Sun Hydraulics 3Q15 Earnings Call Notes

Difficult environment continuing into 2016

“The global business climate continues to be difficult. Demand in all regions is down and the strong dollar persists in creating headwinds for both sales and earnings. Our fourth quarter forecast notes additional softening in demand related to: weak or weakening end markets, macroeconomic conditions, and a strong U.S. dollar. Indicators signal today’s current demand levels will continue into 2016 with accelerating growth during the year.”

PMI was artificially high in the middle of the year because it missed inventory builds

“PMI through the middle part of 2015 into the third quarter, it was artificially high, because it didn’t reflect that a lot of what was going on in terms of production of new orders and hiring practices was going into inventory build in the channel, not only with the fluid power producers, but also with the end users. And so that inventory build given artificially strong signaled that to PMI. And that was supported by inventory numbers that available. Since then, we’ve seen a rundown versus like since August. We’ve seen the rundown of the inventory and as a result PMI has softened significantly since mid-year. In fact, it’s floating right around 50 right now. And the inventory component of that is the piece that first of all was not seen and it is now being readjusted for.”

Inventory balance has probably already happened

“I think it happens very quickly, in fact, I believe is probably already happened. And as the economy stabilizes and starts to grow that inventory will be built back up.”

If the economy strengthens at the beginning of next year, we probably wont get a mid year softening

“normally mid-year is when there is a softening. And if the economy does recover in the early part of 2016, the sequential softening going into the summer of 2016 probably won’t happen, but that something that we need to look at and watch very carefully going forward.”

The currency piece of the forecast is very speculative

“The currencies translation piece of it is very, very speculative in terms of what is the euro going to do or other currencies. We were sitting here a year-ago, I don’t think any of us would have foreseen, the euro weakening or the dollar strengthening to the level of we should have. So I have no confidence that we can predict was going to happen a year from now, relative to currency.”

Seeing excavator production decreasing in Korea primarily related to equipment that would go to China

“we’re seeing OEM business related to excavator production decreasing in Korea. We believe it’s primarily related to equipment that would be going into China, and what the China economy down the way it is, it’s affecting those Korean orders.”

Many large OEMs in Korea are closing plants

“Many of the large OEMs in Korea actually are closing their plants for extended period of times, two, three, four weeks as a result of business conditions in Korea and in China and in Asia in total.”

I see what China is projecting as GDP growth and it doesn’t make sense

“I go to China some years three, four, five times, and I look around and I look at what they’re projecting as the GDP and the growth. And I just would sort of say, I don’t see it, it doesn’t make sense.”

China’s PMIs are the best indicators

“What I would be looking at is I would be looking at the two PMIs. The government PMIs, HSBC PMIs and there is a slight difference between the two. Sometimes there is more than a slight difference, but right now it’s a bit of a slight difference. And I’d be – that’s what we look at as – and talking to our people in the market that kind of what we look at.”

Currency headwinds start to disappear in Q1

“They start to disappear actually in Q1 when we started to see the primary effect specially of the euro. So as we move into 2016, we’re going to see from a currency perspective much easier comparison.”

Digital logic valves are a revolutionary product

“This product has got the same characteristics, game-changing characteristics. It’s not evolutionary at all. It’s totally a revolutionary product. And that’s what we set out to achieve, when we started doing product development and research about three or four years ago.”