, Sun's incoming 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, and thank you, David. 2015 was challenging in many respects. Several end markets experienced further declines, foreign currency impacted both top and bottom lines, and we felt the influence of the late-cycle environment. As expected, fourth-quarter results were sluggish, capping off our year with just over $200 million of sales.

Given the difficult current market issues, Sun was still able to generate significant profit and take action to plan for the future. To recognize the influence and importance of Sun's worldwide employees and shareholders, the Board has again declared a shared distribution for 2015. The shared distribution consists of a contribution to employee retirement plans and a dividend to shareholders. This is in addition to our normal quarterly dividend. We introduced the concept of the shared distribution seven years ago to allow employees and shareholders to share in Sun's success and growth.

We are encouraged with our first-quarter forecast and the possible indications of nearing the bottom of the current cycle. Although global capital markets indicators aren't yet positive, our order rates signified potential that markets may be leveling out.

In 2015, to prepare for the eventual cyclical recovery, we invested in areas which are key to Sun's future growth. We introduced 4 key product lines in 2015 and completed significant development on our digital logic valve technology. We also continue to invest in sales and marketing worldwide. These investments at the bottom of the cycle are important growth drivers as the cycle turns positive.

In a few weeks, I will turn the reins over to Wolfgang. It's been a pleasure to be a part of Sun's growth over the past 20 years, and I'll miss the day-to-day excitement of this unique Company. I look forward to the opportunity to work with Wolfgang in the transition and have the utmost faith that he will lead Sun well into the future. I will continue to participate on Sun's Board to add continuity and leadership and future direction for the Company.

I'd like to thank the investor community for trusting Sun's long-term vision and for bringing your thoughtful questions to help us reflect on our business. I'll now turn the call over to Wolfgang.

Thank you, Allen. Sun is a strong Company with a lot of potential, and I'm eager to delve into my new responsibilities with this fine Company. Sun's unique culture, exceptional customer service, expensive product line, market reach and healthy financial statements are all cause for enthusiasm.

As we all know, the success of a company is not solely dependent on its capabilities. We will be watching leading indicators closely. Trends in our various end markets and regions will shape the performance of Sun for years to come.

Given what we know now, we subscribe to the prognosis that 2016 demand will remain relatively flat, with the expectation that signs of the new business cycle will initiate late in the year. We remain agile and ready to capitalize on early-cycle opportunities with our efforts focused on satisfying customer demand, growing market share and delivering strong financial results.

Tricia will now discuss the fourth-quarter and 2015 financial results.

Thank you, Wolfgang. The fourth-quarter sales were $44 million, down 19% over Q4 last year. Currency negatively impacted the quarter by $1.4 million compared to the prior year, while pricing accounted for roughly 2.7% of sales.

Earnings per share were $0.19, down 51% over last year. Earnings were reduced by $0.04 due to currency.

For the year, sales were $200.7 million, down 12% from our record year in 2014. Currency negatively impacted the year by $7 million compared to prior year, while pricing accounted for roughly 2.6% of sales. Earnings per share were $1.24, down 25% over last year. Annual EPS was reduced by $0.17 due to currency.

Turning to our regional results for the year, demand in the Americas was down 13% over last year, attributable to vulnerable end-markets such as energy, agriculture, mining and, to some degree, construction. European sales decreased 11%, 8% of which related to currency. Asia-Pacific demand dropped 9%, primarily driven by a weakening South Korean economy throughout the year.

Gross margins for the year decreased by 3% from 41 to 38. The decline was a result of both the strong US dollar placing pressure on margins at our subsidiaries as well as decreased revenue, which hindered our ability to absorb fixed costs.

SG&A expenses were relatively flat for the year but would have been up 3.5% before currency effects due to increase compensation related to worldwide sales and marketing initiatives.

The provision for income taxes for 2015 was 32.7%, down about 0.5% from last year. The Q1 tax rate is expected to be 33%.

Net cash from operations for 2015 was $49.9 million. Inventory turns were down slightly at $9.2 million and days sales outstanding were 28.

Our balance sheet remains strong, and we are able to generate significant cash flow. This allows us to take advantage of opportunities that arise for investments that will drive future value.

We are happy to once again share the success of Sun with our employees and shareholders in the form of a shared distribution. Employees will receive a contribution into their retirement plans in the form of Sun stock equal to 5% of wages. Shareholders will receive a shared distribution dividend of $0.04 per share, which will be paid on March 31 to shareholders of record on March 15.

Looking ahead to the first quarter, Q1 sales are estimated to be approximately $50 million, compared to $54 million in Q1 last year. The Q1 sales estimates assume currency is responsible for $1.6 million of the decline.

Earnings are estimated to be $0.31 to $0.33 per share. Currency is expected to reduce Q1 earnings by approximately $0.04.

As Al alluded to earlier, our 2015 order rates appear to be showing signs of improvement. With that said, we aren't foreseeing an overnight pickup but rather a very slow recovery throughout 2016.

