Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Sun Hydraulics (NASDAQ:SNHY)

Q4 2012 Earnings Call

March 05, 2013 9:00 am ET

Executives

Richard Arter

Allen J. Carlson - Chief Executive Officer, President and Director

Dennis Tichio

Analysts

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

Matthew Dodson

George Prince - RBC Global Asset Management (U.S.) Inc.

Operator

Good morning, ladies and gentlemen, and welcome to the Sun Hydraulics Corporation 2012 Fourth Quarter and Year-end Conference Call and Webcast. Today's call 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, Deanna. Good morning, and thank you for joining us for Sun Hydraulics 2012 Year-end Conference Call. Allen Carlson, Sun's President and CEO; and Dennis Tichio of Sun's Corporate Finance Group are participating in today's call.

As most people are aware from the press release sent out on February 22, Sun has changed our segment reporting to one segment instead of reporting each of our foreign entities. Dennis will explain this change more fully, but we want to emphasize that the change has been made to more accurately reflect our business decision-making, and that this therefore provides investors with a better understanding of Sun.

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

Good morning. I'm pleased to report that Sun finished the year with record sales, thanks in part to a stronger-than-expected fourth quarter. Despite lower sales volumes in the second half of the year, our gross margin performance for the year remained at 39%.

Late in 2012, we paid a $1 per share special dividend to shareholders. This decision was driven by expected changes to tax laws in the U.S., our financial strength and the depth of cash on our balance sheet. On the heels of that dividend, in recognition of our 2012 financial performance, the Board of Directors this weekend approved another share distribution totaling $6 million.

Similar to past share distributions, 60% will be paid into Sun employees' retirement accounts in the form of company stock and cash, where applicable. The remaining 60% will be paid to shareholders as an additional $0.09 per share cash dividend. I say additional because the Board also approved the payment of Sun's regular quarterly cash dividend of $0.09 a share.

While business conditions around the world remain mixed, I think we're starting to see more positive trending. Our first quarter forecast indicates a sequential rebound in demand, with demonstrated strength in China and Europe. Sun continues to penetrate new market segments with additional sales channels and expanding customer base.

Friday's U.S. PMI number continued to indicate positive signals, coming in at 54.2%. This is a third consecutive month of a meaningful positive number. As economic conditions improve, we expect the markets for equipment that uses our products will also expand. For those of you who have visited Sarasota or who live here, you can witness the progress we're making on our new factory. We're under roof, and everything is proceeding according to plan. We expect to be operational later this year.

This third Sarasota factory is exciting for all of us at Sun. It demonstrate our commitment to the community and our continued growth.

Sun doesn't commit to greenfield bricks-and-mortar expansion often, and when we do, we view it as a celebratory event and an indication of entering another growth phase.

Thank you for the taking the time to listen and chat with us today. I know turn the call over to Dennis Tichio, who will provide you more detail on the last quarter and the year. I'll be back in a few minutes for the Q&A. Dennis?

Dennis Tichio

Thanks, Al. 2012 was a successful year for Sun. As Al mentioned, the record sales allowed us to maintain our operating leverage, with gross margins at 39%. While we did see margins decline slightly in the fourth quarter to 37%, we expect them to rebound in Q1 with the higher sales volume.

Our 10-K, which will be filed next week, will show the change to a single reportable segment in manufacturing, marketing, selling and distributing our products worldwide. Historically, Sun has 4 operating and reportable segments, which were based on geographic location of our subsidiaries. This change is being made because increasingly, Sun is shipping products directly from Sarasota to end customers worldwide. We believe the investment community will have a better understanding, with less confusion when reviewing the company's results as one operating segment.

The additional information relates to the geographic region to which products are sold, as opposed to the geographic region where the sale was recorded, is more aligned with managerial decision-making and will best inform all interested parties.

Let's look now at the numbers for the fourth quarter end-year. For the fourth quarter, sales were down 5%, with earnings up 8% compared to Q4 last year. For comparative purposes, 2011 Q4 earnings were negatively impacted by tax adjustment of approximately $0.03 per share.

For the year, sales were $204 million, up slightly compared to last year. Sales were driven by strong North American demand, which increased 10% from the prior year.

Sales to Asia-Pacific decreased 9% and Europe, 8%. In 2012, pricing accounted for approximately 3% of sales. Additional sales related to HCT added just over 1%, and foreign currency had a negative impact on sales of just over 1% for the year.

