Helios Technologies, Inc. (HLIO) Q4 2007 Earnings Report, Transcript and Summary

Welcome to the Sun Hydraulics fourth quarter and year-end 2007 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Rich Arter, Investor Relations spokesperson for Sun Hydraulics. Thank you Mr. Arter, you may begin.

Thank you, Rob and thank you for joining us today. With me today are Allen Carlson, Sun's CEO and President and Tricia Fulton, Sun's Chief Financial Officer. Additionally we have a room full of people here in Sarasota, because we are going to run this call from an Investor Open House we are holding here today. So when we get to the question and answer period, we are going to take questions from dial-in audience, and then take some from the live audience here, and move back and forth. So, we encourage those of you that are dialing to ask questions, as well as everybody in the room. Any statements that we make today might be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. So, if you want to learn more about forward-looking statements please refer to yesterday's press release. We'll go thorough some prepared remarks and then we'll do the Q&A. And with that I'd like to introduce Allen Carlson.

Thanks, Rich and good afternoon. Sun again enjoyed strong financial results in 2007 with double-digit growth for the fifth consecutive year. Momentum has continued in to the first quarter of 2008, and we are expecting another quarter of double-digit growth in both sales and income. Strong international demand led the way in 2007. Europe and Asia-Pacific generated nearly 80% of Sun's growth. Our global presence has been, and continues to be, one of Sun's key success drivers. We will continue to take advantage of the opportunities in new and expanding international markets, and we see great potential particularly in Asia. We experienced 5% growth in the US market in 2007. While the domestic demand was moderate, we believe we continue growth at a pace faster than the industry. More importantly, though, domestic demand has strengthened in the first two months of 2008. With all the negative US economic news being reported daily, we welcome the increasing order rate. Last year at the Hanover Fair in Germany, we introduced new electrically actuated products featuring White Oak electronics. These products, which are unique in the marketplace, will be introduced in the North America next week at the International Fluid Power Exposition in Las Vegas. We expect to receive the same favorable market reaction that we experienced in Europe. I would like to thank all of our employees, suppliers, distributors and customers around the globe for contributing to our success in 2007. I would now like to turn the call over to Tricia to provide some more detail on the year and the quarter. Tricia?

Thanks, Al. I'd firstly comment briefly on the fourth quarter results. Net sales were up 18%, just over $41 million. Net income grow 34% to $5.1 million, and basic and diluted earnings per share increased to $0.31 versus $0.23. For the year, sales increased 18% to a $167 million, and net income rose 36% to $22 million. Foreign currency fluctuations accounted for 1.7% of the sales or $2.8 million. Basic and diluted earnings per share ended the year at $1.35 and $1.34 respectively, an increase of 36% and 35% over last year. Growth was driven by sales to Europe, which were up 31%, and sales to Asia, which were up 29%. North American sales increased 6%. Europe and Asia continue to account for a greater percentage of our sales growth. Gross profit increased 25% to $55 million. Gross profit as percentage of sales continued to be strong at 33%. The largest contributor to the margin increase is productivity gain, followed by absorption of fixed costs and a sales price increase in July 2006. Our foreign operations have lower material costs, due to purchases they made in US dollars. This resulted in approximately $1 million in cost savings. SG&A increased 12% to $21 million. The increase was driven primarily by higher costs associated with stock based compensation, outside services, and professional fees relating to tax and legal matters. Our effective tax rate was 35.6%, compared to 34.9%. The increase is attributable to the completion of the company's 2006 US tax returns, which resulted in a provision to return true-up. Our 2008 effective rate is estimated to be 33.5%. This decrease reflects the tax changes in Germany, which lowered rates approximately 10% for 2008. Net cash from operations was $28 million, up $8.5 million from last year. The increase was due to higher net income of $5.9 million coupled with working capital changes. Day sales outstanding were 38 and inventory turns were 10. We continue to look for ways to drive further working capital improvements. 2007 capital expenditures were $12.6 million primarily for new machinery and equipment in the US. Our estimate for 2008 is $13 million. We've mentioned in the past that return on capital employed is a good comparative measure for industrial companies. Last years funds for churn on capital employed was 30% and its averaged 20% over the last five years. Quarterly cash dividend of $0.09 a share was declared in the first quarter, and payable on April 15th to shareholders of record on March 31. Fourth quarter demand is expected to remain strong. Sales are estimated to be approximately $47 million, and earnings per share are estimated to be in the range of $0.41 to $0.43. This represents an increase of approximately 15% in sales and 20% in earnings per share over the last year. Thank you. We'll now turn the call over for questions. Rich?

Okay, Rob. Let's, if there is anybody in the queue for questions from the dial-in audience, let's do that first.

