Helios Technologies Inc (HLIO) 2007 Q4 法說會逐字稿

Greetings, and welcome to the Sun Hydraulics fourth quarter and year end 2007 earnings conference 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're going to run this call from an investor open house we're holding here today. So when we get to the question-and-answer period, we're going to take questions from the 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 in 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're going to go through 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 into the first quarter of 2008, and we're expecting another quarter of double-digit growth in both sales and income. Strong international demand lead 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 U.S. market in 2007. While the domestic demand was moderate, we believe we continue to grow 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 U.S. economic news being reported daily, we welcome the increasing order rate. Last year at the handover fair in Germany we introduced new electronically actuated products featuring White Oak electronics. These products which are unique in the marketplace will be introduced into 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 us more detail on the year and the quarter. Tricia?

Thanks, Al. I'd first like to comment briefly on the fourth quarter results. Net sales were up 18%, just over $41 million. Net income rose 34% to $5.1 million. Basic and diluted earnings per share increased to $0.31 versus $0.23. For the year, sales increased 18% to $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 continued to account for a greater percentage of our sales growth. Growth profit increased 25% to $55 million. Gross profit as a percentage of sales continued to be strong at 33%. The largest contributor to the margin increase is productivity gains 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 U.S. 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 tasks 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 U.S. tax return, which resulted in a provision to return true-up. Our 2008 effectively 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. Days sales outstanding were 38 and inventory turns were 10. We continued 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 U.S. Our estimate for 2008 is $13 million.

We have mentioned in the past that return on capital employed is a good comparative measure for industrial companies. Last year Sun's return on capital employed was 30%, and has averaged 20% over the last five years. A quarterly tax dividend of $0.09 a share was declared in the first quarter, and is payable on April 15 to shareholders of record on March 31. First 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 last year. Thank you. We'll now turn the call over for questions. Rich?

Okay, Rob, let's -- if there's 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. Allen, I'm sorry I didn't have a chance to meet with you when I was down there a couple weeks ago but maybe next year.

They hide me.

They hide you, right. I guess my first question is this. There's a steady drum beat of bad economic news out there, yet your first quarter, your indication for the first quarter is pretty strong and you said businesses seem to get stronger. I'm sure you're scratching your head. Any sense, any reason why you think things have continued to -- actually, have gotten a little bit stronger for you here?

Well, I think you've got to probably look at it in a couple of different lights. One is if we take a look at our international business, 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 a very much an international company today. In fact, 55% of our business now is outside the U.S. That's groundwork and seeds that were planted in the late '80s and early '90s paying a dividend for us today. Because there was a lot of work to get to the position we're at in our international business. So that doesn't surprise me at all.

The U.S. market, I think when you think about it more in a micro standpoint than a macro standpoint, you probably aren't surprised either. There's a lot of bad press, absolutely, but it's in sectors that we don't participate in strongly. For example, there's not too many banks that use hydraulic cartridge valves, so the banking industry is 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 end up on construction sites for residential construction, but it's a small piece of our business. A third element that's really been hammered in the U.S. is U.S. 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, and building bridges and skyscrapers, that kind of construction. So, the business segments that we're in are still quite strong. And our customers in the U.S. are also exporting and taking advantage of a strong export market so some of the equipment that's not even being used in the U.S., the equipment is actually being exported. Hopefully that answers your question.

Okay. And then one last question. The introduction of the electronically actuated valves, how big of 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, you know, I kind of think of the market we're in as one-third, one-third, one-third. One-third being cartridge valves alone, pressure regulating kind of cartridge valves, traditional Sun's market. There's another third which is the electronically actuated market. And then there's the third, a market that is a combination of manifolds and cartridges. The cartridges would come from those sectors. 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 given a half to two-thirds of that sector. So it opens up huge markets and opportunities, not only for the cartridges themselves, but for packages and systems that we couldn't get into before.

Okay. All right. Thank you very much.

Thank you.

