Helios Technologies, Inc.
Q2 2013 Earnings Call Transcript

Published: 6 Aug 2013

[Operator:]

Good day, everyone. Welcome to the Sun Hydraulics Corporation 2013 Second Quarter Conference Call. As a reminder, today's presentation is being recorded. At this time, I'd like to turn the conference over to Mr. Rich Arter. Please go ahead, sir.

[Richard Arter:]

Thank you, Doris. Good morning, and thank you for joining us for Sun Hydraulics 2013 Second Quarter Conference Call. Tricia Fulton, Sun's Chief Financial Officer; and Dennis Tichio, of our Corporate Finance Group are participating on today's call. Allen Carlson, Sun's CEO and President, is traveling and will not be able to join 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. We will take questions once we have completed our prepared remarks. It is now my pleasure to introduce Tricia Fulton.

[Tricia L. Fulton:]

Thanks, Rich. Good morning. Earnings in the second quarter were better than expected, due to slightly higher sales and a $0.01 gain from the acquisition of WhiteOak. Sales while down 2% compared to last year's second quarter, increased sequentially in our normal seasonal pattern. Last quarter, we suggested a gradually strengthening economy that would boost demand in the second half of 2013. While this is still possible, the timing is uncertain. However, we believe demand will continue to improve with the overall health of the global economy. We are especially pleased by last week's 55.4 U.S. PMI number. The new facility in Sarasota is nearing completion. We expect to be operational by the end of the third quarter. This new facility, covering 75,000 square feet overall, adds 58,000 square feet of manufacturing space. This allows us to reconfigure our operations to improve productivity and workflow. We are now in the process of relocating our Kansas operation to Florida. We opened the Kansas facility in 2003 to manufacture short lead-time ductile and larger aluminum manifolds. Consolidating our U.S. manifold production in Florida has many benefits, including a shorter supply chain. This will have a favorable impact on shipments of integrated packages. On another front, WhiteOak is now fully integrated into High Country Tek. HCT is actively engaged in developing next-generation products based on WhiteOak's unique digital technologies, and currently, they continue to develop standard and customizable control modules. As we move forward in integrating the hydraulic and electronic sides of the business, we are able to more effectively market our solutions capability. Before I turn the call over to Dennis, who will give you details on the quarter, I'd like to review our thoughts on the new facility. We have known for a long time to continue growing, we would eventually need additional production space. Throughout the past 10 years, we investigated many alternatives, including locating our production facility outside of Florida. We determined that early on the best approach was to put our next facility in the Sarasota area. We have a highly skilled and knowledgeable workforce, with a good labor pool. We can easily leverage both our human resources and operational investments. We have an exceptionally strong local supply chain. And it's a good area to attract talent. Once we determined Florida was the location, we began to acquire property. With the property in hand as early as 2008, we had a vision and a plan of how we wanted to expand. By late 2009, we had a concrete plan and we're ready to go. As we've often stated, we don't measure capacity, instead relying on identifying and removing constraints. We knew we had the capacity to support sales in the range of $225 million without compromising delivery. As we began to approach this sales level, we put ourselves in position to build. We had discussions with the local government, pulled permits and did all the anticipatory things that typically may delay construction projects. In 2011, we built an on-site utility plant that would service both the existing and new factory. Then in the spring of last year, we broke ground. Throughout this process, a couple of factors govern the timing of the new building. Primarily, we opted to maintain our delivery advantage. We knew we still had capacity to meet deliveries. But when we hit a growth spurt, we would need the additional space. We recognized it was important to have capacity in place at the right time. We had the option of financing or using cash to pay for the building. We believe having a strong cash position that allows this choice is desirable and important. In the end, we decided to use cash to pay for the new facility. We are able to do this without compromising our ability to make other investments. We chose the time to build when trades and materials were readily available. While some of this is the luck of the draw, we were cognizant of the construction economy and it factored into our decision. In the end, we have a new facility that will take us to the next level. We believe we have enough space to easily double the business. Our delivery reliability remains intact, and our service levels have not been compromised. The new facility comes on stream as planned, with no delays and no production interruptions. And it allows us to consolidate off-site lease facilities and related activities into our own production space. We built our last factory in the Sarasota area in 1997, when we were about a $55 million company. The new facility puts us in position to take full advantage of the next growth cycle, while continuing to deliver strong financial results. I will now turn the call over to Dennis and will be back in a few minutes for Q&A. Dennis?