Okay, Sir. (Operator Instructions). Our first question comes from the line of Jon Braatz with Kansas City Capital.

Good afternoon, Allen and Tricia. Now, I am sorry, I didn't have a chance to meet with you when you were down here a couple of weeks ago, but maybe next year.

They hide me.

They hide you, right. I guess my first question is this; there is a steady drumbeat of bad economic news out there. Yet your first quarter, your indication for the first quarter was pretty strong and you said businesses seemed to get stronger. I am sure you're scratching your head, any sense, any reason why you think things have continued to -- I mean actually they've got a little bit stronger for you here?

Well I think, we're going to probably look at it in a couple of different lights. One is, we take a look at our international business but it's continuing to speed right along. I guess that's not really surprising because if you look at the economy in Europe and Asia, it's very strong. And we are much, very much an international company today. In fact 55% of our business now is outside the US. That's our ground work and seeds that were planted in the late 80's and early 90's paying a dividend for us today because it was a lot of work to get to the position we are at in our international business. So that doesn't surprise me at all. The US market, I think when you think about it more in a micro standpoint than a macro standpoint, you probably aren't surprised either. There is a lot of bad press absolutely, but it's in sectors that we don't participate in strongly. For example, there are not too many banks that use hydraulic cartridge valves. So the banking industry, it's in a state of sad shape but that really doesn't affect our business directly, indirectly it might. The housing industry is another example. Yes, some of our products stand up on construction sites for residential construction, plus it's a small piece of our business. A third element that's really been hammered in the US is US Automotive, and again, that’s not a significant market for Sun. Our markets are more into the heavy duty pieces of equipment that maybe are used on mining and exploration, in building bridges and sky scrapers, that kind of construction. So, the business segments that we are in are still quite strong, and our customers in the US are also exporting and taking advantage of a strong export market. So some of the equipment is not even being used in the US, the equipment is actually being exported. Hopefully, that answers your question.

Okay. And one last question. The introduction of the electrically actuated valve, how big an opportunity is that, both, domestically and maybe internationally?

I think it's huge on two fronts. First of all, it's taking us into new markets that we couldn't participate in. And those new markets probably -- I kind of think of the market we are in as one-third, one-third, one-third. One-third being cartridge valves alone, pressure regulating kinds of cartridges valves, traditional Sun's market. Then there is another third which is the electrically actuated market, and then there is the third market that is a combination of manifolds and cartridges, and the cartridges would come from those sector. So, essentially we were excluded from the one-third which is Solenoid Operated Cartridges, but a large portion of the integrated packages also include Solenoid Operated Cartridges perhaps even a half to two-thirds of that sector. So it opens huge markets and opportunities, not only for the cartridges themselves but for packages and systems that we couldn't get into before.

Okay, alright. Thank you very much.

Thank you.

Thanks, John. Maybe a follow-up question before we go to the audience here with if -- George Prince who couldn't be here sent in a list of questions and I think the first couple are similar to the ones that John asks. And George asks, how is the lower-dollar mechanically impacting Sun. Does it help in terms of the competitive nature of the lower sales price for product shipped from the US? Is it simply helping the financials on the exchange rate? Does it help your US customers maybe seeing increased sales due to the lower-dollar and better competitive pricing and I think that's a natural follow-on to John. I'm getting as efficient.

And the answer to all of three of the questions that came from George are yes, yes and yes. It helps Sun and it helps our distributors. We have several European distributors that over the last few years we have moved to be direct shifts from the US. So they are now buying from the US in US dollars. So their costs of goods sold are much lower as their local currency strengthened against the US dollar. The same goes for our inner companies in UK, Germany and Korea, they are buying from us in US dollars as well, so their cost of sales goes down, and that part benefits Sun as I said in the script portion that had affected our sales by about $2.8 million and it has an effect on our gross profit line as well due to their lower cost of sales of about $1 million.

Thanks, Tricia. Anybody in this room have a question? Unidentified Analyst Yes, sir. Do I need the mike over here?

I don't think he needs the mike. I'll repeat your question.

Okay.

If you can take your name now.

[Robert Silver], Private Investor. I have two questions, one pertains to how does Sun view market opportunities in the ship building and marine transit industry? That's part one. Part two, if you can make a comment on your book-to-bill ratio and approximate turnaround time for the time being to assume the order or time tracked until --

Okay. That does it. Thank you. Well in the question, question one here is to deal with the opportunities in this ship building and lower marine transit area. And then I think the question is, generally what are our lead times and what's the book-to-ship ratio that we operate under? Al would you like to take that?

