David Lamb - IR Allen Carlson - President and CEO Tricia Fulton - CFO.

Mick Dupre - Robert W. Baird Jon Braatz - Kansas City Capital.

Good morning ladies and gentlemen and welcome to the Sun Hydraulics Corporation 2015 First Quarter Conference Call and Webcast. Today's call is being recorded. At this time, I would like to turn the conference over to David Lamb. Please go ahead, sir..

Good morning. Thank you for joining us for Sun Hydraulics' 2015 first quarter conference call. Allen Carlson, Sun's President and CEO and Tricia Fulton, Sun's Chief Financial Officer, 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..

Thank you, David, and good morning everyone. A weak GDP in the U.S. and a strengthening dollar made for a challenging first quarter. With more than 50% of our global sales outside North America, currency fluctuations created headwinds for both sales and earnings.

However, if we step away from the currency issues and look strictly at demand, North America and Europe were each consistent with Q1 last year. Asia Pacific business declined Q1-over-Q1 primarily related to the Korean construction industry driven by demand in China. Our second quarter forecast indicates some softening in demand.

On a macro basis through our pockets of geographic weakness in Korea, China and Russia, which is coupled with end market vulnerability and mining, agriculture and oil and gas. The financial effects of these are further exaggerated by foreign currency issues.

We believe that these issues are short term and we will continue to focus on investments that benefit Sun for the long term. These investments include continued focus on our integrated package business, our marketing efforts in Asia, and of course product development.

As you recall, we moved into the third facility at the end of 2013 which enabled us to focus specifically on growing our integrated package business. Today, we continue to make investments and our abilities to design and manufacture custom integrated package solution for our customers.

We brought a new design tool, quick design to the market recently which enables us - enable users to quickly configure a custom integrated package. Additionally in March, new equipment was added to the facility allowing us to run our manful production lights out, saving labor hours and increasing overall capacity.

In Asia, we continue to invest in technical marketing capacity and capability to continue to service and support customers in the region. Lastly, product development efforts are ongoing with the focus on electrically actuated valves. In April we exhibited the Hanover industrial fare Hanover Industrial Fair.

This event allows us the opportunity to meet with our global channel partners and keep a post on the industry. While at the fair we launched an industry first a Bluetooth-enabled cartridge valve. These valves allow users to configure settings wirelessly using an iPhone or similar smart device.

These electro-hydraulic valves are ideal for both mobile and industrial applications, where cost, reliability and ease of use are critical. The controlling app, AmpSet Blue is available free to our website or buy your normal method of downloading apps on to your smart device simply search for Sun Hydraulics.

This technology has beneficial for application where the valves are not easily accessible for configuration either due to replacement deep within the machine or because of system is unreachable from a secure location.

Because these valves can be configured using our iPhone standing several feet away, user safety is paramount with set being completed more efficiently and reliably then with previous controllers. We continue to make progress on development of the digital logic value with our partners Sturman Industries.

The first product which we expect to release during the year will be smaller in size, lighter in weight, use less power and operate faster than similar electrically actuated valves. We’re still in the design and initial prototyping phase but we are already exploring interesting customer application using this product.

Partnerships like one with Sturman are viable options for outsourcing R&D and gaining new technologies. We will look for other partnerships for M&A opportunities where we can acquire new technologies and products and enhance and expand our products in markets. Last month we named our 2014 annual report titled capturing value.

In the 2013 annual report we address value creation for stakeholders. This year we have taken this motion a step further to not only create value but capture it for the long term benefit.

We continue to view EVA or economic value-added as an excellent tool to make decisions that will ultimately grow shareholder value and communicate the long term benefits of our investments.

On behalf of my worldwide colleagues, I’m proud to announce that Sun was once again recognized by Forbes in the list of the 100 most trustworthy companies in America. This is the fourth appearance on the list since 2009. The [indiscernible] have consistently demonstrated transparent accounting practices and solid corporate governance.

We believe this recognition acknowledges our commitment to doing not what is easy but rather what is right. I will now turn the call over Tricia to talk about the quarters results..

Thanks, Al. Before getting into the details on the quarter, I wanted to touch on the subject of foreign currency and how it impacts on the financial results. 75% of all Sun sales are made in U.S. dollars. This includes all sales are out of the U.S. in a large portion of the sales made from our European subsidiaries.

The remaining 25% of sales are made either in Euros, Pounds or Korean Won. We have exposure to FX fluctuations both on a translational and transactional basis. In the current environment, the majority of our FX exposure is on the translation side of financial statements from our foreign subsidiaries are converted to U.S. dollars for reporting purposes.

Additionally our subsidiaries purchase their cartridge valves from the U.S. entity, when they do so they purchase these valve using U.S. dollars. Our stronger USD similar to what we're seeing today impacts our subsidiaries, cost of goods sold and therefore income.

