Helios Technologies, Inc. (HLIO) Q1 2013 Earnings Report, Transcript and Summary

Good day everyone and welcome to the Sun Hydraulics Corporation 2013 First Quarter Conference Call and webcast. Today's call is being recorded. At this time I would like to turn the conference over to Rich Arter. Please go ahead, sir. Rich Arter. Please go ahead sir.

Thank you, April. Good morning, and thanks for joining us on today’s call. Allen Carlson, Sun's President and CEO; and Tricia Fulton, Sun’s CFO are participating in today's call. At this time everyone should have received Sun’s 2012 Annual Report and 2013 proxy statement, which were mailed on or about April 12. Sun’s annual meeting of shareholders will be held on Tuesday, May 28, at 10:00 A.M. Eastern Time at the company’s facility at 701, Tallevast Road in Sarasota, Florida. 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.

Thank you, Rich. Good morning. We’re pleased with our 2013 first quarter results despite difficult year-over-year comparisons due to an exceptionally strong first quarter in 2012. Sales came in right where we expected and earnings were higher than expected, the environment continues to be uncertain at this point, but we sense that the global economy is slowly improving. We are excited about having acquired the remaining ownership of WhiteOak. To help everyone better understand how WhiteOak fits into Sun’s offering, I would like to take a few minutes to review our electrically actuated product history and agenda. Electrically actuated cartridge valves have been around for a long time. In the late 1990’s we began to release our line of electrically actuated solenoid cartridges. In 2003, utilizing the design principles employed in these products, we introduced the range of electro proportional valves. The difference between solenoid and proportional products is that solenoid shifts from one discreet position to another. Proportional valves are infinitely variable within their range of operation. A good analogy is a light switch. A solenoid valve is like a simple on/off switch, while a proportional valve would act more like a dimmer switch. Proportional valves require an ancillary supported device called an amplifier. Basically, the amplifier takes the electrical current and manages it to control the mechanical operation of the valve. As we increase our product development of electrically actuated cartridges, we recognize the importance of other electronic control products and their influence in purchasing decisions. Sun took an initial 40% stake in WhiteOak controls in 2005, based on our needs for differentiated electronic control products. While most amplifiers in the marketplace require mechanical adjustments, WhiteOak had a digital technology that offered many benefits. Using this technology we embedded amplifiers directly into our cartridges to create a unique…

Thanks, Al. As we mentioned in our press release we remain upbeat about the global macroeconomic environment. We realize that in the short-term there will continue to be some volatility and uncertainty. However we also believe that the further we distance ourselves from the great recession, the more foundationally strong the global economy becomes. While the economy still faces problems, it is slowly healing. At a fundamental level, the world needs to invest in infrastructure, investments come in many forms including extraction and processing of natural resources, roads to connect people and places. And buildings and housing for expanding urban populations. New and improved ways to generate energy are also required to manufacture goods that consumers need and want to buy. At the heart of all of these activities is some form of machinery that employs hydraulics. And if there's a machine being built anywhere in the world, that means there's an opportunity for Sun to create value for the machine builder and to capture value for our stakeholders, this is why we remain upbeat about the future. Let's look now at the numbers for the first quarter. Sales were down 8% with earnings down 10% compared to Q1 last year. Sales to the Americas were down 7%, Europe, Africa and Middle East down 9% and Asia Pacific down 6%. In 2013, pricing accounted for approximately 3% of sales and foreign currency had a positive impact on sales of 0.5%, while down year-over-year, we are comparing to a very strong Q1 2012. However, sequentially, sales rebounded; this is typical of our seasonal patterns the rebound was driven largely by European and Asian sales. Gross profit as a percentage of sales remain strong in the first quarter at 40%, SG&A expenses decreased 6%. The provision for income taxes in the first…

Thank you. (Operator Instructions) Mig Dobre of Robert W. Baird. Brian Brophy – Robert W. Baird & Company, Inc: Good morning, this is Brian Brophy in for Mig

Good morning, Brian.

Good morning, Brian. Brian Brophy – Robert W. Baird & Company, Inc: In the past you had mentioned your current capacity could support about $220 million in revenue. How much additional revenue do you expect to be able to support following the opening of the third facility, another $110 million?