Thank you. They are interesting questions and I'll start right by addressing the ship building one. That is a significant market for Sun. I am not sure, actually I made the list of markets but I know that it's significant because they used things like cranes. And if there is, we probably classify it, the market as a crane but there is a huge amount of cranes that are used on ships, because of lot of conveyer drives, there are a lot of bow thrusters on some of the ships, those are all hydraulically operated. I do know for example, one of our largest customers in Scandinavia, it's a company called Macgregor, Macgregor makes equipment for ships. We've opened an office in South of Korea, just recently in the Pusan area, that's a huge ship building area. So there are a lot of hydraulics and we already participated in that market with our low-holding products and some of our other products. I can't venture to guess what percentage of our business would be in that market, but its measurable. The second question is the bill to ship situation. We enter all of our orders and have now for almost 10 years to customer request. We do not have a scheduling department within Sun today. We used to, but in 98 we changed it to every order gets entered to customer request. And it is up to our manufacturing people to figure out how to deal with that. And they do a really good job of managing inventory, managing resources, managing equipment, to schedule to customer requests. We kind of operate like UPS does. There is a different price if you want it tomorrow than if you want it in four week. So it is up to the customer to choose on how they would like to schedule to get the best service at the best price. Our marketing approach is to never say no, but put a price to yes. The average order is probably around three weeks. And so when we talk about not having a lot of visibility, three months out or six months out we don't have a lot of visibility. We have a lot of visibility in the next thirty days, next week we have great visibility. But beyond about thirty days there is little or no visibility and that's great, because we are not planning to run our business on a pipeline that may be partially empty and we don't know it. Our pipeline when you see it, its real, its not a paper pipeline. Tricia, anything else you want to add to that?

No, I think that will do.

Tell you what Rob, how about another question from the dialing group?

Sure- our next question is from [Joe Mondello with Sidoti & Company]. Joe Mondello - Sidoti & Company: Hi guys. Hi, Allen, I also didn’t get a chance to meet with you. But I hope to soon in the future. Hi Tricia and Rich.

Hello, Joe.

Hello. Joe Mondello - Sidoti & Company: My first question, and I believe I addressed this the first time I was down there, I was just maybe getting a hope that I'd get some insight from Allen. Could you give us some insight on your product mix, on how your sales are broken down in terms of individual valves sold and manifolds versus integrated packages and where you see integrated packages going? Is that going to grow in terms of individual products being sold?

Hi, Joe, thanks for that question. Approximately two thirds of our business, maybe a little more, would be in what we would call the street components or cartridges. And about a third or maybe a little less than a third would be in packages, which include cartridges in the manifolds that we produce. We also manufacture just manifolds and ship those, but that piece of our business is getting smaller and smaller, because customers today don’t want to buy a spark plug from us they want to buy the complete engine, and they want us to ship the complete engine directly to the customer ready to go. And we are finding also that that extends beyond just the engine now, they would like the control system for the engine. So we are getting more involved into electronics. The White Oak product is actually embedded into our solenoid valves. The High Country Tek product is actually the master controller for the machine and the engine. So customers around the world are asking for us to provide more content, to have the components that we ship ready to drop in and ready to go and we will continue to see that in the future. That definitely has been a trend for 10-years that will continue. Joe Mondello - Sidoti & Company: Okay, thanks. And also, in terms of the first quarter guidance that you gave, obviously you think you are going to do pretty well. Do you see that just as a carry over of business from the fourth quarter or do you think that in 2008 this is something that you might be able to sustain further into the year?

Well, as Al mentioned early, we don't have a lot of visibility beyond about 30 days, we currently have eight or nine weeks' worth of orders on the books and shipments. But we really can't see much beyond that to say whether we know for sure. That's going to carry into the year, but we typically do see Q1 revenue in excess of our Q4 revenue, just because of less shipping days available in Q4 generally, so we would expect that the Q1 numbers would be up sequentially over Q4 but beyond that we really can't see much. Joe Mondello - Sidoti & Company: Alright and last question, can you just give me, how do you think Western Europe fared in 2007 and what do you expect in that region in 2008?

Western Europe actually fared very well in 2007. We saw substantial increases over 2006 in Germany, UK, Scandinavia and Italy primarily, they were up well into the 30% year-over-year. Obviously we'd like to see that continue, we don't have enough data at this point on Q1 to know where it is going to stand but…

We might add, the Eastern European markets are the newer ones for us, and I think we're doing a lot of, kind of planting seeds, that Allen spoke earlier about there, because those markets are kind of emerging. They are not really a challenge though. Joe Mondello - Sidoti & Company: Thank you.

Thanks Joe. Hop back in here, somebody has a question here? Chris.

Can you guys talk a little bit about input costs given the recently rising prices of steel, maybe help us (inaudible) however your folder is both raw steel and total components lets talk about how you bring forward those prices out and how long (inaudible).

