Sun Hydraulics Corporation Q2 2010 Earnings Call Transcript

Sun Hydraulics Corporation Q2 2010 Earnings Call Transcript
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Sun Hydraulics Corporation (SNHY)

Q2 2010 Earnings Call Transcript

August 10, 2010 9:00 am ET

Executives

Dennis Tichio – IR

Allen Carlson – President and CEO

Tricia Fulton – CFO

Analysts

Chris Weltzer – Robert W. Baird

Jon Braatz – Kansas City Capital

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Sun Hydraulics second quarter 2010 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions on how to participate will be given at that time. As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Dennis Tichio. Sir, please go ahead.

Dennis Tichio

Good morning. Thank you for joining us for Sun Hydraulics 2010 second-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.

Allen Carlson

Thank you Dennis and good morning to all of you. We met both our second quarter revenue and earnings estimates and continued to see strength in the economy. Sun has been able to easily meet increased demand without systematically adding people. We have ample capacity to deliver expanded output.

One of the highlights of last quarter was the beginning of shipments to some new customers. We added a number of new customers that we began working with during last year’s recession. While each case is different, there are at least five things that have helped us secure this business. These include new products, timely and reliable delivery, smaller packaged solution with increased functionality, our differentiated product performance, and our global footprint.

There is nothing new about this model. It is the model that Sun has used for 40 years and is what allows us to consistently grow faster than our industry over the long term. We continue to release new electrically actuated cartridge valves that help to expand our addressable markets. The ability to communicate digitally with system controllers is a necessary capability.

As I have said before, many of these new products mimic expensive legacy industrial products, but do so at more affordable prices and with all the benefits that cartridge valves offer. Reliable delivery is increasingly important to OEMs all over the world. Production, supply chain, timing assumes more and more of a just-in-time orientation. Large stockpiles of inventory at any stage of the supply chain are now the exception rather than the rule.

Sun has been scheduling orders to customer requests for 10 years, and we have built our business to operate efficiently in this type of environment. Because of the inherent design advantages of our cartridge valves, we routinely develop integrated package solutions that are smaller and more efficient than equivalent competitive offerings. Smaller footprints provide machine designers greater flexibility in where to place hydraulic control solutions.

Enhanced operating performance translates to energy savings and efficiency. A lot of what I’m describing here is fundamental. It is like blocking and tackling in football. I believe a company needs to be sound in the fundamentals to be sustainably successful for the long term. If an organization does all the little things right, satisfied customers, market share and financial performance are the long-term result.

I mentioned in the opening that we continue to see strength in the economy. Our third-quarter forecast reflects what we believe to be our historic seasonal order pattern. Sales [ph] are expected to be down a bit sequentially, but are projected to be up 59% compared to this time last year. Estimated Q3 earnings demonstrate the operating leverage we are able to achieve on these higher revenues.

I will now turn the call over to Tricia for some more of the details.

Tricia Fulton

Thanks Al. As Al mentioned, we came in where we expected for the quarter. Sales were helped by a number of new customers in Asia, North America and Europe. You heard some of the reasons for gaining this new business. They are the same reasons Sun has consistently gained market share during cyclical upturns.

July’s PMI, which was released last week, came out at 55.5. There has been a steady softening of the PMI numbers since its high in December last year, but it continues to indicate economic expansion. Remembering that Sun lags the PMI by about six months, we expect business will continue to be strong in the near term.

All geographic segments saw an up tick in demand in the second quarter. On a year-to-date basis compared to the first two quarters of last year revenue was up 48% in North America, 101% in Asia, and 28% in Europe. Despite some fluctuations in currency early in the quarter, on a consolidated basis there was little effect compared to Q2 last year. Translation gains related to the Korean Won were offset by losses related to the Pound and Euro.

We have a lot of flexibility to adapt our environment to current conditions. We’re using light overtime to meet the increased demand, but don’t expect to have to increase our headcount anytime in the near future. As demonstrated by some of the things we did last year, Sun is structured to be agile to respond to any demand levels. While we have some define fixed costs, once we reach the inflection point, we get great operating leverage and our margins expand quickly.

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