In addition to the operational effects of foreign currency, we also recognized the one-time gain of approximately 900,000 related to U.S. dollars held by our German entity. We were able to lock in the majority of the gains by utilizing the U.S. dollars throughout Q1. Let's look now to results for the first quarter.

First quarter sales were $54.4 million down 4% over Q1 last year. Pricing accounted for roughly 2% of sales and currency negatively impacted Q1 by approximately $1.5 million compared to the prior year. Earnings per share were down 9% over last year to $0.39.

Earnings were reduced by $0.01 due to currency but also included a one-time gain of $0.02 per share related to U.S. dollars held by our German subsidiary. From a regional perspective, North American sales were up 1% over Q1 last year. European sales decreased 9% all of which is attributable to currency.

Sales in Asia Pacific were also down 9% in the quarter primarily due to declines in the Korean construction industry driven by demand in China. Gross margins decreased to 39% in Q1 compared to 42% last year. The strengthening U.S. dollar increased material cost in our foreign subsidiaries and accounted for about half of the decrease in gross margin.

This was coupled with higher labor and overhead cost primarily in our U.S. operations. Gross margin is expected to remain at this level in the second quarter. SEA expenses remain flat when compared to first quarter last year. The provision for income taxes for Q1 is 32.4%.

We expect the Q2 rate to be approximately 33.5% driven by a provision to return true-up in our U.K. entity. The special cash dividend of $0.09 per share relating to the share distribution was paid on March 31 to shareholders of record as of March 15.

The company also declared a normal quarterly cash dividend of $0.09 per share payable as of April 15, to shareholders of record as of March 31. Net cash from operation was $14 million. Inventory turn for almost 10 and days sales outstanding were 34.

Looking ahead to the second quarter, currency will continue to play a role on our Q2 results as for other macro economic conditions. Sales are estimated to be $54 million, compared to $61 million in the prior year. Currency is responsible for $2.4 million of the decline in revenues in our estimate.

Earnings are estimated to be $0.34 to $0.36 per share compared to $0.46 per share last year. Currency is negatively impacting Q2 earnings by approximately $0.06. Macroeconomic forces are affecting financial results in the short-term, but is always funds focused on the long-term and factors that are within our control.

Investment in new products and markets are creating opportunities with existing and new customers. Globally, we have the ability to respond to customer needs and can deliver products to customers when and where they need them. Long-term the world needs resources, infrastructure, and food production.

This was good news for Sun and our industry, because hydraulics will be required. We are optimistic about Sun's future and our efforts for main focus on growth and delivering value to shareholders. I would now like to open the call for questions..

[Operator Instructions] Our first question comes from Mick Dupre with Robert W. Baird..

Good morning everyone. I'm looking to maybe get a little a more color and clarify your outlook for the second quarter.

If I look at historical seasonality obviously there’s typically a pretty nice ramp from the first to the second quarter and I understand that we’re dealing with some FX headwinds here but clearly that's not enough really to explain the sequential decline.

So, in terms of what you’re seeing in your end markets, how should we think about whether or not this is just something that’s purely temporary and related to, if you would distribute our inventory destocking, which you highlighted last quarter or if this is something that you're perceiving as a little more permanent in nature, potentially impacting adversity as well?.

I'll take that Mick this is Al. If you take a look at the headwinds that are out there facing not only us but just about everybody in our industry, you have the currency factor, which we just spoke about. But the other factors are called – we call them market driven factors either they are specific markets or geographic.

For instance, large consumers of hydraulic components, our market such as mining, market such as agriculture, market such as energy and those markets have been down mining took a downturn about two or three years ago has not yet come back, Ag is probably about a year now and energy ever since the price of oil went down to $50 a barrel, nobody is putting holes in a ground looking for oil.

That also impacts things such as windmills and solar cells, other aspects of energy production. So it’s not just oil if you would say. So those are three large - four large consumers of hydraulic components. Now how long will these market be down? Well they bottomed out and the signs is that mining is beginning to show some life.

Ag is showing a little bit of life but there is – it's anybody's projection from a market standpoint is when consumer demand for goods and services are going to start driving, commodity prices backup including gas and oil. And on top of all of this, you also have an impact, the geographic impact which is China.

The economy in China is running much below their GDP expectations and their PMI is actually below 50. So those are the factors that are impacting not just Sun but everybody in the industry. The projection is how long it's going to be, I guess is anybody's best guess..

Sure. You and I have discussed this - these items I think in length over the past year or so. So this is not particularly surprising, the thing that is surprising to me is that, a sequential decline in revenue from the first to the second quarter, I have to go back to the great recession really to define that.

So I'm trying to understand if you're proceeding that what we're doing with here, are some unusual effects related to destocking, that's really the essence of my question..

So not destocking, it's demand for products driven by commodities, oil and a very, very low GDP, a GDP first quarter was 0.2. That labels our outlook for Q2 because it's - we really don’t know what GDP is going to be for the rest of the year and while GDP is low in the U.S. its probably even lower to the other parts of the world..