We would now like to open the call for questions.

(Operator Instructions) Mig Dobre, Robert Baird.

Al, congratulations and best of luck. And Wolfgang, I guess, welcome to the earnings calls.

Thank you.

A few questions here for me. Trish, maybe you can talk a little bit about the normal seasonality of your business as we move from the fourth quarter onto the first. Obviously, very different dynamics in terms of shutdowns and the way customers react in the fourth quarter versus the first.

And I'm trying to understand how you view your 1Q guidance versus what normally happens seasonally from the fourth quarter to the first.

Sure. Our normal seasonality Q4 to Q1 shows increased order rates and results from Q4 into Q1. We are seeing that normal seasonality this year. If you look back to 2014 Q4 with 2015 Q1, we did not see that normal seasonality. In fact, we also did not see it going into Q2 of last year. But we do see that now, and we think that that is one of the signs that's pointing to why we believe that we will see some improvement at some point in 2016.

I guess what I'm wondering about is the magnitude of the seasonality because as far as back as my model goes, I normally see the seasonality being something to the tune of 15%, 16% sequentially. You are guiding for a little bit less than that.

So what I'm trying to figure out here is if we actually still see some deterioration in the market ex-seasonality, if that make sense.

Yes, I think we're seeing right now a 13% increase, so that is down a little bit from your numbers that we normally see of the 15% to 16%. Some of that is currency as, we pointed out in the script portion; and in the webcast, I believe. So if you factor that in, I think we are relatively close to a normal seasonal pattern here.

Which we didn't see a year ago.

Right. We didn't see anything; we actually saw a decline from Q4 to Q1 last year.

No, sure; I absolutely recognize that. And then the other question I would have for you is can you maybe parse out what you are seeing in terms of distributor versus OE demand? Obviously, distributors have more -- when we are looking at industrial distributors, they've done maybe a little bit better than many of us expected into 2016. Is this -- are you seeing similar trends in your business?

When we pooled our distributors most recently, we had several of them felt like they would potentially see some modest growth in 2016. Some about the same number felt like they would see flat growth. So I think we maybe on the distributor side have bottomed out.

It's difficult to tell with the OEMs because we don't always have insight into what their inventory levels are. And we aren't as close to them because we are working through distribution.

Let me just add a little bit to Trish's comments. We also follow our distributor inventory. And we saw that inventory start going south in late 2014, continuing into 2015. And it appears that that distributor inventory, they've taken it down to as far as they can take it down. So when they get an order from a customer, they now have to place orders on us.

I see. Then -- and maybe on this topic, the last question I would have is really weather related. I don't know if you have seen anything in the past couple of years in your first quarter that would have impacted demand that was weather related. We've had two tough winters in a row. That's not been the case this year. Are you able to parse out any impacts that are weather driven?

No, not specifically. The only impacts we saw last year related to weather were trying to get parts here from the Midwest. Many of our suppliers are in the Midwest, and that corridor was tough a couple of times last year. But we worked through that and put in some special measures to bring those parts in to make sure that we could get product out the door.

Yes. And we can't really detect that weather is related to an increase or decrease in end-customer demand. In fact, maybe if weather gets really, really bad or there's hurricanes, construction equipment will increase because of bad weather. So it's hard to put a handle on that, Mig.

Okay. And then I guess the last question for me before I get back in the queue is on the gross margin side. Trish, I'm trying to understand if baked into your 1Q guidance how you're thinking about gross margin. And given Wolfgang's comments earlier that we should be planning for a flat year for 2016, how should we be thinking about gross margin broadly for the full year?

Gross margins in Q1 will expand from what we saw in Q4. A lot of that is related to the additional top-line revenue. We're expecting margins around 39% in Q1.

If we remain flat at the levels where we are, those margins will probably stay about the same, although we are considering some additional investments throughout the year that could pull into that a little bit.

But as you know with our fixed-cost base, as we increase the top line, we are able to quickly add that to the gross margin line, and we are very effective with that. (multiple speakers) certain improvement, it benefits us quickly.

You're not seeing anything on the pricing or mix side or material costs or anything that you can call out in terms of movement on the gross margin beyond that?

No, not at this time. I mean, the pricing is relatively flat. Our costs are relatively flat. The mix of products hasn't really changed all that much. So it's pretty much steady-state in that area.

All right. Thank you. I appreciate the color.

Tristan Thomas, Sidoti & Company.

Tricia, really quickly, you mentioned some investments. Could you maybe give us an idea of what you would be looking to do?

Well, we're going to continue to invest in sales and marketing worldwide. We are looking at some initiatives for possibly new geographies that we could explore. There are ongoing discussions of that that I'm not sure that we are prepared to talk to specifically right now until we can put them in place.

Fair enough. Allen, I know in your initial remarks, you mentioned you were seeing some increase in confidence kind of on the ground. Could you maybe go in a little more in depth in terms of what you're hearing across your various segments and why you do think that this could be a bottom in the current cycle?