The currency impact was mostly in the second and third quarters, and driven primarily by the euro to U.S. dollar exchange. Earnings decreased to $1.44 per share from $1.47 a year ago. For comparison purposes, 2011 results included a one-time $0.03 per share gain, resulting from the acquisition of HCT, which was offset by the tax adjustments in the fourth quarter.

Gross profit, as a percentage of sales, remain strong at 39% for the year. Pricing, along with a decrease in overtime and benefit costs, helped support gross profit performance.

SG&A expenses were up 9% for the year. The change is primarily related to SCA costs from HCT which were not present in the prior-year period, and compensation costs, including stock and variable director compensation.

The provision for income taxes for 2012 was 33%. We expect a similar rate for Q1. Net cash from operations was $52 million, inventory turns were nearly $10 million, and day sales outstanding were 27.

Capital expenditures for 2013 are expected to be $14 million, which includes approximately $9 million for the completion of the new Sarasota facility, and $1 million for the completion of the expansion update of our U.K. facility. The remaining expenditures consist of purchases of machinery and equipment.

In 2008, the board introduced the concept of the share distribution as a way to reward employees and shareholders when Sun has a successful year. The share distribution is considered annually by the board. This year, as part of the share distribution, shareholders will receive a cash dividend of $0.09 per share, which will be paid on March 31 to shareholders of record on March 15.

Additionally, a 2013 first quarter dividend of $0.09 was declared, and will be paid on April 15 to shareholders of record on March 31. We are pleased our results and financial strength allow us to continue to reward the stakeholders of Sun.

Looking ahead to the first quarter, demand is strengthening sequentially, led by rebound in Europe and Asia. Q1 sales are estimated to be $51 million, with earnings estimated to be $0.34 to $0.36 per share. I would now like to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll hear first from Mig Dobre with Robert W. Baird.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

My first question is on your guidance. It calls for a sequential revenue increase of about 18%, and at least to me that appears to be pretty much in-line with normal seasonality moving from December to the first quarter. I guess, is it fair to assume that your guidance does not imply any channel restocking, given what we've seen in the back half of this year?

Allen J. Carlson

That's correct.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

And I'm trying to understand exactly how you're thinking about end market trends, because you're maintaining an acceleration, perhaps, in Asia and Europe. Not a lot of comments regarding what's happening in North America. Maybe a little color there would be helpful. And I'm trying to understand, are we simply talking about normal seasonality? Or are you truly seeing activity pick up in excess of that in Europe and Asia?

Allen J. Carlson

Okay. Let me try that. It's -- first of all, it's a very difficult question, trying to gaze into the future. There's a lot of turmoil going on around the world. As I mentioned, things are beginning to sort themselves out in the U.S., but there's still all kinds of issues assorted -- associated, particularly, with Europe and the monetary problems that they have in places like Greece, Italy, Spain. So it's a bit murky. In North America, I believe we will continue to see a pretty strong economy. I don't believe it's going to change much over 2012 numbers. I think there's a slight possibility it could improve. The PMI indicates that it will. But if it does, I don't think it's going to happen till the latter half of 2013. Overall, I think our numbers are driven perhaps by some seasonality, but I think it's a combination of seasonality. And going forward, perhaps, beyond the first quarter, I think you'll begin to see some strengthening that are -- that's more robust. And again, I base that based upon what I'm seeing with the PMI.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

Okay. Then I guess, maybe if you could talk a little bit more about pricing, that would be helpful as well. I'm trying to understand how, maybe, your ability to price has progressed through the year, and how do you think about this dynamic going forward?

Allen J. Carlson

Well, we had a price increase mid-2012. We have no plans for 2013 price increase at this time. If we have one, it will be later in the year.

Operator

[Operator Instructions] And we'll hear again from Mig Dobre with Robert W. Baird.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

Well, I figured I would take another shot if I'm the only one. Maybe we can talk a little bit about...

Allen J. Carlson

[indiscernible] perseverance, Mig, that's good.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

I guess maybe, can you talk a little bit about the contribution that you're seeing to -- growth from new customers versus demand, if you would, on a kind of a same-store basis from existing customers, trying to parse that out?