I think – I'm sorry go ahead..

One of the other factors on a macro basis that we might want to consider here is PMI. Well it's still is above 50. It has been declining for period of time of seven months I think, which does - is a leading indictor for us.

So we are in that normal timeframe from a decrease in PMI where we would start to see a decrease in demand for our products as well..

Okay. I appreciate that. Sort of fortunately sticking with this line of questioning, if I look at normal seasonality of revenues, we typically have a step down from the second quarter into the back half of the year.

And again, I'm trying to figure out from your perspective that normal seasonality would hold going forward any color there?.

All I can do is give you my gut reaction and my feelings is to what I think the rest of the year might look like. I think what we we’re seeing in the first and second quarter is likely to start showing strength in the third and fourth quarter going into next year.

I have no reason to believe that other than just sort of talking to people in the industry and looking at where we are at, and I think all the macro indicators have bottom down and we’re going to start seeing an uptick and that will show results in third and fourth quarter. That's my personal view..

Okay.

And in terms of your exposure to the commodity related end markets, you mentioned mining Ag and energy, can you give us a sense for what the impact on sales would be here for Sun?.

Those three markets combined probably represent 50% of our output and probably as very typical of others in our industry. Those three markets would consume about half of the hydraulics with the other half being probably construction, area with platform devices, things like that. So I'm thinking it's about half..

Okay. That's really helpful. Thank you. And last question for me is really on the margin side, I appreciate the color on gross margin for the second quarter.

One of the thing that has me a little bit puzzled though is, I know that you put through a price increase and I’m trying to figure out exactly how that plan through the gross margin in whether or not later in the year, if things are not improving from a macro standpoint, you would be willing to consider potentially scaling back on investments in order to support gross margin..

Pricing did have an affect on gross margin in Q1 and it offset those increasing expenses that we saw in labor and overhead. So there definitely was that impact there.

With regards to scaling back on investments, Sun has already taken a long-term approach and I think that we will continue to take that approach and do what is right for the business on a long-term basis not looking necessarily quarter-to-quarter. And this is story that we've repeated many times..

All right. Thank you and good luck..

Thank you..

[Operator Instructions] Our next question comes from Jon Braatz with Kansas City Capital..

Good morning Allen and Tricia.

I appreciate the color on the - on your end markets, I guess my question would be, as you look at the first quarter and look back in the fourth quarter, what's the incremental change, what really changed in your markets? Was there a specific end market that got worse on what you were thinking and looks to be weakening more than maybe you would have expected going into the air.

So I'm sort of looking at the incremental change and demand that you’re seeing out there and where that’s coming from?.

First of all, there is no surprises on our Q1. We came in very close to both topline and bottom line..

I'm sorry, maybe looking ahead towards the second quarter where that incremental change is?.

Okay. So the second quarter I think is a continuation of what we saw in the first quarter and looking at projecting second quarter based upon April results. So, we got like one month in and it's hard to project what the quarter is going to look like it's an entirety, but it’s our view right now after one month into the quarter.

Trying to determine what's going to happen in late second quarter, third and fourth quarter is very, very difficult to do. If the GDP picks up and those markets start responding, our forecast will change in a positive direction. I personally believe that consumer spending has not yet kicked-in to commodities such as mining.

I think the price of oil and gas is going to go back up, it probably won't go back up to 140, but it will go back north of 70. And I think that will happen sometime during the course of this year.

I also believe that the exchange rate is not going to stay where it was in the first quarter and we’re beginning to see the euro and other currency strengthen against the dollar already. So that's another factor. But projecting where that will end up for the quarter and the rest of the year's beyond my ability to see..

Is there one particular end market that has – let's say when you look at April numbers there was a one particular end market that appears have gotten worse than maybe where it was in the first quarter?.

We don't have that degree of granularity..

Okay..

Maybe in fact our customers don't even have that degree of granularity..

Okay, all right.

Second question have you - how have you adjusted your production schedules, have you scaled back hours at all?.

We've scaled back on over time..

Scale back and over time, okay..

Correct. And we’re staffed about the right level for running our business with little or no over time. That's basically how we run our business. In normal times we’re running probably 45 hours a week on a 40-hour paying over time. And when times get slow like they're right now, we just scale our overtime back to - like 40 hours..

Okay.

Can you - do you know how much your over time pay was in the first quarter often?.

About 5%..

Okay..

Total labors..

Of total labor, yeah okay. Thank you very much..

Thank you..

Thank you..

[Operator Instructions] We have no further questions at this time. I would like to turn the call back to David Lamb for any additional or closing remarks..

We would like to thank you joining us on today's call. Sun's proxy and annual report were mailed to shareholders in April and you should be receiving them soon, if you've not already. Our annual meeting will be held on Monday June 1 at 10 AM at our facility at 803 Tallevast Road in Sarasota, Florida.

We look forward to speaking with you again after our second quarter release in early August. Thank you..

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