Sun Hydraulics Corporation Q1 2010 Earnings Call Transcript

Sun Hydraulics Corporation Q1 2010 Earnings Call Transcript
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Sun Hydraulics Corporation (SNHY)

Q1 2010 Earnings Call Transcript

May 11, 2010 9:00 am ET

Executives

Richard Arter – IR

Allen Carlson – President & CEO

Tricia Fulton – CFO

Analysts

Robert McCarthy – Robert W. Baird

Joe Mondillo – Sidoti & Company

Kristine Kubacki – Avondale Partners

Jon Braatz – Kansas Capital

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Sun Hydraulics first quarter 2010 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions on how to participate will be given at that time. As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Richard Arter. Please go ahead.

Richard Arter

Thank you. Good morning, everybody. Allen Carlson, Sun's President and Chief Executive Officer and Tricia Fulton, Sun's Chief Financial Officer, are presenting – are participating, excuse me, in today's call. Allen is joining us from Shanghai, China and right now we've got a great connection. We're going to hope that goes through the rest of the 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.

Before we begin, I would like to remind everyone that Sun Hydraulics' Annual Meeting of Shareholders will be held on Tuesday, June 8, in Sarasota, Florida beginning at 10 AM. You can see the investor relations area of our website for more information. It is now my pleasure to introduce Allen Carlson.

Allen Carlson

Good morning to those of you who are listening from the Americas. Good afternoon from Europe and good evening to Asia, where I am right now. We are very pleased with the recovery, which appears to be gaining strength each month. All indicators point to continuing growth throughout 2010.

April's PMI, which has proven to be a good leading indicator for Sun, recorded its highest reading since June 2004. As we pointed out in yesterday's press release, we experienced significant strength in demand during March. Expedited orders continued throughout Q1. We have no indication that Sun distributors are building inventory, or that inventory is being built anywhere in the supply chain.

Sun's U.S. workforce is, again, fully employed and the salary reductions we instituted last May have been reinstated. Our global colleagues either have or are bringing people back off furlough as demand dictates. We believe we have the personnel and infrastructure in place to meet demand for the foreseeable future.

Sun prides itself on being agile and responsive. By keeping our workforce intact last year and making productivity-related capital investments, we are able to timely ship products to meet our customer's needs.

As expected, we began to see the stirrings of the recovery first in the Asia-Pacific region, followed closely by North America. The recovery in Europe has been a bit slower, but that business rebounded nicely in the first quarter. This is the time in the business cycle where Sun gains market share. Key drivers that helped us gain share include our product offering and our ability to reliably deliver quality products when and where our customers need them.

We have seen new business opportunities as a result of our affiliations with High Country Tek and WhiteOak Controls. These companies enhance our capabilities and expand our addressable markets. Coupled with our growing offering of electronically actuated valves, we are able to take an aggressive approach to developing integrated solutions.

These integrated systems, combined with the best independent distribution network in the industry, helped established Sun as a solution-based company. This is beneficial to Sun's customers, who receive better value-added and more cost-effective solutions. And it's beneficial to our shareholder that expands the opportunities for Sun's growth.

I'll now turn it over to Tricia, who will detail the quarter and then we'll take questions and answers. Tricia?

Tricia Fulton

Thanks, Al. As we indicated in last quarter's call, with our workforce fully engaged we will regain our operating leverage. As our orders continue to accelerate, we will see positive gains in both growth and operating profits. Order rates have increased across the board geographically and heated up in both Asia and Europe in the first quarter.

Asia-Pacific sales were up 31% sequentially and 94% compared to the first quarter last year. European sales were up 22% sequentially and 11% compared to last year. North American sales have also continued to expand, up 8% compared to last quarter and 15% compared to last year. As Al indicated, we believe most of the orders we are receiving are needed to fulfill production requirements at the OEM levels. We don't believe there is any significant inventory build occurring, either in our channel or at our customers.

Now, I'll move on to some details for the quarter. Compared to Q1 2009, first-quarter sales were up 25% and earnings increased from $0.03 last year to $0.20 this year. Sequentially, sales increased 16% compared to the fourth quarter. Foreign currency accounted for 3% of the first-quarter sales. Gross profit in the first quarter was $10.1 million. As a percentage of sales, gross profit increased to 32%, compared to 22% in the first quarter last year.

The furlough program had no material effect on gross profit in Q1, as U.S. employees gradually returned to work full-time throughout the quarter. We were able to leverage our fixed costs and pick up substantial growth profit on the incremental sales increase. Our operations are lean and running at a highly productive rate. We believe we still have room for additional productivity improvements, even at higher demand levels.

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