[Dennis Tichio:]

Thanks, Tricia. We are excited to be moving into our third facility in Sarasota, Florida. The new facility along with the utility building totaled approximately $20 million of capital investment. Our strong cash position and ability to generate cash provides us the flexibility to self-fund this project. The relocation of our Kansas operation into the new facility will result in onetime costs of approximately $0.02 per share, $0.01 of which is included in our third quarter estimate and $0.01 that will fall into the fourth. Ongoing fixed costs associated with the new facility are estimated to be $1 million annually. This is net of the savings from relocating the Kansas operation. Let's look now at the numbers for the second quarter. Sales were down 2%, while earnings were up 5% compared to Q2 last year. Geographically, sales in the Americas were down 5%. Europe, Africa, Middle East sales were flat and appeared to have stabilized. Asia-Pacific sales were up 2%. Growth in China and Korea was offset by declining sales in Australia. In the quarter, pricing accounted for approximately 3% of sales, with minimal impact from foreign currency. Earnings benefited from a $0.01 per share gain on the acquisition of WhiteOak. Gross profit as a percentage of sales was strong in the second quarter at 42%, influenced by pricing and lower employee benefit costs. At the lower sales levels estimated for Q3, gross margins are expected to be slightly lower. SCA expenses increased 2%. The provision for income taxes in the second quarter was approximately 33%. We expect a similar rate for Q3. Net cash from operations was $23 million. Inventory turns remained high at over 10, and days sales outstanding were 33. Quarterly dividend of $0.09 per share for the second quarter was paid on July 15 to shareholders of record on June 30. Capital expenditures for 2013 are expected to be $15 million. This includes approximately $9 million for the completion of the new Sarasota facility and $1 million for the expansion and update of our U.K. facility. The remaining expenditures are for purchases of machinery and equipment. Looking ahead to the third quarter. Demand is following our normal seasonal pattern. Q3 sales are estimated to be $49 million to $50 million, with earnings estimated to be $0.32 to $0.34 per share. This estimate does include onetime costs of approximately $0.01 per share for the Kansas relocation. I'd now like to open the call up for questions.

[Operator:]

[Operator Instructions] And our first question comes from Mig Dobre with Robert W. Baird.

[Mircea Dobre:]

Several questions on my end, most of them related to guidance, as I'm looking at the third quarter. I guess, first and foremost, you mentioned that your guidance is in line with seasonal progression of revenues. And to a great extent, I think I understand that. But I also am looking at the fact that your revenue guidance is calling for very, very modest year-over-year growth. And if my memory serves me right, in 3Q '12, we actually started to see demand really sort of come down as OEMs were basically reducing production schedules and, frankly, demanding less hydraulic equipment. So just in the back of my mind, I was frankly expecting a little more year-over-year growth in the third quarter than what you guys are guiding to. Can you help me understand what's really going on in the market?

[Tricia L. Fulton:]

Yes. I think if you look sequentially from Q2 to Q3 in both periods '12 and '13, the decline that we're seeing from Q2 to Q3 in '13 is less than what we saw last year from Q2 to Q3. So even though the numbers look about the same, last year's was a bigger drop and probably rather than -- from what you're saying, the demand in capital goods market was starting to see a pretty big drop-off. We believe this is more like a seasonal drop at this point. And we typically do not have a range in our outlook for our revenue, but there seems to be some volatility in the orders that we just to -- want to open up that range a little bit by not giving out a hard number. But from an end market perspective, we're still getting a lot of positive feedback from our distributors, that they're seeing a lot of opportunities in the marketplace. Geographically, Asia is looking much better than they were last year at this time and Europe seems to have stabilized for us, which we think is encouraging because it's been so uncertain for quite a while.

[Mircea Dobre:]

So I realize that the fourth quarter is still out there, and you're not guiding to that. But obviously, 4Q '12 was extremely challenged, even more so than 3Q. And all else equal, knowing what you know today, is it fair to assume that growth in the fourth quarter year-over-year should be, frankly, meaningfully higher than what we've seen in the third quarter?

[Tricia L. Fulton:]

Year-over-year, I would say that is our thought process. We do expect the second half of '13 to be stronger than the second half of '12. And given that our guidance for Q3 for this year is just slightly above where we were last year, that would indicate that our thoughts are that the Q4 numbers will be higher than they were last year. But it really is difficult to tell. Like I said, there are some volatility out there in the order rate. So I don't want to make any predictions. But on a big picture level, we are expecting the second half of this year to be ahead of last year.

[Mircea Dobre:]

Okay, okay. That's helpful. Switching to gross margin, really good performance in Q2, and that's always been a big part of the Sun story. And your third quarter gross margin, as I can tell, is implied to be fairly subdued on a year-over-year basis. Can you talk a little bit about price costs, some of the things that go into your guidance? And then maybe talk about how you see gross margin progress going forward. Meaning, if you continue to get pricing and we have relatively stable volumes, how should we think about gross margin next -- beyond the next couple of quarters?