Allen J. Carlson

Sure. First of all, our market is made up of thousands of customers. That's kind of the good news and the bad news. The good news is, with that many customers all around the world, it tends to balance things out and smooth out any ups or downs. Kind of the bad news of that is, with thousands of customers made up of small- and medium-sized accounts, there's no sort of one piece of information or pieces of information allows us to say ,"What's this win?" So we have to look at it as a -- in a macro kind of world, and not as a -- adding all the pieces together to get the sum of the parts. So I really can't provide any more color than we already have.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

Yes, but I know for instance, that you've been investing in enhancing your distribution in places like China for instance, and I'm wondering how that has played through in your performance for the year.

Allen J. Carlson

Yes. Well, China, if we want to take that just on its own, what we saw was a significant ramp-up in, I'll call it, mid-late-'11 through early '12. Mid-'12, things began to slow down, and we're beginning to see a rebound in some of the growth. That's a little confusing because our sales into China is through systems integrators and distributors. And a piece of what we see, especially early on, like in '11, was associated with buildup of some inventory at new distributors and new integrators, and it's very hard to sort of slice it which is business into the OEM end market versus which a buildup of some inventory with new distributors.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

Okay. Can you provide any sort of color on demand trends for mobile versus industrial applications?

Allen J. Carlson

I would say that the mobile is stronger and has always been for Sun. And I think the demand for mobile is probably the growth is exceeding the industrial. But there's another -- there's a third segment that I think that continues to show strength and, perhaps, is growing faster than the other 2, and that's this category called Other. It includes things that we don't traditionally think of as mobile or industrial categories, solar and wind and wave energy and offshore oil exploration. And we're quite heavily into things like that. Frac-ing is another one. We provide lot of hydraulics that go into -- onto frac-ing equipment. So this category of Other, I think, continues to grow. And I don't have an exact number, but it's probably somewhere around 10% of our business today.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

I see. That's helpful. And when you're talking about your first quarter guidance and the sequential uptick, I'm wondering, where exactly are you seeing the sort of improved incremental demand?, Is it on the mobile side? Is it in industrial or Other? Or what's the contribution from each one of these areas?

Allen J. Carlson

I think it's all 3, Mig, and I can't break it down into a finer or more granular detail than that. We don't even take surveys, for example, on our split until -- I think we do it once at every 3 or 4 years.

Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division

All right. And I guess my last question is going to be on your expectations for SE&A expenses as you look at 2013. You've got the new facility coming online, which is great, but I'm also wondering how you're thinking about sales and engineering headcount, potential additions there. How should we think about expenses on the year-over-year basis?

Dennis Tichio

Year-over-year, SE&A for the first half of the year should remain relatively constant to what we saw last year. As the new building comes online, we'll see fixed costs anywhere in the range of $1 million to $1.5 million. Some of that will show up in the gross margin as well as SE&A. But for the first half of the year, relatively in constant compared to last year.

Operator

Will take our next question from Matthew Dodson with JWest, LLC.

Matthew Dodson

Can you talk a little bit about kind of the contribution of the incremental margins that you guys think about? If you are starting to see your business pickup and reaccelerate, how we should think about the flow-through that you potentially could get as sales continue to go up?

Allen J. Carlson

Here's how I think about it, and Dennis can comment on it. But if we add $1 of incremental new business, it's somewhere around $0.40 to $0.50 of that $1 of new incremental business drops to the bottom line. Now, of course it depends a lot upon what the product is, but just generally speaking, it's about $0.40 to $0.50 goes to the bottom line for $1 of incremental business. Dennis, you have anything?

Dennis Tichio

No, I agree.

Matthew Dodson

Well then so -- I guess then can you help me understand? So you basically did $43 million -- just $43 million in sales and you're guiding next quarter for $51 million, right? And so sequentially, that's an 18.6% increase in sales. And if you took the $0.26 to the midpoint of your range of 35%, that's 34.6%. So that's what you're talking about is the extra flow-through, so you're basically going to flow that $0.40 or $0.50 through the P&L, right?

Allen J. Carlson

That's right.

Matthew Dodson

Okay. The other question I have is since you talked about China and Europe picking up, does that have any implications for the tax rate?

Dennis Tichio

No. We expect the tax rate moving into next year to be roughly the same, 33% to 34%.

Matthew Dodson

And then the final question I have for you is, you have a very short lead time business, right? It's primarily a terms business. Because you're seeing orders picked up, is that your customers giving you more lead time or more of a positive book to bill? Or can you talk a little bit about the visibility that you have?

