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

Good morning. Thank you for joining us for Sun Hydraulics' 2013 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.

Good morning. Our strong fourth quarter results provided a positive end to 2013. We're encouraged by the strength of orders throughout Q4 and into Q1. Our year-over-year growth in Q1 and macroeconomic indicators like PMI lead us to believe that 2014 will be a strong year for Sun. U.S. PMI demonstrated another strong reading yesterday remaining firmly in the expansion phase. Historically, Sun follows the PMI by about six months leading us to believe we should see continued robust business conditions in 2014. So far in 2014, demand is up across all geographic regions. Over the past couple of years, demand has not been in sync geographically. We believe this alignment is a significant indication of the strength of the worldwide capital goods market. Our performance in 2013 enables us to once again issue a shared distribution which consists of a contribution into employees' retirement plans and a dividend to shareholders. This is an addition to our normal quarterly dividend. We introduced the concept of the shared distribution five years ago to allow both employees and shareholders to share in Sun's success and growth. Beginning today, Sun is exhibiting at IFPE which is the largest trade show in North America for our industry. The show brings us together not only with other manufacturing companies in hydraulics but also OEMs who ultimately design and manufacture equipment on which are products are used. We're introducing several new products at IFPE that will be immediately available for sale to our customers. These products expand our addressable markets and enhance our integrated packaged capabilities. The result is creative solutions for our customers which ultimately helps us and them grow. The most notable of these new products is a line of solenoid valves, which provides outstanding value and performance that is aligned with customer requirements.…

Thanks, Al. As Al mentioned, we recently completed our third factory in Sarasota. This represents a $20 million investment which will foster the growth of our integrated packaged business and provide the capacity to meet future customer demand. The new building adds approximately $1 million to our annual fixed overhead costs. The planned investments in Asia and new products development that were mentioned are expected to total at least $1 million in 2014. We expect to incur these expenditures evenly throughout the year. While the cost of these efforts will be reflected in 2014, the benefits will influence Sun for many years to come. Let's look now at the numbers for the fourth quarter and the year. With fourth quarter, sales were up 13% driven by growth in all geographic markets. Earnings per share were up 23% compared to Q4 last year. For the year sales were 205 million, up slightly compared to last year. Sales were driven by international demand. Sales at Asia Pacific were up 7% and Europe up 2%. Sales to the Americas decreased 3%. In 2013 pricing accounted for approximately 2% of sales and foreign currency had a positive impact on sales of approximately $1 million for the year. Earnings increased to $1.45 per share from $1.44 a year ago. Gross profit as a percentage of sales remained strong at 40% for the year. SCA expenses were up 2% for the year. The change is related to increases in compensation, which are due to stock compensation and amounts related to Sing Wan [ph] that were not present in the prior year. The provision for income taxes for 2013 was 34%. We expect the rate for Q1 to be approximately 33%. Net cash from operations was 47 million, inventory turns were 9 and days sales outstanding were 28. Capital expenditures for 2014 are expected to be 10 million. This includes approximately 2 million from improvements to our high volume cartridge valve factories. The remaining expenditures consist of purchases of machinery and equipments. We are happy to once again share the success of Sun with our employees and shareholders in the form of a share distribution. Employees will receive a contribution into their retirement plans in the form of fund stock equal to 10% of wages. Shareholders will receive a share distribution dividend of $0.09 per share which will be paid on March 31 to shareholders of record on March 15. This brings our annual yield based on our 2013 average stock price to 1.4%. Additionally, first quarter dividend of $0.09 was declared and will be paid on April 15 to shareholders of record on March 31. Looking ahead to the first quarter, demand is signaling year-over-year growth in all markets. Q1 sales are estimated to be 55 million with earnings estimated to be $0.41 to $0.43 per share. I would now like to open the call for questions.

Thank you. (Operator Instructions). We'll take our first question from Mig Dobre with Robert W. Baird.

Good morning, Allen, Tricia. This is Joe Grabowski filling in for Mig this morning.

Hi, Joe.

Hello, Joe.

Hi. Congratulations on a really strong quarter and a strong year. I wanted to start off by asking about Q1 guidance and obviously we're about two-thirds of the way through the quarter, so I'm sure you have pretty good visibility into the quarter. With the revenue guidance you're calling for an 8% year-over-year increase compared to the 13% year-over-year increase in Q4. So, just wondering if there was maybe something unusual that made Q4 a little stronger or maybe some factors that are making Q1 a little softer or maybe just talk about that a little bit?

I don't think that Q1 is softer but I do think that we had a really strong Q4. If you look historically at the difference between our Q3 and Q4 numbers, especially over the last three years, you see a pretty significant difference between Q3 and Q4. But this year our Q3 and Q4 were very similar. So came out with a really strong fourth quarter and we're pleased with what we're seeing into Q1 for '14 as well.

Anything you attribute to that? I'm sorry, was just wondering if there was anything you contributed to strength in Q4 too?

No, nothing specific but again looking geographically we saw really good gains in Q4 in all geographic regions and this is really the first time in a while that we've seen geographic expansion across the board. So we kind of think it's landed itself to that explanation and everything sort of coming into sync now.

Okay, that makes sense. You mentioned the geographic breakdown for the year. Would you happen to have it for the quarter?

With regard to…?

Between Asia and Europe and the Americas for the quarter?

For fourth quarter?

Yes.

Yes, in the Americas we were up Q3 to Q4 up 7% -- I'm sorry, Q4 to Q4 we were up 7% in the Americas, 29% Asia Pacific and 16% Europe.

Okay.

As you can see it was a really strong growth across the board. Asia led that but strong in all of our major three geographic markets.

Sure. Okay, great. And then as far as….

I'd like to add one thing that I was almost afraid to throw it on the table but I will anyway, because I don't really have exact numbers to tell you. But I do know that the weather conditions in the first quarter – I've talked to a number of our customers and a number of our distributors and they've commented that it had a negative impact on orders. Additionally, the PMI drop that occurred in January is attributable by most economists related to the weather conditions in the U.S. So Q1 slightly down compared to Q4 and maybe what other people think. I think a piece of it and I don't know how big that piece is, is related to weather conditions.

Got it. Trust me, we live in Milwaukee. I'm not surprised to hear you say that. It's March 4 and it snowed last night, so the weather is not letting up. So that's not surprising. But then on the flipside, the EPS guidance for the quarter for Q1 I thought was really strong when I plug in the 33% tax rate that you mentioned on the call, I get like a 29.5% operating margin in Q1 compared to about 25% in Q4 and a really strong incremental margin for Q1. So, maybe talk a little bit about the EPS guidance for Q1 and maybe how price cost is trending or anything else that might be helping the EPS guidance for the quarter?

Sure. The first thing that I want to make sure that you have factored in there is our price increase that went through October 1.

Yes.

So, we do pick up margin pretty quickly from that, but we also, as we historically have done, we pick up margin very quickly on incremental sales increases. So we're looking at a $6 million or more top line increase that flows very nicely to the bottom line and we pick up a lot of income there that flows back through – your assumptions on the operating margin seems to be in line with what we're looking at as well, so I think they're on target there but we haven't seen at this point cost escalations but we do get some more top line revenue out of this.

Sure. That makes sense. And on the October 1 price increase, did it maybe not have a full impact on the fourth quarter? Is there a little bit of a lag between when the price increase goes through and maybe when you receive all the gross margin benefit?

Absolutely. Our distributors have the opportunity to place orders that don't include the price increase for a period of time. And so we don't get the full impact at any point in the first quarter that it takes effect. We do expect to see that in the first quarter.

Right, so sort of the full impact now flowing through in the first quarter?

Yes.

Okay. And you mentioned the distributors – Al mentioned the distributors mentioned the weather a little bit, but have they mentioned any end markets in particular that might have drove the 13% increase in the fourth quarter, any end markets are maybe accelerating a little more than others?

I don't think there's anything specific. Our businesses are like the tide comes in and the tide goes out and so I think the tide just rose in the fourth quarter.

Okay. And then just my last question, maybe an update on the third Sarasota plant, how production is being balanced between the three plants? How many shifts are you running, weekends, overtime? Any color you could give there?

The new plant began production in September and we phased out the Kansas operation from September-October timeframe. Right now, the Kansas facility is completely closed. All of the production for integrated packages both aluminum and ductile is out of the third factory in Sarasota. I would say that the third factory is probably about 50% utilized at this time. That will continue to grow. Our other factories, the 1500 University facility has had no impact because of this. The 701 Tallevast next door to the new factory is being refurbished for additional products and that factory is probably at about half utilization right now.

Okay. All right, great, guys. Thanks for taking my questions. Best of luck in 2014.

Thank you.

Thank you.

(Operator Instructions). We'll take our next question from Jon Braatz with Kansas City Capital.

Good morning, Allen and Tricia.

Good morning, Jon.

Hi, Jon.

A couple of questions. Tricia, you mentioned – can you go over those costs that you were talking about that will filter through 2014? I sort of didn't get the chance to hear the full costs?

Sure. Let me get the page to make sure I'm giving those to you correctly. The new building annual costs are anticipated to be about $1 million of overhead related to that. That will obviously be an ongoing cost. In 2014 we are also expecting another $1 million worth of additional costs related to investments in our Asia marketing and new product development.

Okay, all right. Is that incrementally or an entirely new $1 million?

For Asia and new product development or for the building?

Yes, in total – in Asia and the marketing?

Yes, that's a total cost for those two initiatives and right now it's a 2014 cost, but I would anticipate that we will see those Asia marketing efforts for several years.

Okay. And then going back to the margins for 2014, obviously, the margins are going to be pretty strong in the first quarter. If you would sort of ex-out the benefit from the price increase, will we see leverage in both the gross margin and the SG&A line? As you go through the quarter, will we also see – I guess will we see leveraging of the SG&A line?

Yes, that's a fixed cost for us. We don't have a direct sales force. We sell primarily through distribution, so that's not a cost that changes a lot with sales volume. So we are able to leverage those operating expenses very nicely with incremental revenue increases. There's also a piece of the growth margin which is fixed. It's a pretty large piece that's fixed, so we leverage that very nicely as well.

Okay. And then lastly can play geopolitical analysts, obviously there is some tension over in Eastern Europe. Any sense from your European customers, European distributors, end markets, how sensitive they are to the events over in Eastern Europe and if it worsens, do they cut back immediately or sit on their hands? Any sense of that at this time.

I think it's too new to be able to predict. This all happened in the last week or so. So at this point in time, I don't think it has raised any concerns, any attention. Obviously if it drags on or I guess deepens, there's going to be issues. But at this time it's kind of like business as usual.

Yes. Okay. All right, Allen, thank you very much.

(Operator Instructions). With no further questions, I'd like to turn the call back over to Dennis Tichio for any additional and closing remarks.

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

This does conclude today's conference. Thank you for your participation.