Helios Technologies, Inc.
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

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. And at this time, I'd like to turn the conference over to Mr. Rich Arter. Please go ahead, sir.

[Richard Arter:]

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.

[Allen J. 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 U.S. 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 U.S. 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 delivery performance. But most importantly, the new facility will provide room for growth for the foreseeable future. Our fourth quarter forecast is move -- 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 will now turn the call over to Tricia to talk about the quarter's results.

[Tricia L. Fulton:]

Thanks, Al. We are encouraged by the year-over-year growth in sales in this 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 2 items

[Operator:]

[Operator Instructions]. And we'll go first to Brian Rafn of Morgan Dempsey Capital Management.

[Brian Gary Rafn:]

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

[Allen J. Carlson:]

Okay. Well, first of all, that facility is just coming onstream. 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 1 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 a relocation. And things are very smooth operationally.

[Brian Gary Rafn:]

Okay. As you guys look at, in 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 expedited, because 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?

[Allen J. Carlson:]

Sure. We say probably 3 to 5 days in the supply chain in an expedited mode. If we weren't expediting, it would probably even longer than that, maybe 10 days. So there's a huge shortening of the supply chain in doing this. And 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 cojoined with the manufacturing community, which is also a huge plus. So all in all, it's good for us and good for our customers.

[Brian Gary Rafn:]

Yes, okay, okay. How do you guys -- I'll just ask one more and get back in line. How do you guys look at your CapEx to DNA 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 of years, do you see CapEx going back to DNA or do you still see an accelerated rate of spending?

[Tricia L. Fulton:]

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. And with regards 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.

[Operator:]

[Operator Instructions]. We do have a follow-up from Mr. Rafn of Morgan Dempsey Capital Management.

[Brian Gary Rafn:]

Okay, I'll keep going. 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 would the end of third quarter as a percentage of total?

[Allen J. Carlson:]

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

[Brian Gary Rafn:]

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

[Allen J. Carlson:]

It's incrementally growing. And every time we sell a piece of electronic hardware, it's bringing other products with it. So if you add $1 of electronic hardware from WhiteOak or High Country Tek, it's probably adding $5 worth of a hydraulic hardware. So they ramp-up together.

[Brian Gary Rafn:]

Okay, okay. And what is the headcount that you added with the third plant? I mean, how many from an employee hires, say, the last transfers from Kansas and what have you guys been doing hire to staff the third plant?

[Tricia L. Fulton:]

We had a handful of employees who moved from our Kansas facility to Florida, about 5. 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 are able to absorb some of the labor time that was being spent in Kansas with other employees that we have in Florida.

[Brian Gary Rafn:]

Okay. What do you, as you guys look out again, kind of the thought being kind of a modest kind of a tepid, sluggish, expanse, you guys made comments about certainly mining infrastructure, which I think are all very valid. How do you see hiring an 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 your hiring? Is it engineering demands, expeditors, is it labor guys on the line, machine tool[ph] guys, where do you see your bottlenecks from a human labor standpoint?

[Allen J. Carlson:]

Right. 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 want to be. Part of the intention of consolidating those 2 plants was to pick up gains in productivity. And those gains in productivity have represented about 15% -- about 15 employees that were able to run the same amount of output without. So that's been helpful. When I look at the next couple 2 or 3 years, I think we're -- the front office were staffed very, very well. We've hired a lot of young engineers, both product engineers and manufacturing engineers. We've -- we are well-equipped in just about all areas in the front office. Our production employees will be increased as demand increases, and 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 are in very good shape from a human resource standpoint.

[Brian Gary Rafn:]

Allen, what are you, just for those of us who don't live in Sarasota, what's kind of your local employment situation? What's on employment, what -- how would you describe kind of your local economy in Sarasota for business?

[Allen J. Carlson:]

Pretty typical, I think, of all of Florida and probably much of the U.S., unemployment rates 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 we get them up to speed. We would never hire 15 employees to start on the same day.

[Brian Gary Rafn:]

Okay. With the third plant, what is that kind of drive your overall capacity in sales for Sun Hydraulics?

[Allen J. Carlson:]

This reminds me 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 could handle it with the bricks-and-mortar we've got by this concept of curious constraints. And you mentioned it earlier that we -- our approach is to identify constraints and then go fix them. We are 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. And to answer your question, I think we have bricks-and-mortar for $350 million in sales.

[Brian Gary Rafn:]

Okay, 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 you're still doing any machining in outsourcing?

[Allen J. Carlson:]

We -- of course design all the manifolds in-house for our own consumption, whether they're iron or aluminum, and we do that in multiple locations as well for around the world. Like, for example, in Europe, we have a facility that manufactures manifold 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, I'm typically catalog the products, we found over the years that we could outsource those to a number of suppliers if it's in 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 really staffed with a lot of cartridges in very dense packages. We couldn't possibly find anybody to make some of the more complicated ones, but the easy ones, we outsource.

[Brian Gary Rafn:]

Okay. And so the thought process then is not from a capacity, you will continue to outsource kind of you see a margin of safety flexwise relative to the production, there's no plan to bring in the simple designs in-house?

[Allen J. Carlson:]

No way.

[Operator:]

[Operator Instructions]. And it does appear we have no other questions. I would like to turn the conference back over to the speakers for any additional or closing comments.

[Richard Arter:]

Allen, would you like to make a final comment?

[Allen J. Carlson:]

Sure. There are a number questions today about our new facility at 803 Tallevast. And that facility is coming on stream. I would say 2/3 of it is currently running. We've finished the 1/3 during the fourth quarter. But I'd like to make the point that, that facility, machines, manifolds, either an aluminum or ductile iron, that machine is very complicated ones, and we call them 5 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 a really a component that goes into an integrated package and it's the integrated package that we are 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.

[Richard Arter:]

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

[Operator:]

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