So the question is about input cost and how they are affecting us? What we see going forward and things we might do to calm that, any potential loss?

Yeah. Last year we did see moderate increases in our inputs not only just as a material line, which would include the seal and purchase parts but also in the fringe benefits and utility costs on that are major inputs to us. We've been able to offset those thus far with the price increase that we implemented at the beginning of the year and with productivity gains that have been put in place. We obviously have more productivity being planned this year with more automation of the equipment, which you'll see when you take a tour little bit later on the back in cellular manufacturing area. So as far as the inputs of the raw materials in the purchased parts, we have not seen any increases coming through so far. Those are usually negotiated directly between us and the supplier at the time at which the supplier feels that they have absorbed as much of them as they are able to and then obviously we would absorb some of them before we would have to pass them on as well.

(Question Inaudible).

We don't have any direct purchase commitments. We have very long term relationships with our suppliers so the intent is that we will be with them on a long term basis. I think that they feel the same, but the only reason that we change that is for having a problem with them so --

And then you've got quite a bit of cash and (inaudible) you maybe prioritize the uses of that cash as in '08 and going forward, however, in acquisitions with share repurchases -- (inaudible)?

The question has to do with a large amount of cash; Chris is in the back of the room, similarly, you can probably hear him on the phone.

Yeah, fair amount of cash on the balance sheet and do we have a kind of priority laundry list and what we want to do with that going forward?

Yeah, we have about $19 million today on the balance sheet in cash right now but $8 million of that is in the US. So reminder of it is in Europe and Asia. And we do not regularly bring back the money to repay trade assets to the United States unless there is a need for it or the government provides us some incentive for doing that. So with the $8 million that we have currently on the balance sheet, we pay for all of the dividends of the company, all the CapEx that happens, majority of it is in the US. We currently do not have a stock buyback plan in place and that obviously could be started up if we felt that the stock price was at a point the board wanted to repurchase some of it. We have the regular dividends and that's been issued. If there was an acquisition we have the cash that's available in the US, as well as our $35 million line of credit available.

One more in the Korean segment, looking for a year-over-year margin compression in '07. Can you talk about what was driving that and what your outlook is, whether that's going to be (inaudible)?

The question is about margin compression in Korea over the past year, and what do we expect going forward?

As Al mentioned before in our Korean operation, we just opened a new sales office in Pusan which is in the southern part of Korea. We see some great growth opportunities in that region for continued growth in Korea. And to start up that office, we have hired some additional sales people and we leased some space and got up and running in the sales office there. So that's some of what's been eating into the operating profit there and obviously, we'd like to see them a little higher, back in the levels they were maybe in 2006 versus what were experienced in 2007.

So improved as given a clever absorption?

Yes.

Thank you. Okay Rob, do we have anything out there from the dial-in audience?

Yes we do, we have a question from Brian Rafn with Morgan Dempsey.

Good afternoon, everybody.

Hi, Brian.

Hi, Brian.

How is sunny Florida?

Sunny.

Alright. Good.

We've got a barge load of snow coming here form Wisconsin. So it's on it's way.

They might be clean snow?

Question for you, what on the shifts in hourly. What are you guys running at the end of the year at Sarasota?

We are currently running two 10 hour shifts daily. We are working overtime at this point, most people are working about 50 hours total for the week. We still have our weekends shift running in bottleneck areas where we can get some extra production out of working 12 hour shift on the weekends.

Okay. What are you seeing as run rate on salary and wage growth as you go into the new year? As far as it would it be, mid low-single digits, anything out of the ordinary?

No, we actually implement all of our wage increases at the beginning of each year and they are approximately 5% going into 2008.

Okay. You spoke, Tricia, about some of the input cost, raw materials. Can you give us a sense, I think you talked about the Delta, what steel and resin cost, anything I mean, say '07 versus '06, up single digits, up low-double digits?

Up single digits.

Okay, okay. Can you measure and, obviously, you have some significantly robust strength, you guys get a sense it was from web hits or bid codes? What's your -- what's been the kind of the trend in Date Code rate?

We don't really measure that per say, we've got it in some pieces of our business like the manifold business where we have an enquiry to design a manifold and we capture how many of them were actually successful but selling through distribution, the way we do, we don't get engaged in a lot of Date Code activity as our distributors do.

Yeah, okay. From the standpoint of your manifold cartridge integrated package systems, what percentage of those packages would have the High Country Tek and the White Oak Controls on it?

Right now the High Country Tek products; it would be zero because traditionally the customer would order those products separately. We haven't done anything to integrate the High Country Tek into our business as a standalone business today. White Oak is another, is a different situation because we do intend that into our products. The number, the percent number in terms of dollar sold is a relatively small number. A percentage that's actually going out into some units as let's say prototype or [compounded] production corrections unit, it's a large percentage of our new enquires.