Thanks, Jon. Maybe a follow-up question. Before we go to the audience here. 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 Jon asked. And George asks: Does it help -- has the lower dollar -- how is it mechanically impacting Sun? Does it help because of the competitive nature of the lower sales price for products shipped from the U.S.? Is it simply helping the financials on the exchange rate? Does it help your U.S. customers maybe seeing increase sales due to the lower dollar and better competitive pricing? I think that's a natural follow-on to Jon's question.

I'm giving to it Tricia.

And the answer to all three of the questions that came from George are yes, yes, and yes. It helped Sun and it helped our distributors. We have several European distributors that over the last few years we have moved to be direct-shipped from the U.S. So they are now buying from the U.S. in U.S. dollars. So their cost of goods sold are much lower as their local currencies strengthen against the U.S. dollar. The same goes for our intercompany -- companies in U.K., Germany and Korea. They're buying from us in U.S. dollars as well, so their cost of sales goes down and that part benefits Sun. As I said in the script portion, that 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 a million dollars.

Thanks, Tricia. Anybody in this room have a question? Yes, sir?

Do I need the mike over here.

I don't think you need the mike. I'll repeat your question, if you state your name, though.

Robert Silver, private investor. I have two questions, one pertains to how does Sun view market opportunity in the ship-building and marine transit industries? That's part one. Part two, if you can make a comment on your book-to-bill ratio, and approximate turnaround time from the time you receive the order or contract until it's in the customer's hands.

Okay.

That does it.

Thank you. The question, one has to do with the opportunities in the ship-building and/or 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. Allen, would you like to take that?

Yes, thank you. They're interesting questions and I'll start by addressing the ship-building one. That is a significant market for Sun. I'm not sure it actually made the list of markets, but I know that it's significant because they use things like cranes. And if there's -- we could probably classify the market as a crane, but there's a huge amount of cranes that are used on ships. There's a lot of conveyor drives. There's 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 is a company called MacGregor, it 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. There's a lot of hydraulics and we already participate in that market with our load-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 it's measurable.

The second question is the bill-to-ship situation 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's up to our manufacturing people to figure out how to deal with that. They do a really good job of managing inventory, managing resources, managing equipment, to schedule customer requests. We try and operate like UPS does. There's a different price if you want it tomorrow than if you want it in four weeks. So, it's up to the customer to choose how they would like to schedule to get the best price at the best service. 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 30 days. Next week we have great visibility. But beyond about 30 days, there's little or no visibility. And that's great because we're not planning to run our business on a pipeline that may be partially empty, and we don't know it. Our pipeline, when we see it, it's real. It's not a vapor pipeline. Tricia, anything else you want to add to that?

No, I think that's it.

Tell you what, Rob, how about another question from the dial-in group.

Sure. Our next question is from [Joe Mondelo] from Sidoti and 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.

My first question, I believe I addressed this the first time I was down there, I was maybe hoping to get some insight from Allen. Could you give us some insight on your product mix, on how it's broken -- 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, I'll take that question. Approximately two-thirds of our business, maybe a little more, would be in what we would call discrete components or cartridges. About a third or maybe a little less than a third would be in packages. Which include cartridges and 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're finding also that that extends beyond just the engine now, they would like a control system for the engine. We're 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 end of the engine. So customers are asking for us around the world 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's definitely -- has been a trend for 10 years. That will continue.

Okay. Thanks. Also, in terms of the fourth quarter or the first quarter guidance that you gave, obviously you think you're going to do pretty well. Do you see that just as a carryover 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 earlier, 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 it's going to carry into the year. But we typically do see Q1 revenue in excess of our Q4 revenue because just 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.

Okay. And last question, can you just give me -- how did -- what do you think Western Europe faired in 2007 and what do you expect in that region in 2008?

Western Europe actually faired very well in 2007. We saw a substantial increases over 2006 in Germany, U.K., Scandinavia, and Italy primarily. Where 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's 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 a seed like Allen spoke earlier there because those markets are kind of emerging, they're not really established.

Thank you.

Thanks, Joe. Hop back in here. Somebody have a question here? Chris?

Can you talk a little bit about input costs given the recently rising prices of steel, maybe help us [inaudible] your closure is both deal and [inaudible] components and talk about how you bring forward those prices out and how long [inaudible].

So the question is about input costs and how they're affecting us. What we see going forward and things we might do to combat any potential [loss].

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

How far out do you [inaudible] those purchases.

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 if we're having a problem with them, so --

And then you got part of [cash] can you maybe prioritize the uses of that cash in '08 and going forward, whether there are acquisitions scheduled, et cetera?

The question has to do with a large amount of cash. Chris is in the back of the room so nobody could probably hear him on the phone. We have a fair amount of cash on the balance sheet, and we have a kind of priority laundry list of what we want to do with that going forward.

Yes, we have about $19 million sitting on the balance sheet in cash right now, about $8 million of that is in the U.S. The remainder of it is in Europe and Asia. And we do not regularly bring back the money to repatriate it back to the United States unless there's 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 the dividends of the company, all the CapEx that happens, majority of it is in the U.S. We currently do not have a stock buyback plan in place. That obviously could be started up if we felt that the stock price was at a point that the board wanted to repurchase some of it. We have the regular dividends that have been issued. If there was an acquisition, we have the cash that's available in the U.S. as well as $35 million line of credit available.

One more. In the Korean segment in year-over-year margin [compression] in '07, can you talk about what was driving that and what your outlook is, whether that's going [forward] in '08?

The question is about margin compression in Korea over the past year, and do we expect -- 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 good growth opportunities in that region for continued growth in Korea and to start up that office, we've hired some additional sales people and 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 profits there. And obviously we'd like to see them a little higher back to the levels they were maybe in 2006 versus what we were experiencing in 2007.

So, it proves that it is [inaudible]?

Yes. 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. How's sunny Florida?

Sunny.

Good, we've got a barge load of snow coming from Wisconsin, so it's on its way.

It will be clean snow.

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

We're currently running [2 to 10-hour] shift daily. We are working overtime at this point, most people are working about 50 hours total for the week. We still have our weekend shift running in bottleneck areas where we can get some extra production out of working 12-hour shifts on the weekend.

Okay. What are you seeing run rate as you go into the new year on salary and wage growth as far as -- 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're approximately 5% going into 2008.

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

It's up, single digits.

Okay. Can you measure, and I obviously have some significantly robust strength, do you guys get a sense from web hits or bid quotes, what's been kind of the trend in bid quote rate?

We don't really measure that per se. We've got it in some pieces of our business like the manifold business where we have an inquiry 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 bid quote activity. Our distributors do.

Okay. Yes, 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 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. It's a stand alone business today. White Oak is another -- is a different situation because we do embed that into our products. The number, the percent number is in terms of dollars sold is a relatively small number. The percentage that's actually going out into some units, as let's say prototype or [compound] of production units, it's a large percentage of our new inquiries.

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 have had such robust growth. Any plans, property, plant, equipment, for building expansion?

I was almost disappoint that you didn't ask that question.

I know that.

I've been waiting for that, Brian.

That's right.

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

Right. Right.

And the answer's 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're related to a piece of equipment. You know, last year we spent $12.8 million in capital to eliminate constraints. We've also outsourced more product to local suppliers. When I say outsourcing, I don't mean outshoring, our suppliers here are relatively closely connected. And so we get more capacity by outsourcing 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 invested our business.

Right. Have you done much with cellular manufacturing layout changes on the floor and changing [assembly] lines, that type of thing.

Yes. In fact, 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 mind because we turned the switch on a week ago. There's a lot of that. Plus the equipment that we bring in. When we bring in a new CNC machining center, we actually take out one and a half old machining centers and get one and a half more output out of less footprint

Okay. Great, great. I got you. 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's almost all new machinery. A lot of automation. Not a lot of replacement. But some probably 20% to 25% maybe is replacement.

So, 25% would be the maintenance 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 for incoming orders might be 30 days. I feel pretty confident that 60, 90 days out we pretty much know what pieces of equipment we're bringing in. But if you ask me what piece of equipment are we going to bring in in June and July, not a clue. Don't even care, we'll address that in May.

Sure.

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's replacing in footprint-wise.

Right, 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 -- you mentioned a little bit about east of the eastern block, [inaudible] in [Central] Europe. Are you seeing -- is it volume increases, is there a difference in the complexity of the orders or individual order sizes? Where that business is coming from.

Most of our business in the Eastern Europe is, I'll call it, prospected business. We're planting seed. In fact, we got our first significant order from Russia. We've been shipping product into Russia for probably three or four years, but one of this, two of that, six of this. But there's a market opportunity for us in Russia and we received our first significant order there. But for the most part yet today, Eastern Europe is prospecting. It will eventually pay off.

Okay. And you guys are still, from the standpoint of moving to distributors, you're still somewhat reluctant to identify how you see strength in your specific end markets, probably a little confused?

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

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

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 to repeat the question, I'm sure they've heard it because it was close to the phone but the 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 U.S. are from U.S. distributors and they get a very nice discount for payment within 16 days. So, we have very little collection issues at all with U.S. distribution. We're starting to sell more now out of the U.S. to foreign markets, those same discounts are not extended on the foreign shipments. And those are generally about 30 days. So, we're seeing a little bit of a slip in the DSO just because the international business is -- tends 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, specific, outside of manufacturing. On the inventory side, you'll see our inventory turns are very good. Inventory turns in the U.S. were the majority of the manufacturing is done, are running around 15 times a year. They're a little bit slower in the foreign operations primarily because there are stocking distributors there turning it as quickly as we're doing with manufacturing but our inventory turns at 10 times a year overall for the corporation are very good.

One another question from the audience here, Christine.

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

The question has to do with the electrically actuated products we introduced in Europe, which were received favorably, are we getting the same or expecting the same favorable thing here? Then is there any cannibalization that might be going on with that product introduction? Good question. Go ahead, Al.

Which part of that multiple question do I start with?

[Either] that or capacity.

Thank you, Christine. The product that was launched a year ago, actually it's a little less than than a year ago because the Hanover fair was in April of '07 resulted in a number of opportunities for prototypes new production. In our business, the cycle from customers' 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 sold, you measure it in terms of numbers of prototypes, numbers of calls, numbers of engineering projects that stem out of that. And so in Europe, we received a significant number of opportunities that we hadn't even thought of. We sort of thought there was a market in this area or this area when we launched the product. Turns out that most of our opportunities have been in a market that we hadn't even anticipated it being. So now it's 10 months later and we're going to launch it in Las Vegas next week at a very large show, it's called CONEXPO IFPI. CONEXPO means construction equipment and IFPI is International Fluid Power [inaudible]. People from all around the world, Europe, Asia, U.S., I think it's 125,000 people a day attend the show.

2.2 million square foot show. It's huge.

And one of the hall is a hydraulic hall and we're in with the hydraulics people, and there will be a lot of hydraulics people floating around, but also people that spec. equipment, heavy equipment at the show, their engineers will be there. We expect that people will have heard about the product. We had a web -- what we call a WEBINAR about month ago where people could see the product and hear about it over the Internet from around the world. I believe there will be a lot of people that heard it and seen it and will want to come and touch and feel it and talk to the guys that know about the product. That will drive, again, some more new opportunities. We did this by design. Because when you release a new product there's two concerns you have. One concern is nobody's interested in it, and the second concern is everybody's interested in it. So staggering the launch by a year has allowed us to gauge the interest and what we needed to do in production to be able to gear up and meet the demand. We're current on demand, there's no pass-due on that new product. And we're promoting it. There was some leakage in the U.S. because we didn't -- a customer inquired into the U.S. We didn't not take the inquiry. We just weren't promoting it. They found out about it, great, but we're not out beating the street trying to sell it in the U.S.

Is it primarily a new market?

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

I guess the second question would be, 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. There's no question about it. We're constantly honing that, we're working with our distribution people to make it stronger. There are some weaknesses in some areas so we point those out and 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 both outgrow 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's something from the dial-in audience.

Okay. Our next question is from Jon Braatz from Kansas City Capital.

Al, I just have one follow-up. Obviously Sun Hydraulics has a pristine balance sheet, lots of cash. Assuming the right acquisition would come around, how leveraged would you want to -- would you feel comfortable in taking the balance sheet?

I really haven't thought about it because it's not an issue. If the right opportunity came along, a leverage ratio of 30% debt to 70% equity, there's a lot of companies that are operating comfortably in that zone. That wouldn't bother me if I really felt it was a trip to Las Vegas and we're going to bet the farm on it, okay, 50/50 maybe. I've got a banker here in the audience whose saying it's even more than that.

Don't listen to him.

It has to be strategic, though, Jon.

Sure, absolutely.

And we like to pay as we go. At the end of the day, we're engineers.

Yes. Okay. All right, thank you.

A question here?

I was just curious, it may be naive, but is patent infringement any kind of a serious risk in the market you are now?

Not really.

The question is about a degree of patents and how much protection we have on them. Is there risk.

Sun has a few patents but we really don't view patents as the key to protection. The reason why, you can get around patents pretty easily if you put your mind to it. And a small company, your patents are really only as good as the staff of lawyers you're prepared to hire. So, our approach has always been let's satisfy the customer with a quality product and ontime 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 you said, we have a few, we don't view it as key or critical.

Anything? An announcement made that [inaudible] on a video that's for [inaudible] lots of playing what's [inaudible] used for. As I watched the video, I saw [inaudible]. How many applications of Sun in that video not just the [waterfall] stuff?

The question has to do, we showed a video here for those on the dial-in side, a video presentation, which included a video of a machine called a [inaudible], a submersible craft that harvests timber in the water. There's a bunch of Sun products on there, part of the video showed conventional things on backhoes and tug boats and a variety of things of the the question is, does Sun's product extend into those applications as well.

Probably on every one of those pieces of equipment, if it's not for the boom or the outriggers or the gramo, we are probably in some way on every one of those pieces of equipment.

Great point.

I'm Ron. I'm sure you're glad you're not in Cleveland today.

A little warmer here.

You highlighted the international growth and highlighted Europe and Asia-Pacific when you quickly went through the map in your earlier presentation, I didn't have a 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 forecasting particularly the strength of the Brazil this year.

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

That's a question I can answer from firsthand experience. Back when I first joined Sun in '96 I spent the first two years in my life here working in our marketing group and I made some visits to Brazil, Argentina, Chile. Rich was with me on some of those. We did some prospecting down there. And we didn't believe there was a 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, in Buenos Aires, we have a distributor in Chile, a distributor in Peru. So we have a presence there through distribution. It's growing. I was amazed how much we actually sold into South America last year because we planted some seeds and walked away from it. Haven't really spent a lot of time recently. But the business is growing and we're addressing it through distribution.

Someday Brazil might be a place to have a sales office because it's a pretty strong economy and a pretty strong market. A lot of our products end up into that region, not sold into that region but through, you know, for example ship-building, 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 the U.S. or someplace else. That market's a good market for us and we don't ignore it. There's opportunities there.

Here's another question -- we answered George's questions. Any other questions from the audience? John.

Yes, two questions. One, can you comment on your acquisition strategy? You certainly have capital to make acquisitions. Secondly, can you talk a little bit about product, new penetration such as energy and (indiscernible).

The question has to do with do we -- 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 the acquisition side, there's a filter that we use that provides us a pointer to whether we're interested or not in pursuing a particular acquisition. And some of the key drivers in the filter include is it strategic. There's opportunities to acquire companies that maybe have a strong balance sheet or a strong P&L, but they're not strategic, they're not taking us where we want to go. So that's probably the first question. The strategic fit of that company. Then the second question is if you pass that test, is there a cultural fit? Are they like us, or could they be like us or not? So cultural fit is the second criteria that we look at. Then the third, obviously, is are they available? Do they -- is an 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 an acquisition. 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? It's a growth strategy piece of the equation. The second part of your question had to do with -- I forget, what was the --

New products going into new markets.

I kind of answered it with the first answer. Yes, because of the strategy, is a growth strategy, obviously part of that growth strategy is the new market field. Both of the acquisitions -- actually, if you dial the clock back to '98 there have been three acquisitions. All of them were strategic and growth oriented.

The first one was Korea. We acquired a company in Korea because we believed it was a strategic fit in that part of the world and as we said earlier, our Korean company was $4 million when we acquired them -- $2.5 million in sales when 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 White Oak. That also is strategic, but it's not a geographic presence, it's a product presence. It's allowing us to embed some technology into our products. That was about three years ago.

And the most recent one was last fall, 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 customers and they cannot only provide them the electric control solution but they have access to technology on the hydraulic side.

I can add to that, Al, some of the products that we develop are what I would call enabling products. And some of these electro-hydraulic products for example, there are a company that did steering systems for a boat. And so our distributor, 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, maybe helped those designers to develop a new way to do things. They had an idea, they needed this, that and the other thing to be able to do it and our products oftentimes 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 power gen and wave energy. There's a video, you can go online and take a look at it, that's a power gen company in Scotland generating electricity out of waves. That piece of equipment has 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 and the environment that they have to live in. So, a whole new market that didn't exist five years ago. Power gen through waves. That is happening over time.

Rob, anybody else in the dial-in? We've got about five minutes left.

Yes, we have Brian Rafn with Morgan Dempsey.

Yes, just a follow-up. You guys talked about -- you said never say no, price to say yes. What type of percentage for my education, is there a difference between a, be it an order for cartridges, manifolds, turn key packages, if a guy wants it tomorrow versus, say, the normal three or four weeks?

About a 20% difference.

About a 20% difference.

Usually what happens, we get an order for 500 pieces of something, perhaps he needs 20 pieces tomorrow, and the other 480 pieces he needs in four weeks.

Okay.

So, he can get the 20 pieces and he's 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 --

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, it may not even be a Sun component, usually it's not a Sun component, he's 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 he can get it in one day.

Okay. Sounds good. Thanks guys, 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 [Krug]. Your product is getting more complex, apparently. Do you have any problems recruiting technical high-level people and manufacturing people as a result?

The question has to do with the products becoming more complex and how that affects our ability to recruit both technical engineering kind of people as well as manufacturing kind of people.

The answer to the question is no, we don't have any problems recruiting. However, it certainly something we recognize as important in our business, so we pay attention to it before we need people. This is a great area to attract engineers that maybe had a career with another company and they've got 25, 30 years experience and they'd like to come to Sarasota and work the last 10 or 15 years of their career. It's a great area to get experienced engineering people. On the other hand, fresh outside of college, we've got a number of summer interns who are constantly sort of filling the gap with young interns, University of Florida has some good people that we've 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've hired a lot of really good manufacturing people with automation skills and robotic skill and maintenance skills. Something you have to work at and don't take it lightly, but we really have not had a problem.

[inaudible ]

I don't know about that part. But, yes. The Sarasota school system is great. The Florida school system is quite good.

Pretty actively engaged in the local area in the schools. Additionally, on a -- on a university level, Sun's forever had a program that any accredited university that wants to utilize some hydraulics products in their teaching endeavor gets a thousand dollars worth of products list price free every year. And that's open to any university or two-year technical college in the country. So fluid power, hydraulics really isn't a taught discipline in North America, but there are technical schools and schools like Purdue and some of the Midwest engineering schools, some of the ag, A&M universities, they have hydraulic labs and they call us and they could go on our Website and pick a thousand dollars worth of products that they can play around with, with their students and we ship those free of charge. So we're active with the community, yes.

I'll put a plug in for the culture?

Yes, sir.

The culture is the draw?

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.

Engineers like to work here because it's kind of a big sandbox they can play around with products and be creative and work close with manufacturing and marketing community. So I agree with you, Bob, our culture here is a big plus for a lot of the engineering people.

And manufacturing as well.

That's correct.

So with that, it's 5:00, so we've been talking for about an hour. We're going to conclude today's conference call for those of you out there, we appreciate you listening. Again, the -- there's the presentation on the Website if you'd 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. Thank you.