Good morning ladies and gentlemen and welcome to the Sun Hydraulics Corporation 2014 Fourth Quarter and Year End Conference Call and Webcast. Today’s call is being recorded. At this time, I would like to turn the conference over to Dennis Tichio. Please go ahead.

Good morning. Thank you for joining us for Sun Hydraulics’ 2014 fourth quarter and year end 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.

Thanks, Dennis. Good morning everyone. 2014 was a milestone year for Sun. We were able to achieve double-digit top and bottom line growth which resulted in record sales and earnings. Our performance in 2014 enabled us to once again issue a shared distribution which consists of a contribution into employees’ retirement plans and a dividend to shareholders. This is in addition to our normal quarterly dividends. We introduced the concept of the shared distribution six years ago to allow both employees and shareholders to share in Sun’s success and growth. During the year we made significant investments to enhance our capacity and capabilities, allowing us to better serve our customers and expand our addressable markets. Our third Sarasota facility was fully operational in 2014. This provides a physical capacity to grow and drive operational improvements and houses a design production and assembly of our integrated package business. Integrated packages provide a customized system solutions for equipment manufacturers with fewer lead falls [ph], EGR rates and reduced installation and maintenance costs. Our cartridge valve design characteristics allow our integrated packages to be smaller in size and lighter in weight. And our delivery reliabilities ensure customers get it [indiscernible] and where they want it. Providing complete custom solutions is an area for long term sustainable growth for Sun. Also in 2014, we made significant advances in product development. Our efforts were focused on electrically actuated cartridge valves, electronics and continued expansion of our hydro-mechanical cartridge valves. Combined, this results in innovative products that extend our offerings to complete system solutions. As one example, [indiscernible] we released a line of cartridge valves that utilize specialty for use with fire resistant fluids. These shields are required for certain application segments, including aerospace and military. While our products are not directly used in aircraft, they…

Thanks, Al. 2014 was an important year for Sun. We were able to invest in our business, add the infrastructure necessary to augment future growth. While doing this, our employees and channel partners remained focused on our hot priority. It’s growing and satisfying customer demand. The result was record sales and earnings. During the year we communicated the impact our investments would have on our earnings short term, knowing we would be better positioned for long term sustainable growth. We now have the physical capacity in place together [ph] through the next growth cycle and looking forward capital expenditures will normalize. We will still have some incremental sales and marketing costs through the first half of the year as we continue to grow and penetrate certain markets. Product development is an ongoing process for Sun to remain at the forefront of innovation. We had several new product releases last year and expect further new product releases in 2015. As Al mentioned, we are financially strong to take advantage of opportunities in the marketplace and we’ll do so with the keen eye on creating value for shareholders. Let’s turn [ph] now the numbers for the fourth quarter and the year. For the fourth quarter, sales were up 12% driven by robust demand in North America which was up 18%. Europe and Asia Pacific were each up 5%. Currencies in fact, had a negative impact on sales of approximately $600,000 in the quarter. Earnings per share were up 22% compared to Q4 last year. Earnings were elevated by two items. Additional interest income of approximately $300,000 related to a tax benefit received on a prior period tax position and foreign currency gains of approximately $400,000 for cash balances held in US dollars at our German subsidiaries. This gain is partially offset by…

Thank you, Tricia. We do keep a write-in question and we are going to go ahead and start with that. The question was, can you go into some detail on how FX impacts you, where it impacts you and the financial impact?

The currencies that can impact our results are the euro, British pound and Korean won. We do not hedge with financial instruments against changes in FX. FX impacts us in two ways and sometimes three. The first is from the translation of foreign subsidiary financial statements to US dollar financial statements. When we referred to sales being down by over $1 million in Q1, this is what we are referring to. Exchange rates today are lower than the ones a year ago. At the same exchange rates being used, we would not see this decline in sales. As you move down the income statements, we also have lower costs as a result, by the time you get to the bottom line, the impact is lessened about $0.01 per share. The second way the FX impacts us is from transactions. The majority of our foreign subsidiaries’ cost of goods sold are purchased in US dollars. As their currency weakens against the dollar, their costs increase compared to what they would have been had the exchange rates matched the prior year. In Q4, cost of goods sold was increased by almost $300,000 related to these transactions. Q1 could be over $0.5 million, as a cost of goods sold line. We are nationally hedged approximately 75% in euro which helps to manage and mitigate the risks of foreign currencies. In Europe, both our UK and German subsidiaries sells to a portion of their customers in US dollars. This in turn helps them build the US dollars to use to offset purchased products in US SEA, limiting our exposure to changing rates. Additionally, with expectations of a declining euro, in Q4 we converted euro into $9 million. This balance helped to offset losses that we experienced as a cost of goods sold level and this is the primary reason for the large foreign currency gain in Q4. Additionally, we can use this balance to subsidize our US SEA sales over the next year and half and use [indiscernible] US SEA on hand to purchase goods. We do not believe that a stronger US SEA significant hurts global demand for our products, as our products are used in the occasions that require high performance and reliability. With that, we will now go ahead and take questions from the audience.