Okay, okay. You guys get a sense of capacity utilization where you guys might be and, I asked this question on the manifold side, you guys had such robust growth, any plans, tropic plan equipment for building expansion?

I was almost disappointed that you didn't ask that.

I know that, I've been waiting for that.

Yes, you're right.

I think you started asking me that question about four years ago?

Right, right.

And the answer is pretty much the same. We continue to run our business by identifying constraints and addressing the constraints. Usually the constraints are not bricks and mortar related, they are related to a piece of equipment. Last year we spent $12.8 in capital to eliminate constraints. We've also outsourced more products to the local suppliers, and when we say outsourcing, I don't mean out-shoring; our suppliers here are relatively closely connected. So we get more capacity by outsourcing our products that we can. Our approach is to manage our capacity utilization to get as much bang for the buck that we can on the dollars that we invest in our business.

Right. Have you done much with cellular manufacturing layout changes on the floor, in other words, changing assembly lines, that type of thing?

Yes, we in fact, we've had -- I wish you were here because we could take you and show you a new automated area for production which I guess probably two weeks ago might have consumed 10, 11, 12 employees, is now being done with a lot of automation and three or four employees. As an example that one comes to the mind because we tried to switch on a week ago.

Okay.

There is a lot of that plus the equipment that we bring in, when we bring in a new CNC machining center, we actually take out 1.5 old machining centers and get 1.5 more output out of less footprint.

Okay, right, right, I got you. Okay. You talked on your budget Allen about $13 million, maybe a question for Tricia, what on the CapEx budget would be for new machinery going in '08?

It is almost all new machinery, a lot of automation, not a lot of replacement but from probably 25% replacement.

Also 25% would be then maintenance, then roughly.

Probably less.

Okay.

We don't measure it that closely.

Right.

And we don't look out that part, just as we talked earlier that our outlook or incoming orders might be 30 days. I feel pretty confident that 60, 90 days out we pretty much know what pieces of equipment we are bringing in. But if you ask me what piece of equipment are we going to bring in June and July, not a clue, we don't even care.

Right.

We will address that in May.

Sure, sure.

And like Al said even though we may be replacing one machine with another, the capacity of the new machine is usually drastically different from the old one that it is replacing in footprint-wise.

Right. I've got that. That was a very good answer on that. You talked about the robust sales revenue growth and demand in Western Europe. What are you seeing and you had mentioned a little about the [Eastern block you know Warsaw pact] in the Central Europe. Are you seeing, is it volume increases, is there a difference in the complexity of the orders or individual order sizes. Where is that business is coming from?

Most of our business in Eastern Europe is, I will call it prospecting business. We are planting seeds, in fact we got our first significant order from Russia. We have been shipping products in to Russia probably three or four years. But one addition to that six of this, but those are market opportunities for us in Russia and we've received our first significant order there. But for the most part, yet today Eastern Europe is prospecting, but it will eventually pay off.

Okay and you guys are still from the standpoint of moving to distributor still some are reluctant to identify how you see strength in your specific end markets, probably a little confused?

It is very diverse as our product and so that's diversity and then selling through disposition, we don't have good gauge on what the end market is. We probably could get a better handle on it, but we are just too busy selling applying and taking care of customers to worry about where it's going.

Sure. Super. I'll get back in line. Thanks, guys.

Thank you.

Thanks, Brian. Anything from the room? Yes, sir.

My name is [Dale Grove]. Could you elaborate on collections in '07 versus '06 and the same thing on inventory?

Sure.

Just repeat the question, I'm sure they heard, it was close to the phone, but -- question has to do with collections and inventory, comparing '06 numbers to '07?

Sure. On the collections, the majority of the collections that we make in the US are from US distributors and they get a very nice discount for payment within 15 days. So we have very little collection issues at all with US distributions. We are starting to sell more now out of the US to foreign markets. Those same discounts are not extended on the foreign shipments, and those are generally about 30 days. So, we are seeing a little bit of a slip in the DSO, just because the international businesses tend to take a little bit longer to pay. But overall we have very good collections. We don’t have very many write-offs for bad debts, very minimal compared to most other industries and specifics outside of manufacturing. On the inventory side, you'll see our inventory turns are very good, inventory turns in US where the majority of the manufacturing is done are running around 15 times a year. They are a little bit slower in the foreign operations primarily, because they are stocking distributors and churning it as quickly as what we are doing with manufacturing, but our inventory turns at 10 times a year overall for the corporation are very good.

We have another question from the audience here. Kristine.

