Helios Technologies, Inc. (HLIO) Q2 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's Sun Hydraulics Corporation 2012 Second Quarter Conference Call. 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.

Thank you, Melody. Good morning, and thank you for joining us for today's call. Allen Carlson, Sun's President and CEO, and Dennis Tichio of Corporate Finance are joining us on today's call. We will take questions after we have concluded our prepared remarks. 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. At this time, it is my pleasure to introduce Allen Carlson.

Good morning, and thank you, Rich. Our North American business continues to drive demand in the second quarter. For the year, North American capital goods production has been buoyant and has helped support a tepid, global manufacturing economy. Europe continues to struggle on a macro level and this impacts demand for our products. Our earlier optimism about a second half acceleration of China's growth rate has not yet materialized. Both Asia and Europe will eventually regain their footing but the full impact on North America, short-term, remains to be seen. As we frequently stated, Sun is an extremely agile company. We're able to rapidly shift to adapt to changing business conditions. At this point in time, it's hard to discern what the next 6 to 12 months have in store. Our third quarter forecast indicates more slowing than we would typically attribute to normal seasonality. However, thanks to the strong first half, Sun remains on track to have another great year of sales and earnings. On last quarter's call, we talked about beginning construction of a new factory in Sarasota. This work is underway and we continue to be encouraged about Sun's long-term business outlook. We expect to continue to grow at a faster rate than our industry and we need this capacity in the future. In the shorter-term, we have tollgates established with our construction company on this project that will allow us to slow up or ramp down construction, as circumstances dictate. We have enough capacity in place to meet our customers' needs and are fully confident that the new factory will be operational when it is needed. These volatile economic situations are difficult for everyone, but the way Sun is structured, and the relationships we have with our employees, our suppliers, distributors, and customers, help us to operate in a more efficient manner than many other companies. Our focus remains on providing better products and services to the industries we serve, to help us grow profitably and expand our market share. The PMI came out late last week at 49.8, the second consecutive month slightly below 50. The PMI hovering around the 50 number supports the idea of volatility in the short-term. I will now turn the call over to Dennis who will provide details on second quarter results.

Thanks, Al. The second quarter was another strong quarter for Sun. As Al mentioned, our North American demand continued to drive results. Sequentially, North American sales were up 9%, with Europe down 5% and Asia down 1%. Adding new customers in both Europe and Asia has helped soften the declines in these regions through the first half of the year. We will continue to invest in these important geographies where we believe there is significant room for Sun to grow and gain market share. Let's look now at the numbers for the second quarter. Second quarter sales were $57 million, up 4% over Q2 last year. Earnings per share were up 5% over last year to $0.43 per share. Sales continue to be impacted from currency translation as a result of a stronger U.S. dollar. Q2 sales were down approximately $1 million from currency compared to the prior year. Second quarter results were also affected by the inclusion of HCT, which was not part of last year's numbers. This year, HCT accounted for $1 million of sales with a minimal effect on earnings in Q2. Gross profit margin remains high at 40% for the second quarter. Gross margin is expected to remain about the same in the third quarter. SCA expenses increased 3% compared to the second quarter last year. The changes related primarily to HCT costs, which were not present in the prior-year period. We will have one more quarter where HCT costs will continue to influence the year-over-year comparison. The provision for income taxes for Q2 was 33%. We expect the Q3 tax rate to be the same. Net cash from operations for the quarter was $12 million. Inventory turns were approximately 10x and day sales outstanding were 35. Capital expenditures for 2012 are expected to be approximately $13 million, which include $6 million for the new U.S. factory and $2.5 million for an update of our U.K. facility. The remaining expenditures consist of purchases of machinery and equipment. A quarterly dividend of $0.09 per share for the second quarter was paid on July 15 to shareholders of record on June 30. Looking ahead to the third quarter. All geographic regions continue to moderately slow down. Bills are estimated to be to $49 million compared to $53 million in the prior year. This estimate is positively affected by the addition of HCT sales and negatively affected by currency rates, which essentially offset each other. Earnings are estimated to be $0.34 to $0.36 per share compared to $0.44 per share last year. HCT is not expected to contribute to 2012 earnings. However, for comparison purposes, 2011 third quarter results included a one-time $0.03 per share gain resulting from the acquisition of HCT. The remainder of the earnings decline predominantly related to lower sales volumes. I would now like to open the call up for questions.

Melody, we'll take questions now. [Technical Difficulty]

[Operator Instructions] And we'll go to Rob McCarthy with Robert W. Baird.

This is Mig Dobre, in for Rob McCarthy. So my first question, it relates to the revenue guidance for the third quarter, and from what I'm seeing here, the revenue guidance implies about a 14% sequential decline. And as you mentioned earlier, this is a little bit more than seasonality. Actually -- so first, my question would be, what would be a normal seasonal decline in the third quarter? And then, how should we think about this environment because looking back, I think the only other time where we've seen, in recent history, where we've seen this kind of sequential move was really in the September quarter of 2008.

I'll start with the question. Normal seasonal decline is usually 5% to 8%. This, as you said, was a little bit higher than that.

Let me add a little color to that, Dennis. Yes, it is greater than our seasonal decline, as we indicated. There's a lot of uncertainty looking at the third quarter numbers. The uncertainty comes from what's happening in Europe as well as what's happening in Asia, specifically for us, Korea and China. Myself, personally, I don't have a lot of confidence in that $49 million forecast. However, that's the consensus of our group here after looking at a lot of different data coming in. And so, as we said in my opening remarks and in the press release, there's just a lot of uncertainty and I think the $49 million is probably on the low side and has potential for upside. But the consensus of all the group here at Sun, that's the number we picked.