[Operator Instructions] And we’ll take our first question from Mick Dupre with Robert W. Baird.

So looking at the 1Q guidance, I appreciate the color on the FX. That’s very helpful. It seems to me though that your 1Q guidance implies a very little organic growth, so growth excluding FX. Am I correct on that? A - Allen Carlson That’s correct.

So kind of looking at, if you would, sales by geography, how do you think about the moving pieces here in getting us to relatively flat, North America versus Europe versus Asia?

Looking at North America, Q1 to Q1, we are seeing a small amount of growth in that region. We are seeing though reduced growth Q1 to Q1 in Europe and in Asia and we mentioned in the press release that we had pockets of areas where we are seeing growth and certainly when we look at that by country, there are some countries that are doing better within Europe or within Asia, primarily in Asia, China and Europe, there are a few different countries but overall Europe and Asia compared to last year are down slightly with North America relatively flat to what we saw in Q1 of ’14. At least what we can see through February. January is a tough month coming out of the year end but on pretty normal order pattern we did see sales in February that were up over what we are seeing in January which we think is encouraging going forward.

I guess I remember speaking with you certainly late in the year around our conference in November. And the tone of your press release and what you just said now, it seems pretty different from what we heard. So I am wondering can you give us some color as to what changed, because it sounds like we are little bit more downbeat now than we used to be, and frankly, I guess my question is, why are we talking about very little organic growth in spite of a price increase and PMIs above 50 for a good portion of the world, and new product introductions?

There are few factors I think that are causing over the last three or four months for our view to change a little bit. Some of that’s foreign currency, obviously the euro has been pretty hard hit and that does have some effect on these results for Q1 forecast.

Right, but I am excluding that. I am asking organic.

We believe that the low price of oil is probably changing some investments in that segment going forward. Anything besides the currencies that’s coming out of Europe with regard to QE in Greece is certainly putting a damper on global economic conditions. We are seeing declines in other parts of Asia outside of China as well, Korea is a pretty big market for us and they are taking a hit in Q1. We also did see an uptick in our North American distributor inventories in Q4 but we believe we will probably work its way through our system, or through their systems in Q1, another global economic driver we believe is Russia. We don’t have a lot of sales in Russia but that was a growing market for us and we’ve definitely seen the effects of that which also affects several other things within the European market.

And I recognize that you are not providing full year guidance, you are only looking a quarter out. But it does bag the question, given the fact that your organics, or X and X comparisons remain pretty difficult for the remainder of the year. So based on the way you are guiding 1Q, should we expect organic growth to be base case scenario similar to 1Q going forward, or is there something that can potentially lead to acceleration as the year progresses, just based on the way you are thinking about new product introduction or anything else?

I will take a shot at that, Mick. You are right. I don’t think you can a whole year on first quarter projections and I am not prepared to make an attempt as to what the whole year is going to look like. However I think there are some factors going forward that will be different than what we are seeing today, and when I say different, I am referring to things like oil. I don’t expect the price of oil to stay now at $50 a barrel, that’s going to change. I expect the situation with Russia and while Tricia said we don’t do a lot in Russia but many of our customers do. If you take a look at our product sales out of Germany, a high percentage of their customers who ship and export into Russia, when we talk about oil, it’s not just the price of oil, it’s the price of energy. And so low oil also impacts other things, like the wind-mills, like sour, there is an impact beyond just the price of oil as it relates to business conditions. China, has a very low GDP growth currently and I only expect that to stay low. I expect that development is going to sort of crank up investments or loosen up money policies that will drive growth. Even though we are seeing growth in China, it’s growth in China with a significant amount of headwinds. So I think there are some positive things on the horizon, I can’t just tell you the timing of those things, another one it just came to mind is mining. Mining has been down for two or three years now, as global demand for commodity products has softened, I don’t think that’s going to continue. I think that the drop in mining means actually we’re going to start seeing going forward, an increase in mining, ag is now as well. So the global markets like hydraulics is not going to stay at the current levels, I believe it’s going to crank up as global economy cranks up. When is the timing on that, it’s beyond what I can consider using first quarter of ’15.