I was wondering on the electrically actuated product, based on your experience in Europe how has -- are you expecting roll out into the United States with North American customers to be somewhat the same and how would that acceptance go and are you expecting any maybe cannibalization and is there a price differential there?

Okay, the first thing had to do with the electrically actuated products we introduced in Europe, which were received favorably, are we getting the same expecting the same favorable thing here and where is there any cannibalization. That might be going out with that product introduction. Lets say, good question. Go ahead.

Which part of that multiple question should I start with.

(inaudible) capacity

Thank you, Kristine. The product that was launched a year ago actually it is little less than year ago, because the Hannover Fair was in April, '07, resulted in a number of opportunities for prototypes new production. In our business the cycle from customer's interest to a production order is three to five years. So, when I say that the launch was very favorable, you don't measure it in terms of dollars. So you measure it in terms of number of prototypes, numbers of calls, number of engineering projects that stem out of that. So in Europe we received significant number of opportunities that we hadn’t even thought of it. We sort of thought there was a market in this area. This area when we launched the product, turns out that most of our opportunities have been in markets that we hadn't even anticipated being. So now its 10 months later and we're going to launch it in Las Vegas next week at a very large show it's call the CONEXPO FP. CONEXPO meaning construction equipment and FP is international fluid power. There will be people from all around the world; Europe, Asia, US. I think it is 125,000 people a day attend that show.

2.2 million square foot show.

And one of the halls is the hydraulic hall and we're in the hydraulics people and there will be a lot of hydraulics people floating around and there would also be people that have equipment at the show, their engineers will be there. We expect that people will have heard about the product. We had a web, we call it a webinar about a month ago where people could see the product and hear about it, over the internet from around the world. Believe there will be a lot people that heard it seen it and who want to come and touch it feel it. Talk to the guys and know about the product and that will drive again some more opportunities. We did this by design, because when you release a new product there are two concerns you have, one concern is nobody is interested in it and second concern is everybody is interested in it. And so staggering the launch by a year has allowed us to gauge the interest and what we needed to do in production. We are able to gear up and meet the demand. We're current on demand- there is no pass doing that new product and we're promoting it. There was leakage in the US but we didn't -- a customer enquired in the US. We did not take the enquiry we just weren’t promoting it. They found out about it, great but we are not out beating the street trying to sell it in US.

Is it primarily a new market?

It’s a new market and it will not cannibalize anything for us at all. It is probably a new market, not only for Sun but may even be a new market for our industry. There are very few well done electrically operated valve that embed the smarts into the valve. So this little chip that we put into valves marries up the ability to communicate to the outside world directly without having to go through an interface. If you were a little older, I would talk about the day when the alternator was the generator and it was a little black box on the firewall of your car was something called a voltage regulator and the generator wasn't any good unless you had a voltage regulator. We kind of have done the same thing with our valves. In the past, you had to have an amplifier or a piece of electronic black box on the firewall of the machine somewhere for the valve to work. We've taken and eliminated the black box and put it directly into our product.

And the second question will be, just how happy are you with your current distribution network? Are you looking, are there any geographical gaps at this time?

Overall, we have the strongest distribution network in the industry and there is no question about it. We are constantly holding that. We are working with our distribution people to make it stronger. There are some weaknesses in some areas, so we point those out and we work together in a very collaborative way with our distribution. We don't take a heavy handed approach and beat them up. Our approach is, let's collectively figure out how we can broker both for our business because they are our sales force in the marketplace and they do a great job for us.

Rob, let's see if there is something from the dial-in audience.

I think our next question is from Jon Braatz with Kansas City Capital.

And I just had one follow-up. Obviously, Sun Hydraulics has a pristine balance sheet, lots of cash. Assuming the right acquisition would come around, how much leverage would you want to, would you feel comfortable on taking the balance sheet?

We haven't thought about it because it's not an issue. And if right opportunity came along, our leverage ratio of 30% debt to 70% equity, there are a lot of companies that are operating --

Right.

Quite comfortably in that zone, that wouldn't bother me if I really felt it was a trip to Los Vegas, and -- we are going to bet the farm on it, okay 50-50 may be.

Okay.

I've got a bank premier and the audiences are saying it's even more pathetic.

Well, don't listen to them.

Well, it has to be strategic though, Jon.

Sure, absolutely, absolutely.

And we like to pay as we go. At the end of the day we are Engineers.

Okay, alright, thank you. I was just curious then, being naïve, but is that infringement any kind of a serious risk in the markets you are in?

Not really.

The question is about the degree of patents, how much protection we have on with no risk?

Beside just a few patents, we really don't view patents as we keep the protection. The reason why, if you've got a lot of patents, it's easier to put your mind to it. And a small company, your patents are really only as good as the staff of lawyers you are prepared to hire. So our approach has always been, let's satisfy the customer with a quality product, and on-time delivery. Our manufacturing processes, our productivity; all the things that go towards the fabric of the company as opposed to a staff of lawyers to get patents and then a staff of lawyers to protect your patents. Like I said, we have a few; we don't view it as key or critical.