[Tricia L. Fulton:]

Well, there are a few things that play within the margins. As you said, pricing did play a factor in the second quarter. Right now, our third quarter numbers, there are no differences related to pricing from last year's third quarter and this year's third quarter. But going forward, if we can get pricing along the way, we can, and that obviously has a positive influence on our gross margins. And we also have things like the building that are adding some additional costs that will mitigate some of that. But as we start to see increased volumes at the top line, the fixed costs that we're talking about, the additional ones related to building get absorbed pretty quickly, if we see growth spurts coming over the next couple years.

[Mircea Dobre:]

I see. I guess, last question for me is sort of looking back historically, 2012, as I can tell, was fairly flat compared to 2011. And we're kind of on track of having, say, a flattish year in 2013 versus '12. I'm wondering, you've added this facility in Sarasota. What sort of growth do you have in mind when you're looking at that next couple of years? Because, obviously, what we've seen so far has been a fairly muted environment.

[Tricia L. Fulton:]

Yes. We have our estimates for the next quarter, but we really don't have hard numbers for what our expectations are over the next couple of years. But when we take a long-term view, which is why we built the building when we did, and if you look at that long-term view in relation to the macro indicators, as we said in the press release, there's really more positive there than negative, which bodes well for us longer term. And I think we do have the potential for growth there, and now we're definitely ready for that growth with this new facility in place. And it gives us a lot of opportunities going forward. We know the world needs infrastructure, which requires hydraulics. I think we talked about that in the last conference call. So we believe that we have great opportunities, and we're optimistic about the future.

[Operator:]

[Operator Instructions] And we'll go next to Jon Braatz with Kansas City Capital.

[Jonathan P. Braatz:]

On the gross margin front or, let's say, the cost side, what are you seeing in terms of raw materials? Are you seeing any pressure there or any benefit from what were you seeing in terms of maybe some lower cost?

[Dennis Tichio:]

Raw materials have remained relatively stable. We're seeing some fluctuation depending on product mix, and there's a slight increase during the quarter. But overall, it's relatively stable.

[Jonathan P. Braatz:]

Okay. All right. Secondly, it looks like maybe the second half might -- from a revenue standpoint might be a little bit softer than we thought. Is there a particular geographical area or market that maybe from your perspective has weakened a little bit from prior expectations? Is there anything a little bit softer than what you thought maybe earlier this year?

[Tricia L. Fulton:]

North America has softened over what we saw last year. That was really the only market during 2012 where we were seeing increases in demand. But that does appear to have softened for us, at least for this quarter and going into next.

[Jonathan P. Braatz:]

Okay. All right. And then lastly, I'm sorry to see you're closing the Kansas facility. I guess, I'll have to come down to Florida to see the...

[Tricia L. Fulton:]

To Florida, right. You're welcome anytime.

[Jonathan P. Braatz:]

Florida versus Lenexa, big difference. Could you go through -- I think you touched on it, could you go through some of the economics of the decision and what time -- what the benefits are going to be on the cost side?

[Tricia L. Fulton:]

Sure. Some of the benefits are going to be that Kansas was making iron manifolds and some large aluminum manifolds, and we would then ship the cartridges made in Sarasota to Kansas to be put into the integrated packages. So we had some time lag there, as well as some logistical costs in getting the parts to the right place to be put together and then shipped out. So we do see some advantage in having those operations consolidated into the Sarasota area, where the logistics becomes much, much easier. We also can utilize our employees more effectively, our leadership more effectively and probably, our machines as well, where we can coordinate in Sarasota when the machines are used and what's built on them. We also have the opportunity now to consolidate all of our shipping out of Sarasota into this new facility. We have been shipping out of the 2 locations in Sarasota. So we will have 1 consolidated shipping area as part of 803 Tallevast, the new building.

[Jonathan P. Braatz:]

Okay, all right. Any of the guys leaving -- moving to Florida from Kansas?

[Tricia L. Fulton:]

Yes, the plans are not entirely finalized yet, but there will be some of the employees that are moving to Sarasota, which will definitely help with our continuity of those operations.

[Operator:]

[Operator Instructions] And Mr. Arter there appear to be no further questions. At this time, I will turn the call back to you, sir.

[Richard Arter:]

Thanks, Doris. Thank you, everyone, for joining us on today's call. We'll be back in November with the third quarter results, and look forward to speaking with you then. Thanks for joining us.

[Operator:]

And ladies and gentlemen, that does conclude today's conference. We thank you for your participation.