Sun Hydraulics (SNHY) Q2 2016 Earnings Call

Sun Hydraulics (SNHY) CEO Wolfgang Dangel said sales in North America were the laggard during the quarter

“Second quarter demand was slightly better than anticipated, gross profitability remained in line with company estimates. Regionally, Europe and Asia were each down only marginally. The Americas experienced the greater part of the decline year-over-year primarily attributable to the continued impact lower oil prices and lack of investment in the mining sector.  If you have been following the economy and if you see how Sun is aligned in terms of their end-market, some of the other sectors that we operating in have been soft for quite number of quarters already, agriculture, forestry, material handling, softening even the contraction sector has shown some recent signs of weakness. So if you look at the portfolio and the way we aligned up to these end-market, is actually not a very big surprise.”

Yet Asia remained the bright spot

“Looking forward, Brexit and the geopolitical climate impair our visibility of the future. We are encouraged however, by increased demand in selected markets throughout Asia Pacific with considerable sales to China, Australia, India and Japan. We feel the success in these markets is directly attributable to our increased marketing efforts in these regions.”

They are investing in the future despot the challenging global macroeconomic landscape

“Despite today’s uncertainty, we continue to make investments that will strengthen Sun’s market position now and looking forward. We are accelerating the manufacturing efforts, expanding our electronic and digital capabilities, acquiring talent to complement our current competencies and acting on opportunities where we can grow in both new and existing geographic regions.”

Sun Hydraulics 1Q16 Earnings Call Notes

Sun Hydraulics’ (SNHY) CEO Wolfgang Dangel on Q1 2016 Results

Environment continues to be uncertain

“From our perspective the environment continues to be uncertain with economic indicators signifying little trend movement either positive or negative we recognize that we cannot control microeconomic issues. Keeping this in mind we know there are many elements of our business we can control like product development, increasing productivity, maintaining delivery liability and developing new markets and customers.”

China ag and material handling have been very soft as well

“I think in China we have to be careful. So besides construction machinery and mining the two major target end markets for us are material handling and agricultural and both of those segments have been very soft during the first quarter still.”

“Tricia Fulton
Not following normal seasonal pattern, part may be due to weak Korean construction market
You know you’re absolutely right, Mig, we’re not following a normal seasonal pattern and when we looked at this last year which was one of the years that you brought up that we also did not see a normal seasonal pattern we were a bit confused by that as well. This year I believe that a lot of this is driven by what we’re seeing in the Korean Construction market that has been hit very hard and it’s dropping our Asian numbers and we’re also seeing a bit of the slowdown in parts of Europe certainly not all of it but parts of Europe are slow for us.

Korean business tends to be sold into China

“I believe that we had a lot of our Korean business for that type of equipment that was being sold into China. And we’re now seeing a decrease there because I believe some of the equipment is being made in China. Our business tends to be with smaller and medium sized OEMs in China so it’s possible that we’re not seeing the effects of the macro yet”

Some economic indicators are pointing to a stronger second half, but we have limited visibility

“ we have some economic indicators that are pointing toward a stronger second half this year or at least the latter part of the second half maybe stronger and certainly into ’17 show some promise as well. But I don’t think that we’re diverging from our normal pattern here, I really believe that it’s macroeconomic driven and we have a lot end markets that are being challenged, continue to be challenged and we also have geographical regions that are being challenged and it kind of depends on where those play out as we go through the year and at some point maybe they’ll better align but right now it’s kind of a mixed bag what we’re seeing and it’s a bit confusing as well going into the rest of the year especially with the lack of visibility that we have because of our short book to ship cycle.”

Sun Hydraulics 4Q15 Earnings Call Notes

Tricia Fulton

Saw more normal seasonality from Q4 to Q1 this year

“Our normal seasonality Q4 to Q1 shows increased order rates and results from Q4 into Q1. We are seeing that normal seasonality this year. If you look back to 2014 Q4 with 2015 Q1, we did not see that normal seasonality. In fact, we also did not see it going into Q2 of last year, but we do see that now, and we think that that is one of the signs explaining to why we believe that we will see some improvement at some point in 2016.”

Distributors said they may see some modest growth in ’16

“When we pooled our distributors most recently, we had several of them that felt like they would potentially see some modest growth in ’16, some — about the same number, felt like they would see flat growth. So I think we maybe on the distributor’s side have bottomed out. It’s difficult to tell what the OEMs, because we don’t always have insight into what their inventory levels are, and we aren’t as close to them because we’re working through distributions.”

Allen Carlson

Distributors appear to have taken inventory down as far as it will go

“Let me just add a little bit to Tricia’s comments. We also follow our distributor inventory, and we saw that inventory started going South in late ’14, continuing into ’15. And it appears that that distributor inventory, they’ve taken it down to as far as they can take it down, so when they get an order from a customer, they now have to place orders on us.”

Consumer spending will eventually incite capital spending

“I think another thing that’s going to happen, I can’t predict when, and that is consumer spending will eventually turn into capital spending in projects. That hasn’t happen yet, but I think the way out of this slowdown — I won’t call it a recession, but the slowdown will be based upon consumer spending driving things into the capital markets.”

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.”