Sure, I mean, a lot of what you talked about are more or less macro related items, which who knows how they’re going to play out. I guess I am wondering if there’s something company specific that you are seeing or you are hearing from customers that could lead us to think that on a standalone basis, Sun Hydraulics can see a divergence versus the broader market trend and some acceleration?

We have some new products coming out of the gate, which will have an impact in 2015 and beyond, that’s going to have a positive impact. But what we are seeing is pretty consistent with what the industry is seeing, you know that, as well as I do when you take a look at others in our industry, they are seeing significant declines in their hydraulic segment.

No question. Then if we can go back to one of Tricia’s comments, on inventories at distributors, any more color there. I found that to be an interesting comment. What do you think that there has been this inventory build-up and what are basically the implications in terms of how this inventory build-up works itself through?

It’s not a significant inventory build, it’s not like inventory is up 30% or anything at distributors. We do track distributor inventory quarterly and we did note that there was an increase, it could potentially be related to the December 1 price increase that we announced but we don’t know that for sure, that seems like it would make some logical sense that they may have built a little bit ahead of that price increase.

I guess the last one from me before I rejoin the queue would be on product development and releases for this year. The way I interpreted your comments is that we’re going to continue to see maybe some incremental expenses. You mentioned the first half in particular. Can you give us a flavor for how you are thinking in terms of full year impact, say for instance on SG&A. Should we see that line item flat or is that going to be up for the full year? Any color would be helpful.

We expect SG&A to be relatively flat. And the comments that I made was more related to marketing efforts than product development costs specifically. If you look at where we started seeing some incremental costs are marketing efforts in Asia, last year on a comparative basis, there were not a lot of those costs in Q1 but we do have some costs in Q1 related to that, that were not present in the prior year. But as we move through the quarter, the comparisons get easier for that. We do not expect to have a significant expense in Q1 related to product development. That is an ongoing effort and we do expect to have those continuing ongoing costs that we generally do but there is nothing extraordinary related to that in Q1.

Let me just add a little bit to that, Tricia. The investments that we’ve made in our product development, in technology innovations, that sort of thing, those investments were made in ’14 primarily from a product development perspective. Those products will start rolling into the marketplace, probably in the next 30 to 60 days, we will see some of the first new products being launched. And so there will be some incremental costs in the marketing of those products. However the product development portion itself will probably be declining as we ramp up the marketing efforts.

We will go next to Jon Braatz of Kansas City Capital.

Questions were just answered but Allen, can you give me a sense as to how much your – from your US production, how much is exported and is that at risk at all given the strength of the dollar?

Thanks, Jon. The answer to your question is about 60% of what we manufacture in the US gets exported. We feel the export markets are primarily northern part of Europe and Asia which would be Korea and China predominantly. Will there be an impact? I believe there will be a sight impact. I don’t believe it will be significant. It will make it a little more difficult for us to compete a new business but the base business we’ve got – customers are not going to change from brand after brand wise, foreign exchange rates. Most of our customers take a relatively long term view on exchange rates anyway. So while I think there will be some slight impact, I believe it’s going to be significant.

From an accounting perspective, there are some of those sales – export sales that are sold in US dollars directly from the US. So that portion of it maybe can be impact more but like Al said the long term is releases importantly.

Are you competing any – against general European competitors for that European market?

Both North American and Europeans.

And secondly, back to the distributor question, given your reduced sales outlook, do you think that may be by the end of the first quarter, would you anticipate that the distributor levels might be back to more “normal” levels? Or is that too early, you really can’t see that far right now?

It’s probably too early to tell. We will have them report in at the end of Q1 but like I said it’s a small increase relative to the total sales amount anyway.

We’ll go next to Brian Rafn with Morgan Dempsey Capital Management.

Let me ask from the standpoint of the three plants in Florida, what are you guys running – relative to the -- what overtime relative to ways you exited 2014?

You have cut out the first part of the question, I didn’t – a few words were missing. Could you repeat the question please?

Yes, I am looking to see what the number of shifts that you guys are running in the plants and what overtime?

Number of shifts is kind of all over the map, we have a workforce that is sort of self-directed and – but I would sort of try to normalize, probably our normal first shift production, is the same as the normal first shift production, it’s probably 50% of our output, the other 50% would come from the second and third shifts, or weekend shifts, we’ve also got some weekend shifts going on. So that is part of troughs of running of the business, is not capacity utilization, we look at third year constraints and we will flex our production based upon where those strengths are and what the opportunities are to address also with shifts. In terms of overtime, all I can say is we’re morally normalized, but I don’t have a number. Dennis, Tricia, could you put a number on that?