That’s probably a good picture, I would say it’s equal to the facility in size that we have today each of the other source going to add about another third to, maybe perhaps more than a third capacity. Brian Brophy – Robert W. Baird & Company, Inc: Got it. And then looking out to the second half of 2013, all of the machinery OEMs are going for some improvement in the back half. I know you guys don't issue guidance, but are you guys, do you guys have that sense, currently, maybe some improvement from the first half to the second half of 2013?

That's kind of what I see as well. I don't know that I would forecast that as much as I might say that I speculate that that may happen. If we take a look at the drivers globally, I think the U.S. is likely to stay above where we are at perhaps plus or minus a few percentage depending upon a number of factors. I think Europe is coming off the bottom and things are likely to correct themselves looking forward. I think Asia is stimulating the economy, China's been trying to stimulate the economy for the last six months or so. I think that will begin to see traction in that area, so I think globally looking forward, the second half is likely to be stronger than the first half, but again, that's very speculative. Brian Brophy – Robert W. Baird & Company, Inc.: Got it. Thanks. That's all the questions I had.

(Operator Instructions). Next we’ll hear from Jon Braatz of Kansas City Capital. Jon Braatz – Kansas City Capital Associates: Good morning, Allen.

Good morning, Jon.

Hey Jon. Jon Braatz – Kansas City Capital Associates: Good morning, Tricia. Couple of questions. Do you sense that, as you look forward, you mentioned some seasonal improvement and some, hopefully, improving market trends. Do you see any inventory build? Do you see anything your distributors are doing to maybe prepare themselves for maybe a better second half?

We actually are not seeing inventory build at this time. We do query our distributors each quarter to take a look at their inventory. We know it's not an exact science and that sometimes it's difficult to get those numbers from them. But we're seeing pretty steady inventory levels at this point. So we certainly don't see build, but we believe a lot of that's related to the fact that we can deliver on time we can deliver it tomorrow if you really want it. And I think our distributors have come to realize that we're pretty good at getting them the products when they need them. Jon Braatz – Kansas City Capital Associates: Okay.

WE haven't really gotten a lot of forward-looking feedback from the distributors. I think they have as little visibility as we do. But, overall, I think everyone feels pretty positively going into the second half of this year. Jon Braatz – Kansas City Capital Associates: Allen, you were talking WhiteOak and when you look out maybe five years from now, how big a product line can electrically controlled valves be compared to where it is today? How large do you think it could be then?

Sure. When we started our initiative with electro hydraulic products, it was in the late 1990 and, at that time we essentially had no business in that arena, although we were being asked all the time if we could embed some electrically actuated products since to our integrated packages. Roll the clock forward 15 years to to-date, we believe that electrically actuated products and the products that they pull through, the integrated packages, is about 20% of our business today. If I still look forward over the next decade and when that product begins to mature, I would estimate that it will be about half of our business perhaps even more than half, but at least half, and we’re at 20% today. So that will give you a pretty good idea of the impact. If you took a look at the pie chart a decade ago, it didn't have any of these products as a slice of the pie. Today it's 20% of pie and in the future it will about 50% Jon Braatz – Kansas City Capital Associates: When you look at where you stand today in that market going maybe, let's say, from 20% to 50%, is it you’re grabbing some market share to generate that those revenues or is it just the pie expanding, or both? I'm sure it's both, but relatively speaking, when might be more important?

No, I think it’s both and I think they’re both equally important. We have been able to drive a lot of business that is totally new business to our industry. But it's not just the hydraulic products that goes with them. It's the companion electronics coming out of California with our HCT business that is driving new opportunities that didn't exist for anybody. An example of this was in our annual report a few years back where we showed a city bus with a fan control system, and this system essentially didn't exist prior to us doing it. Jon Braatz – Kansas City Capital Associates: Okay. All right, thank you very much.

Okay.

(Operator Instructions). Mr. Arter, it appears there are no further questions, I’ll turn the conference back over to you.

Thank you, April, I just want to remind everybody again that the Annul Meeting of shareholders will be held at our facility at 701, Tallevast Road in Sarasota on Tuesday May 28, at 10:00 AM Eastern Time. Thank you all for joining us on today’s call and we look forward to talking to you again on August 6, after the release of our second quarter results. Thank you.

And that does conclude today’s conference. Thank you all for your participation.