I see. And if you don't mind, perhaps, commenting a little bit as to how you're thinking about the sequential progression in North America as well. I understand that Europe and Korea would be challenged sequentially.

I think the situation is -- the situation that's happening in Europe and in Asia will have a bleeding-over effect into North America. I think North America will still remain strong, but I think, many of us, not just Sun, but many, many U.S. companies that we -- that are customers of Sun, supply product into Europe and Asia. And they're seeing a slowing down and, as a result, it's going to drag down the U.S. economy. We're all interconnected today. There's no longer 3 economies that are separate from each other. All these economies are interconnected in so many ways.

Okay. So let me see if I can ask this in a different way. Do you expect to see the United States segment grow revenue year-over-year in the third quarter?

Maybe yes, maybe no. I don't -- again, it goes back to those uncertainties. There's just a lot of uncertainty right now in the world economy. That's reflected in the PMI numbers, as well. It's coming out. We're floating right around 50. So it's hard to tell.

Next, we'll hear from George Prince with RBC.

I -- you sort of have been answering the question I was going to go with, but is it -- your overall thinking on the economy here or is there individual customers that have communicated to you that, hey it is tough out there, we can't give you what we used to give you?

No, George. It's the macro view.

It's definitely the macro view. And that's why...

Because you've typically always done that and you base it off on PMI or ISM, or those things. And so that's where you're gathering your data?

Exactly. And that's where -- I don't have a lot of confidence in the number that we forecasted. I think there's upside potential but, again, I couldn't put together a forecast that says it's wrong. So the consensus is, it's $49 million, but I do believe it's -- and by the way, that's a macro number, it's based on macro indicators. I believe there's upside potential for that number.

Are you tightening your belt a little bit? Or are you just going as normal? Or are you even hiring at this point?

We are very conscious of a slowing down. Have we tightened our belt? In some respects, we've -- we're taking look at direct labor. There's no reason to hire additional direct labor. Are we hiring still sales and marketing and technical people? Yes, we are. So it's not batten down the hatches completely but it's just be fully aware that the economy in the second half of the year is not going to be as buoyant as it was in the first half.

Do you get any signal from your customers that the election may change things?

I'd hope so.

And next we'll hear from John Braatz with Kansas City Capital.

Just a follow-up of everything on the macro view. Did you discern a difference in like July orders and sales versus June? Do you see any slippage in that regard that might be a little bit more of a telltale sign as to how business is going?

John, that's actually part of the problem. In our third quarter forecasting every year. What happens in July, okay, is lots of the U.S. companies go on vacation. They shut down in the Fourth of July week. Europe shuts down just about completely in July. And then we have China sort of doing a stimulus thing that they've been working on for almost all of 2012. So this is a real hazy period for us every year, not just this year, but every year. And so that's where my confidence in our forecast in the third quarter is not very -- I don't a lot of confidence in it, but I don't have a lot of confidence, every year, this time of year.

Okay. Okay. And then secondly -- I'm sorry, secondly with regard to your expansion in Sarasota, how slowly will you go? And in the end, when do you think it might be operational?

Probably the soonest we could have it on stream, if we said full speed ahead, as fast as you can get it, the earliest we could have it on stream would be mid-2013. We have the opportunity to push it out comfortably to mid-2014, if we choose to.

[Operator Instructions] And we'll go to a follow-up question from Mr. McCarthy's line.

Just a point of clarification on the Sarasota facility. Trying to understand what the impact on the P&L would be if you were to take the option of pushing out this facility to 2014?

There'd be no impact from the P&L if we push it out. It'd still be under construction, would not be up and running.

That's correct, yes. There's absolutely no P&L under the construction period.

There will still be some maintenance cost or...

Minimal.

Minimal and some depreciation perhaps...

[Operator Instructions] We'll go to Kristine Kubacki with Avondale Partners.

I'm just wondering and I hope you didn't answer this already, but can you talk a little bit about maybe if some of the slowdown has been because of destocking at the dealer level, kind of what are their inventory levels looking like? And then you guys have commented on the past that maybe people have been cautious but their expediting orders so they need it, but they're also not stocking ahead of it. Can you talk a little bit about, are people. Expediting things, or are they slowing it down across-the-board there?

Great Kristine, good question. What we're seeing relative to inventory levels, it's -- there's been no effect, it's been flatlined for probably -- since late 2009, 2010, in terms of increases or decreases. Are we still seeing expedited orders at a significant rate? Yes, we are. In fact there's been a couple of weeks where it's probably been at an all-time peak high. I think, we have to look beyond just our distributors but look at their customers as well. And I think there's a lot of last-minute ordering going on with -- at the end customer who's building a machine perhaps that he didn't anticipate to build, and that's pulling -- well, we need this product from -- but our distributor doesn't have it, so the distributor places an expedited order on us. I think there's a lot of that going on. And that goes on all around the world. That's just not North America, we ship a lot of expedited products into China.

[Operator Instructions] And gentlemen, it appears we have no further questions at this time.

Okay. Thanks, Melody. And I'd like to thank you all for joining us on today's call and we look forward to speaking with you again next quarter.

Ladies and gentlemen, that does conclude today's conference. Thank you all for joining.