We’re seeing some reductions in overtime now, coming into the beginning of the January we had pretty big backlog and worked through some of that with over time but we are really seeing like alpha normal levels of overtime, in the two series of constraints that there is one area that sort of holdings yup, we will worked over time in that area to bring them up to the speeds. And to go back to the shifts, as you – we were 100, a lot of different shifts and the majority of our people are on the first shift and that may be for 10 hour days, that maybe 5 to 8 hour days but we do augment that with the weekend shifts and strong third and fourth quarters as well?

Tricia, you talked a little bit about expedite orders, they have been at some cases 10%, 15%, 20%, what’s been to placed?

Expedited orders have been over the last four years and steady about pace 123& 1 and obviously with certain sensitive or 10% or even more. After average mortgages to ‘15 and a lot of we believe is the fact. The people know they get

The question has been – you have verily high branded in equipment and try to what you guys, is just way so educat questions. So we do know a few questions for sure. When know that the merger market is a significant diver for our end utilization. When I saying energy, it’s inclusive of windmills and it’s offset up 100%, and inclusive hundreds maybe is an utilized 0.4 million, cons live ear, energy. Then as you did a steady a year ago, or weaker toddlers, that’s third that asset for us and the mining markets stood hit, probably two or three years ago, when we were able to grow through without impacting, we saw growth over the last two or three years but a significant margin for us in mining and mining has been – nothing is going on in that market. My guess is that mining is somewhere around 5% to 10% of our growth. Perhaps even more significant to our bottom line than the top line because the products that are used in mining are big heavy duties, high performance kinds of products.

Can you talk – are there any kind of – without talking about sides, are there any end market segments that are demanding a higher content of your hydraulic cartridges and are there any segments that you see again demanding, hydraulics that would power, as an end market versus say, four, five, 10 years goal.

Hydraulic franking for example didn’t exist 20 years ago. It exists today. Mind-mills sour parts of the energy markets, didn’t exist, to the degree they exist today. So those will be the areas that I think will impact just a moment.

Anything on raw material inflation, raw material feedstock, fishing trends, where do you guys – 2015?

We are not seeing significant changes in our purchase and we do purchase on the country side, a large portion of our parts, from outside the suppliers, something like 97% but we are not seeing significant price changes in those.

You talked a lot, and certainly your new products, you talked about electrically actuated cartridge valves, digital actuated. Some of the new technologies that you guys are using, what percentage of your cartridge valves which would, would be from these new kind of niche designs.

I would just say a lot of actuated products which are products 10 years ago and did not exist. From I am doing this from money now. What we are believe to be getting 25% to 30% of our products from electrically associated high products and the decade was zero.

Same, now on packaging you guys like packages where you are not just man of follow but we would at the other, and then with the electronics in sales and what wound been as interne agree,

Today’s that is reading about 30% of our million, 30%, 45% our entered integrated packages back a decide again, it’s really probably be 50 basis to 2l of a much smaller number and in a good I will mixed and we were at – probably $100 million Anywhere at 210 million, we more table in that frame time and it was probably loan 10% to 15% in a 107 million a decade ago. Today it’s about 30% of 220 million.

You guys, it hurt me if I am wrong. In the past you guys out-source some of your manifold manufacturing, it’s actually going with the 3D plants capacity, you bright in that inside.

Things could still outsource and our strategy is to outsource the high volume simple long term product.

And we’ll take a follow-up question from Mick Dupre with Robert W. Baird.

Just looking to clarify something. Did I hear that gross margins in the first quarter are expected to be similar to the fourth or was it a full year ‘14?

Similar to the full year at 41%.

And last question would be, maybe some clarification on the statement in your press release, what exactly you mean we remain ready to respond to business conditions in 2015?

That can mean a lot of things. It can mean that we are ready to take on if demand ramps up quickly. We are ready to respond to different markets and we are ready to respond if we keep the business levels that what we are seeing for Q1. We have a very flexible workforce and we can pretty much be ready for anything. We are obviously hoping that’s on the upside but it’s hard to tell as we can only give one quarter. End of Q&A

And with no further questions in queue, I will turn the conference back to Dennis Tichio for any additional or closing comments.

We want to thank you for joining us on today’s call. We look forward to speaking with you again at our first quarter release in early May. Thank you.

And ladies and gentlemen that does conclude today’s conference. We thank you for your participation.