Tristan, your question kicked out on the first part. I didn't hear it all. Could you repeat it, please?

Yes, no problem. You mentioned that you're seeing some increase in confidence. I was just wondering what you're hearing on the ground across your segments as to why -- that is why you think (multiple speakers)?

Okay. I think there's a number of factors associated with that. Let's just take a look at the global aspect of it. Wolfgang and I just came back from Japan and Korea. And the signs there clearly are that they had some difficult times; customers as well as distribution had difficult times in 2015. And the sense there was that it was kind of at the bottom and they were looking forward to a recovery.

So, globally speaking, the geographics market -- and our guys in Europe say the same thing that there's more positive signs right now than there are negative signs. And that's the first time we can probably say that in a long time.

From a product standpoint, we are getting orders for a lot of our core products. And some of our new products are beginning to show some life. So from a product standpoint, we're getting little kick there.

The end markets continue to remain flat, but we are going into a cycle where I don't know how much longer it's going to be able to stay at the bottom. Mining, energy, you know, the price of oil -- I rather doubt that oil is going to go much lower. It probably has the opportunity to go higher. In fact, it's recently bounced back a little bit. So I think the energy markets and the material sector will begin to show improvement. Definitely have bottomed out, and more than likely will begin to show improvements.

I think the dollar/euro situation probably is where it's going to be at for a while. But more than likely the dollar won't get any stronger; likely, it will get weaker. So if you start looking at these different macro aspects of what's likely to happen versus anything could happen -- but what's more likely, it's mostly in our favor.

So those are sort of what we're seeing right now and why we are cautiously optimistic about 2016. We see going forward late 2016 and into 2017 the likelihood is that the recovery will be in better shape.

I think another thing that is going to happen, I can't predict when, and that is consumer spending will eventually turn into capital spending and projects. That hasn't happened yet. But I think the way out of this slowdown -- I won't call it a recession, but this slowdown -- will be based upon consumer spending driving things into the capital markets.

Okay. Thanks for that color. Just one final question -- in your press release you talk about the electro-hydraulic cartridge valves. Is that the DLVs, or is that -- are they synonymous? Are they slightly different, or what?

Okay, I'll take the question. Sun began investing in electrically actuated valves about 10 years ago. Over the last 10 years, we've come out with a variety of electro-hydraulic valves. And those populate our integrated packages to a large degree.

More recently, we've gone high-tech in the area of electro-hydraulic valves. Less of a me-too kind of product and more high tech. And so, I think right now we would say there are two in the classification of high-tech, very unique, highly differentiated electro-hydraulic products.

One is our Bluetooth valve where you can actually dial in the valve with your iPhone or whatever phone you have. You can talk to the valve with your iPhone and dial it in.

And the other one is the digital valves that we are working on: high speed, low-power digital valves, which we are working with Sturman into sort of a technology project. So those would be the two that we are referring to more recently.

Okay. And what opportunities does that open up in terms of new end-markets, new applications?

The Bluetooth valve opens up markets that have been very, very difficult to use electro-hydraulic valves for. I think we have a video on our website, in fact, that shows one application where it's being used on a dredging application, for example. But there are many, many applications where you want to be able to adjust a valve on the fly remotely, and this valve allows you to do that. So it's opening up new markets.

The digital logic valve is opening up new markets as well. Probably doesn't compete directly with common products of the day. But it's applications that require low power, high speed, smaller size. And we have a number of prototypes out in the field right now working in that environment. I don't want to get into the specifics of it because the product has not yet been released for general sale.

Okay. Thanks, and, Al, best of luck in your future endeavors.

Thank you.

(Operator Instructions) John Braatz, Kansas City Capital.

Tricia, looking at foreign currency rates, if currency would stay the same as it is right now, can you give us a sense as to what impact it would have this year versus last year? And maybe when we begin lapping the worst comparisons -- and are we in the third and fourth quarter when we maybe start seeing even some favorable benefits?

If currency was to stay about where it is now, we would see some benefit in a few of the quarters. But it's not big at this point. I think we're right around $1.10, and most of the year last year ranged between $1.08 and $1.12. So we won't see the big impacts if it stays the same that we saw last year in the big swing, both top line and bottom line that we talked about each quarter last year.

Okay, so it begins to level off as we go through the year, then?

Yes, the euro really has the biggest impact on us from a currency perspective. We also saw some effect from the South Korean won. But, again, it's a much smaller impact than the euro had for us.

Okay. All right, all right, Tricia. Thank you.

Yes.

And there are no further questions in the queue at this time.

Okay. We would like to thank you for joining us on today's call. Be on the lookout for Sun's 2015 annual report and proxy scheduled for release in early May. We look forward to speaking with you again after our first-quarter release, which is also in May. Thank you very much.

This does conclude today's presentation. We thank you all for your participation.