An announcement made to (inaudible) on a video there is a water spot and that's awesome. And when I watch the video, it's all been installed. How many applications of Sun may have been in that video not just for waterfall some?

The question has to do, we showed a video here but also on the dial-in side in our presentation which included a video of a machine called [sockej], that's a submersible craft that harvests timber with water and we said there are a bunch of products down there but part of the video also showed conventional crackles on backhoes and tugboats and a variety of things and the question is did Sun's products extend in those applications as well. And problem- on everyone of those pieces of equipment if it is not for the boom, for the outriggers or the grappo, we are probably in the same way on everyone of those pieces of equipment.

Good point.

I'm sure you're not at Cleveland.

Yeah, warmer here. You highlighted the international growth and highlighted Europe and Asia Pacific when you quickly went through the map in your earlier presentation that I did have lot of time to look at it but I did not see anything in terms of office or location in Brazil, do you have any real opportunities down there that you are engaged in or forecasted? What is typically strength of those ligaments there?

Question has to do with the map we have in our presentation, and it's viewable on our website, if anybody wants to look at. That shows sales by region and it showed a 47% in the Americas, 20% in Europe -- 33% in Europe and 20% in Asia Pacific and the question has to do with there was no indication of a location for Sun in South America, Brazil, especially that we see potential there and what's going on?

That's a question I can answer from first time near periods. When I first joined Sun in '96 I spent the first two years of my life here working in our marketing group and I made some visits to Brazil, Argentina, Chile … which was with me on some of those. We did some prospecting down there and we didn't believe there was huge market for us but we believed there was a market. And so today we do have a distributor in Sao Paolo, we have a distributor in Argentina, and Paris. We have a distributor in Chile, we have distributor in Peru. So we have our presence there through distribution, its growing. I was amazed that how much we actually sold into South America last year, because we expected some season walked away from it, and haven't really spent a lot of pattern recently but the business was growing and we were investing it through distribution. Some day Brazil might be a place to habit our sales office, because of it's a pretty strong economy and a pretty strong market. A lot of our products end up into that region, not sold in that region but through for example ship building, and a lot of ships that are built in that part of the world- fishing, mining and exploration, so the products end up there but they may have been built in Germany or Italy or US or some place else. That market is a good market for us and we don't ignore what those opportunities are.

Here is another question.

Well, we answered George's questions.

Any other questions from the audience, John?

The question has to do with, what is our acquisition strategy, if we have one? And what are the opportunities for new products as far as markets that are emerging or something we haven’t touched before?

On acquisition side, there is a filter that we use, that provides us a pointer to whether we are interested or not in pursuing a particular acquisition. And some of the key drivers in the filter include is it strategic? There is opportunities to acquire companies that maybe have a strong balance sheet or a strong P&L, but they are not strategic, they are not taking us where we want to go. So that's probably the first question. The strategic fit of that company. And the second question is if you pass that test, is there is a cultural fit? Are they like us or could they be like us or we are not. So cultural fit is the second criteria that we look at. Then the third, obviously are they available or do they -- Is acquisition something that would be of interest to them. That's a piece of the puzzle as well. But strategy is the most important piece as to why we look at acquisitions and the strategic piece is for the strategy to help us grow our business. Will it take us into new markets? Will it strengthen us in markets we already are in, but its a growth strategy piece of the equation. The second part of your question had to do with. Yeah what was the topic, new markets?

New products going in to new markets.

I kind of answered it with the first answer. Yes because of the strategy its a growth strategy, obviously part of that growth strategy is the new markets space. Both of the acquisitions, actually feel if you dial a clock back to '98, there have been three acquisitions, and all of them were strategic and growth oriented. The first one was Korea. We acquired a company in Korea, because we believed that it was a strategic fit in that part of the world and as we said earlier our Korean company was $4 million and we acquired it in. (Multiple Speakers) $2.5 million in sales and we acquired them in '98 and last year their sales were well over $20 million and it has taken us into new markets that we wouldn’t have been in otherwise. The other acquisition is wide open that also is strategic but it's not a geographic presence, it's a product presence its allowing us to embed some technology into our products. That was about three year's ago and the most recent one was last fall, it was a company called High Country Tek, out in California that makes controllers for customers who use electrically actuated valves. So, we can provide more of a complete puzzle and work closer with customers on a complete control solution, so it's not just the hydraulics, the complete control solution. And what's exciting for them is they can go in and talk to the customers and they can not only provide them the electronic control solutions, but they have access to technology on the hydraulic side.

If I can add to that Al. Some of the products that we develop are what I would call enabling products, and some of the these electro hydraulic products for example are there is a company that did steering systems for boat, and through our distributor and we got together and they had a new way to steer a boat. So you ask yourself, did that is that part of the market, I mean it was never done like that before. But our products I guess may be helped those designers to develop a new way to do things. They had an idea; they needed just that, and the other thing to be able to do it. Now products, often times, help people to do that and they create new little ways to do things that didn't previously exist.

Correct, another example of that Rich is in Powergen, in wave energy. There is the video I think you can go online and take a look at it. That's a Powergen company in Scotland generating electricity out of waves. That piece of equipment, there are a lot of Sun components embedded into it that would be very difficult to do any other way just by the nature of what they have to do in the environment that they have to live in. So whole new market that didn't exist five years ago, Powergen through waves. That's happening over time.

Rob anybody else on the dialing, we've got about five minutes left.

Yes there is, we have Brian Rafn with Morgan Dempsey.

Okay.

Yeah, just a follow-up on, you guys talked about I think you mentioned you said never say no price to yes. What type of percentage, just for my education? Is there a difference between a, be it an order for cartridges, manifolds, turnkey packages, if a guy wants it tomorrow versus say the normal three or four weeks?

Got a 20% difference.

A 20% difference and…

And usually what happens, we get an order for 500 pieces of something, perhaps you need 20 pieces tomorrow and other 480 pieces he needs in four weeks. So he can get the 20 pieces and he is quite happy to pay the 20%, the other 480 pieces he pays the standard price.

Okay, but are those type of orders, I'm trying to think from the standpoint of next day emergency do you have like failures of equipment on site or is that.

We actually have a third category which is a one to three day delivery and that's usually for customers who have a production down line. He may not even be a Sun component, usually isn’t a Sun component, he is trying to get his equipment back up and running and the service part he needs is not available, so he converts the machine over to a Sun component because you can get it in one day.

Okay, sounds good. Thanks guys I appreciate it, good job.

Thank you. Anything else out there Rob?

No, that's all from the phone sir.

Is there anything here in the room? Yes Sir.

[Charlie Kurt]. Your product is getting more output apparently. Do you have any problems recruiting technical high level people and manufacturing people?

The question has to do with -- the products are becoming more complex and how that affects our ability to recruit both, I guess technical engineering kind of people, as well as manufacturing kind of people?

The answer to the question is no, we really don't have any problems recruiting. The way -- however, it's certainly something we recognize, it is important in our business and so we pay attention to it before we need people. This is a great area to attract engineers that may be had a career with another company and in fact 25-30 years experience and if he like to come to Sarasota and even work for last 10 or 15 years of their career. So it's a great area if you get experienced engineering people. On the other hand, the fresh outside of college, we've got a number of some are interns; we're constantly -- we're filing the gap with young interns. The University of Florida has some good people that we brought on. Our engineering people are very engaged in recruiting and bringing on people from a technical standpoint, I would say the same is true with our manufacturing people. We've got -- we hired a lot of really good manufacturing people with automation skills and robotics skills and maintenance skills. Something has to work at and don't take it lightly but we really have not had problem.

Would that mean that the Sarasota school --

No, I don't know ones in that part but yeah -- the Sarasota school system is great. The Florida school system is quite good. So we are pretty actively engaged in the local area in the school. Additionally on a university level, some forever had a program that any Accredited University that wants to utilize some hydraulics products and they are teaching endeavor gets $1000 worth of products with price free every year and that's open to any university or two-year college, technical college in the country. So fluid power, hydraulics really is not a taught discipline in North America. But there are technical schools, schools like Purdue and some of Midwest engineering schools, some of the AG, the AMM universities, they have hydraulic labs and they call us and they could go on our website and pick $1000 worth of products to that they can play around with their students and we ship those free of charge. So we are kind of active with the community. Yes.

I will put plug in for the culture.

Yes, sir.

The culture is the draw?

So yes, the comment was the culture of Sun Hydraulics is probably a little different than most, and we have a reputation, not just locally, not just nationally, but truly internationally, that probably draws people to us. Engineers like to work here because it is kind of a big sand box. They can play around with the products and be creative. And to work close with the manufacturing and the marketing community. So I agree with you, Bob. Our culture here is a big plus for lot of the engineering people.

And manufacturing as well?

That's correct. So with that it's 5 O' clock, so we have been talking for about an hour. So we are going to conclude today’s conference call. For those of you out there, we appreciate your listening. And again, the presentation is on the website is if you would like to look at it, and thank you for joining us.

Ladies and gentlemen this concludes today's teleconference. You may disconnect your lines at this time.