Allen J. Carlson

Sure. You're right, our lead times are very short. And it's typically 30 days or less. That's the kind of visibility that we have. We'd also know that about 10% to 12% of our business is even less than that, like 3 days of lead time. So when we see our expedited business grow or our short-term business grow, short-term meaning 30 days, usually that's a very positive sign because our channel partners, our distributors and integrators that are out there are filling orders that are coming in faster and need products. So it's a positive sign, it's not that they're giving us more lead time. Additionally, our lead time, regardless of what it is, has been very consistent over the last decade. So we find ourselves and our distributors and other channel partners and our OEM customers looking at us as a very, very reliable source, and therefore, not having to carry just-in-case inventory. So it's a pretty clear signal of what's going on in the marketplace.

Matthew Dodson

Got it. And I do apologize, I do have one last question. Are you seeing any indications of any kind of your raw material cost push?

Allen J. Carlson

No, it's been somewhat stable. Part of what I said earlier about price increase of our products into the marketplace, we watch that very closely. And I'm not quite sure where it's going to go as the economy begins to heat up. We're already seeing it in energy prices, for example. Just go to the local gasoline station and fill up your car and you'll see it quite quickly. How is that going to translate into other commodities and other things we use, we're watching that very closely.

Operator

[Operator Instructions] We'll hear next from George Prince with RBC.

George Prince - RBC Global Asset Management (U.S.) Inc.

Hey, you mentioned the new facility, and you mentioned that you wouldn't necessarily take that without some thought. So I was just curious, you can use whatever metrics or references or thoughts that you have, but where do you think Sun will be in 3 years? For you to put up that building, you must have some plans or hopes. What do you think?

Allen J. Carlson

Okay, George. Well, first of all, we believe we're going to continue to grow, and we believe that we probably have, depending upon a lot of factors, but we're at a $204 million clip business right now. We believe that we probably have enough capacity to do $220 million, $225 million. So we don't need to build that building, didn't need to build it when we kicked it off. However, it's a great time to add bricks-and-mortar. You're going to get the best electricians and plumbers and carpenters, and materials are readily available. There's actually been no delay in the construction of that building at all. It's been like clockwork. Additionally, we've seen no material escalation, as the building has progressed. So we started with a cost factor of x. And normally, in a lot of construction periods, you end up being 20%, 30% over what you've thought. That's not going to be the case in this building. It's going to be exactly what we thought it was going to be on the front and. So there's a lot of advantage of taking -- we actually started planning for this building in '10 and '11 and kicked it off in late '11. So we did our homework on this facility knowing that it wasn't needed, but it was going to be a great investment. As we go forward, I look at it this way, we've got some opportunities to move some products in there initially. But we're moving into a pair of size 12 shoes with a pair of size 6 feet. But we'll grow into that facility over time. And you ask about 3 years out, where do I think we'll be at in terms of utilization of that facility.

George Prince - RBC Global Asset Management (U.S.) Inc.

Any metric you want.

Allen J. Carlson

Okay. My guess is that we'll be about a size -- a pair of size 8 feet into a size 12 shoe. You can do the math on that any way you want.

George Prince - RBC Global Asset Management (U.S.) Inc.

Yes. Well, so, clearly, you must have hope for good demand, expansion of your products, probably expansion of your product lines.

Allen J. Carlson

Yes we do.

George Prince - RBC Global Asset Management (U.S.) Inc.

There must be some pretty positive thinking on that for you to go from a size -- to -- you set up for size 12 with demand for size 6.

Allen J. Carlson

I understand, yes. And a lot of it is going to allow us to relay out our factories to get some more efficiency. Some of it's going to come in growth. The growth piece of it is more macro than, "Hey, I can't say I'm going to take these piece of new business and this geographic market." Sun doesn't work that way. It's kind of like the tide coming in. It rises slowly. It's not a tsunami.

Operator

And at this time, there are no further questions. I'd like to turn the call back over to Mr. Arter for closing remarks.

Richard Arter

Thank you, Deanna. Thanks for joining us, everybody. I just wanted to notify everyone that Sun's annual report and proxy will be mailed on or about April 12. Our annual meeting of shareholders will be held at our facility at 701 Tallevast Road in Sarasota on Tuesday, May 28, at 10:00 a.m. Eastern time. Thank you, all, for joining us on today's call. And we look forward to again speaking with you on May 7 after the release of our first quarter results.

Operator

This does concludes today's conference. We thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sun Hydraulics Management Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts