Greetings and welcome to the Sun Hydraulics Corporation Third Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Karen Howard, Investor Relations for Sun Hydraulics. Thank you, Ms. Howard. You may now begin.

Thank you, Manny, and good morning everyone. We certainly appreciate your time today for our third quarter 2017 financial results conference call. On the line with me are Wolfgang Dangel, our President and Chief Executive Officer, and Tricia Fulton, our Chief Financial Officer. Wolfgang and Tricia will be reviewing the results that were published in the press release distributed after yesterday's market close. If you don't have that release, it is available on our website at www.sunhydralics.com. You'll also find slides there that will accompany our discussion today. If you look to the slide deck, on Slide 2 you'll find our Safe Harbor statement. As you may be aware, we will make some forward-looking statements during this presentation and also during the Q&A. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from where we are today. These risks and uncertainties and other factors are provided in the earnings release, as well as other documents filed by the company with the Securities and Exchange Commission. These documents can be found at our website at www.sec.gov. I also want to point out that during today's call, we will discuss some non-GAAP financial measures which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP to non-GAAP measure in the tables that accompany today's earnings release, as well as in the slides. Wolfgang will get started with some highlights for the quarter, Tricia will go through the detail of the financial results, and then we'll turn it back to Wolfgang for his perspective on our outlook before we open up the line for questions and answers. So with that, it is now my pleasure to introduce Wolfgang.

Thank you, Karen, and good morning everyone. Please turn to Slide 3. We continue to be very pleased with our team's performance as we are progressing through 2017. We’ve had a lot of exciting activities going on especially teams from our two business segments have been working closely together to execute our vision 2025. I’ll deploy into that in a moment. Let me start with highlighting the financial results for the quarter. Sales nearly doubled to $88 million compared with the $26 million in the third quarter. Enovation Controls contributed $30.8 million in the quarter, representing 34% growth over the 2016 third quarter on a pro forma basis. Consistent with the first half of the year, the significant Enovation Controls growth has driven by strong demand in the vehicle technology business, specifically recreational markets, as well as our power controls business benefiting from economic improvement and stable oil prices. The rest of our business also realized significant organic growth, up by 27% in the quarter over the prior year third quarter. Sales in all of our markets around the globe grew considerably as our many initiatives are taking hold, which I’ll talk about on my next slide. Our consolidated sales growth has been particularly strong in Asia, which increased 72% over the prior year third quarter. Included in debt, our organic business in Asia grew 55%. The growth trends we realized in both of our segments continued through October. Turning to the bottom line, earnings per share were $0.42 for the quarter or $0.43 on a non-GAAP basis, this is more than double the 2016 third quarter EPS of $0.19. The non-GAAP number is calculated in the table at the end of both the slide deck and release. It excludes a small change in fair value of contingent consideration relating…

Thank you, Wolfgang and good morning everyone. I’m starting on Slide 6th with the review of our third quarter consolidated results. Third quarter sales were $88 million, up 95% compared to last year’s quarter. This includes $30.8 million for the Enovation Controls business indicating that the organic business grew 27%. Most of our products did not have any price increases in 2016 or 2017. The pricing had an immaterial impact on the comparability. Foreign currency translation had a favorable 200,000 impact for the quarter. I will now touch on sales by region, which are designated here in the sales bar chart. We inserted a chart in the back of the press release, as well as the supplemental slides summarizing this information. As we previously noted, we start experiencing progressive improvement in all of our geographic markets a little over year ago and that has continued to the present time. We realized year-over-year third quarter growth in each region. In the Americas sales more than doubled over the third quarter of 2016 to $52.1 million, driven by the Enovation Controls business, as well as organic growth. The Enovation Controls business is heavily weighted to the US, driving our sales to the Americas market up to 59% of the consolidated total. EMEA realized 36% growth to $19 million and the Asian Pacific region was up 72% to $16.9 million. Our organic business grew 21%, 15% and 55% in the Americas EMEA and APAC respectively. We have made investments in sales and marketing, including the addition of sales application specialists in the field, which we believe are generating sales to complement the market expansion. Regarding profitability, our consolidated adjusted EBITDA more than doubled to $22.5 million, representing 25.5% of sales in this year’s third quarter. That was up from 21.7% in last year’s…

Thanks, Tricia. Please turn to slide 14. The economies nearly all regions around the globe and nearly all centers are performing very well, and seemed to be growing at an accelerated rate. Leading indicators point to continued acceleration into early or mid 2018, and then slowing growth for the remainder of the year. The growth in U.S. industrial production is supported by strong consumer spending and increasing demand for industrial good. It appears that the U.S. total industry capacity utilization rate may have peaked in 2017 supporting a theory of flowing growth in 2018. As we look around the globe, industrial production is currently growing at an accelerated rate in Canada, Brazil, and Europe. However, India and China both reportedly experiencing flowing growth currently, looking towards next year, other than India which is expecting accelerating growth, slowing growth is expected in all other global region by the end of 2018. As our cartridge growths are important to the construction machinery sector, we look to the phases of the U.S. construction market. Currently sale-unit housing starts are accelerating, but multi-unit housing starts are in redemption retention. Those trends are expected to shift in 2018, but the overall construction industry is expected to expand which boards well for Sun. U.S. manufacturing production is growing at accelerated rate, despite some weakness in the order industry. This economic activity is benefiting us, given our current concentrations in material handling and general industrial applications. While production is expected to continue to grow in 2018, it’s expected to be at the slower rate. Indicators for the North American electronic sectors as published by the Institute of Printed Circuits Association also suggest growth, but with some anticipated volatility. So, in addition to gross resulting from the execution of our strategic initiative, Sun is enjoying the benefit of…

[Operator Instructions] Our first question is from Mig Dobre of Robert W. Baird. Please go ahead.

Good morning everyone, it’s Joe Boyarsky [ph], I’m for Mig this morning.

Good morning, Joe.

Good morning. So, starting off on hydraulics, the sales growth in Asia Pac has continued to accelerate. And I know you kind of touched upon on prepared remarks, but can you kind of update us on the Asia Pac initiatives within here and kind of in and those, and can sales growth continue to accelerate at these run rates?

Yes Joe, just to give you an update on some of the major initiative, it’s pretty much in alignment with what I reported earlier on. So, we have been intensifying customer contacts and activities in the marketplace. We have been adding more with application engineering skill sets to the team. And, last but not least, I would also contribute some of this staggering growth we’ve seen on the hydraulic side obviously to rebounding of the construction machinery sector in China. But in a natural from an internal perspective, but it’s probably much more activity in the marketplace and adding additional strength to accretive capable existing team.

Got it, okay. Thanks for that color. And, then switching to the electronic segment, Q3 sales were about $3 million, $4.5 million, and the guidance in place Q4 sales of $18 million to $23 million. I know you talked about seasonality in Q4, but that’s more seasonality than I would have expected and anything else going on there or is that really the magnitude of the Q4 seasonality?

That’s pretty much the only reason there. As we mentioned earlier on, so we expect shutdowns of some of the OEMs in December and that’s pretty much the OEMs that we are seeing.

Okay, got it. And, then a big part is the vision 2025 target is an incremental sales from M&A, and now they were about a year out from the announcement of the Enovation acquisition, just any color on how the M&A pipeline is looking?

Yes. So, I mean, that has been ongoing activity as we reported during the earlier webcast. And, we are filling the pipeline with [Frost Bank], some of them obviously are at various stages of discussion. But we have embedded the whole motive of operandi of becoming acquisitive into our daily activity. So, we’ve build up team resources and competence within Sun and the overall activity, I have to say I’m pretty pleased where we are at this point.

Got it, and then final question, the $1.2 million of restructuring expense in Q4, does that flow through SG&A, I mean, is it included in the margin guidance for the year? And, assuming that does flow through SG&A, how will Q4 SG&A compare to Q3?

The majority of it will flow through SG&A, there is a small part that will flow through cost of goods sold as well it is included in the margin guidance.

Got it, okay. Congratulations on a solid quarter.

Thank you, Joe.

Thank you. Our next question is from Joe Mondello of Sidoti & Company. Please go ahead.

Hi good morning, everyone.

Fine, Joe.

So, in the press you cited that going forward that growth maybe decelerating, I just wanted to understand that, is that just a comps just get a little tougher and so because of that the growth will decelerate or are you seeing any pockets anywhere that sort of indicate to you that things may be slowing compared to this pretty good 2017 we’ve seen?

I think it’s too slow Joe, so on one hand obviously I want to be careful of creating not the impression that we can continue with some of the staggering growth numbers we’ve seen in certain pockets; we just talked about Asia Pacific a minute ago. Secondly, we are not, I mean, the tailwind of the economy is still expected to be strong turning into 2018. As I pointed out on numerous occasion, our challenge is always to have clear visibility, so we have good visibility for about a quarter, so we are mid of November now, so let’s say we can probably pretty valuate what is going to happen in Q1, but it’s difficult to give a precise for cash therefore Q2, Q3, Q4 next year. Overall, I think the economy is doing fine, we are not seeing any specific pockets that would concern us. First and foremost, I have to say I’m less concerned about the economy, I’m actually very excited about our strategic initiatives holdings out the way they are and taking the grip on certain situations here and we are definitely seeing progress in so many areas that I think the combination of both the macro-economic environment, plus the rollout of the strategic initiative meeting feel comfortable as FY 2018 is concerned.

Okay, great. And, then regarding Enovation accretion, I know you gave some information regarding that, but how accretive was Enovation including the non cash amortization?

It was accretive about $0.11.

Okay, and then looking at the fourth quarter with such a follow ups and revenue at the electronic segment, is there any – I imagined gross margins will follow up pretty significantly as well or how do you manage that or how does the business sort of look seasonally on a sort of more of a bottom line margin perspective?

The margins overall don’t change a lot, we will see a little bit of decrease in the gross margins in the fourth quarter and operating margins obviously in the electronic segment on the lower sales, but there will be some variable expenses that also go down with sales that will help those margins not drop probably as much as what we would understand incremental revenues drop.

Okay. And, just looking at the hydraulics segment, in past sort of strong recovery is like we are seeing here in 2017 compared to 2016, in past recoveries in the third quarter has may be not been a seasonally weak on a profitability standpoint. And, I thought maybe that was going to take place again here just given the strength that we are seeing given the 25% revenue growth. I was just wondering if there is anything that you saw that was a little surprising that maybe profitability wasn’t as strong as given the strength in revenue or was that sort of in line with what you’re looking at?

Yes, we talked about it a little bit in the prepared remarks, but we did see some inefficiencies in the electronic segment even with the incremental increased in the sales that were related to the curve-out, as well as the few SEA things like audit seasons and stock. But certainly we believe that those inefficiencies going forward can’t be overcome and were related to the curve-out specifically, but we did recognize after it was down just a bit.

And, maybe Joe if I may add, the only impact on the hydraulic side that you’re referring to is probably attribute to the hurricane as I mentioned earlier on, I mean, at the end of the day, we lost about five manufacturing days which is a full week, that’s the only negative impact.

Yes, it’s a good point. Is there any way for you to quantify of what you lost regarding that?

No, we didn’t make an estimate, I mean, it’s probably tailwind in the fourth quarter coming in, because I think there is reconstruction and we see in those hurricane affected an increase in demand for our product. But I can’t quantify exactly what that would be for the five days. The five days is an estimate as you can imagine you’re ramping down preparing for the hurricane, you’re weathering the storm and then you’re ramping up again, so it’s an estimate when I said probably last five days of manufacturing as a whole, but we didn’t quantify it.

Okay. And, then last question for me, just regarding the balance sheet and cash flow, do you anticipate being more aggressive starting in 2018 in terms of debt pay-down? How you’re looking at?

We plan to pay-down the debt as quickly as we can with available cash. We have some pretty significant cash outlay related to capital expenditures this year that probably kept us from doing more there, but certainly as we normalized on the capital expenditure side, I think there will be available cash pay-down more quickly.

Okay. And, regarding CapEx, it’s obviously going to be implemented in 2017, but looking at 2018, does that - do you have any idea of what that looks like in 2018?

We estimate going forward as part of vision 2025 that our CapEx will be 4% to 5% of sales.

Okay, okay. Thanks a lot. I appreciate it.

Thank you. [Operator Instructions] And, the next question is from John Breth of Kansas City Capital. Please go ahead.

Good morning Wolfgang and Tricia.

Good morning, John.

Good morning, John.

During the quarter you announced the launch of a couple of new product line within electro-hydraulic segment. Wolfgang, what is that due to your - how does that improve your position, where did you stay in that segment from in the marketplace and how much will that improve your competitive position in the marketplace and how significant can these products be?

Excellent question John, I mean, it’s a substantial expansion of our existing product offering in terms of aligning here with the electrification trends that we have seen in the industry, so we have seen a strong shift from hydro-mechanical valves to electro hydraulic valves, and this expansion here is significant for us, because it will give us the access to additional customers and it will help us to go through a higher content per machine with existing customers. So, it is significant moving forward. As I said, I mean, I would probably just like as the significant product launch over the past decade here in the company.

Wolfgang, is there any way you can quantify for us the opportunity that you’re looking at with the introduction of these products?

Look at the hydraulic - electro-hydraulics offering in the marketplace, so we can probably say that about the third of the market is to be allocated to that specific bucket. Our position in the past has been reasonably weak in that area, so we always talk about the $ 2 billion market in total places, the third of that is in the electro-hydraulics, so let’s say it has $600 million, $700 million. I think we will probably target at the end of the day maybe a double digit market share in the range of 10% to 15% in that area. So, if we do math there, I mean, that could be down the road significant incremental revenue for the company.

Thank you very much.

Thank you. [Operator Instructions] There is another question from the line of Joe Mondello of Sidoti & Company. Please go ahead.

Hey guys, I just have one follow up question, just regarding the profitability in margins that you saw in Enovation, they looked like they were pretty strong what I would consider prior we thought maybe the third quarter was a little bit seasonally weak quarter, obviously revenue was really good in the quarter. So, just wondering if you could help us understand just the normalized seasonality and maybe not as strong of a growth year like we are seeing here?

If you look back historically in the previous two quarters at the margins on the electronic side, the growth margins in particular were a little bit weak in the third quarter, but again that goes back to the reasons that we talked about previously. But the second quarter margins were higher on that incremental sale. From seasonality perspective, the third quarter tends to be a little bit stronger for them just given that there is a model year rollout mid-year. So, I think that’s a little bit of what we are seeing here and if we go back to the pro forma of 2016 numbers, we saw the same thing last year. But again the Q4 then is seasonally weaker due to the shutdowns, which again affects margin.

And, that’s on revenue perspective you’re referring to or..?

Yes.

What about the margin generally unseasonal…?

Those margins should grow from the revenue. There is no seasonality change in the margins per say, it’s all driven by the - what the revenues are doing unless there is something extraordinary that’s happening or something different is happening like we saw this quarter with the inefficiencies.

Right, okay, okay; thank you.

Thank you. There are no further questions in the queue at this time. I would like to turn the conference back over to management for closing remarks.

Thank you. Thanks again for your participation. And, thank you to all of the hardworking Sun employees who are driving these results. We look forward to meeting some of you at the Baird Conference this week and then updating all of you obviously on our full-year results in February. Thank you very much and have a great day. Bye-bye.

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. And, thank you for your participation.