Helios Technologies, Inc.
Q4 2017 Earnings Call Transcript

Published: 27 Feb 2018

[Operator:]

Greetings, and welcome to the Sun Hydraulics Corporation Fourth Quarter and Full Year 2017 Financial Results. 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 your host today, Ms. Karen Howard, Investor Relations for Sun Hydraulics. Please proceed.

[Karen Howard:]

Thank you, Rutanya, and good morning, everyone. We certainly appreciate your time today for our fourth 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 will 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 or 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 measures 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 details 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. And with that, it’s now my pleasure to introduce Wolfgang.

[Wolfgang Dangel:]

Thank you, Karen. Good morning, everyone. Please turn to Slide 3. We are very proud of our team’s performance in 2017. In addition to reporting solid financial results, even more importantly, we made significant progress on our Vision 2025. I’ll get more into that in a moment. Let me start with highlighting the financial results for the year. Sales increased 74% to $343 million, a record-setting level. Enovation Controls contributed nearly one-third of those sales or US$109 million. On a pro forma basis, Enovation Controls realized 33% sales growth over 2016. The historic Sun business also grew very well by 21%. We reported EPS of $1.17, after excluding one-time type items that Tricia will review with you. Our non-GAAP EPS was $1.60, up 72% over 2016. Similarly, our adjusted EBITDA grew by 82% to US$87 million that represents a 25.4% adjusted EBITDA margin. Since we reported a couple of very significant items after the end of the year, I want to point them out here. In late January, early February, we accessed the equity capital markets and successfully raised about $240 million. We subsequently were able to sign a definitive agreement to acquire the Faster Group, one of the M&A initiatives that we are in process. We announced this on February 19th. We will use the proceeds of the equity offering together with existing cash and drawing on our revolving credit facility to fund the acquisition where we closed which is expected in the second quarter. I will re-summarize the acquisition in a few moments. We were introducing our guidance for 2018 recognizing that we will update it to include Faster, once we close on that transaction. We expect revenue for our current SNHY business to be between $370 million and $385 million and adjusted operating margins between 22.7% and 24% for 2018. Please turn to Slide 4 and I will summarize the key investments we have made in 2017 in accordance with our Vision 2025 strategic plan. As we have been reporting throughout the year, we undertook a very complex carve out of the Enovation Controls business from its prior operations. This involves the takedown and set up of numerous production lines and inventory movement between Tulsa and at San Antonio. This was ongoing throughout the year and successfully completed in the fourth quarter. It was quite a phenomenal feed by itself, but it was further complicated by significant customer demand resulting in 33% revenue growth. So we are quite pleased with this accomplishment. Additionally, we have already begun work on realizing the synergies identified at the time of the acquisition, which we already started realizing. This includes cross-segment team interactions to drive cross-selling and other activities. Next, the contributions to Hydraulics revenue by newly added sales field application specialists accelerated faster than we expected. This was further enhanced by the connections we are making in the field between our global suppliers and our global channel partners facilitating problem solving and creating further opportunities for all stakeholders. Regarding new product development, in very short order, we developed our first product line that was a joint project between our hydraulics and electronics engineering teams. Announced in October, this is a new line of competitive priced, highly performance electro-hydraulics. Recall that one of the strategic benefits from the Enovation acquisition was to leverage their electronics knowledge. We have many more such projects in our pipeline. The last key 2017 initiative that I will highlight for you is the beginning of the construction of our facility in South Korea. Once complete, it will provide for expansion of our existing activities in the region including manufacturing, engineering, sales and warehousing. This supports our in the region, for the region initiative as our growth in this region has been accelerating. In 2017, our Hydraulics segment realized 40% growth in the Asia-Pacific region. All of these activities are in pursuit of our Vision 2025 goals, which include establishing critical mass at $1 billion in revenue, while maintaining superior profitability and financial strengths. Please turn to Slide 5 and I will recap the planned acquisition of Faster Group that we announced last week. This will be a very strategic and transformational acquisition for SNHY moving us further along our Vision 2025. Headquartered in Milan, Italy, Faster is a leading global manufacturer of quick-release hydraulic coupling solutions. Product offering is very complementary to our existing hydraulic cartridge valves and manifolds, expanding our addressable market. It brings some very important end-markets to us, particularly the global agriculture market, which is entering a high growth cycle. Similar to Sun, Faster Group is known for its high-quality, high-performance products and excellent customer service. The Faster brand is number one in Europe, and number two globally. These differentiating factors are driving Faster to gain market share growing ahead of macroeconomic trends. The enterprise value is €430 million, or approximately $531 million. This represents a 12 times, seven estimated 20 EBITDA multiple which is comparable to the multiple at which we valued Enovation Controls back in 2016. Taking into consideration our estimated annual synergies of $7.5 million, the valuation represents 10.8 multiples on estimated 2018 EBITDA. Importantly, the acquisition will be immediately accretive to EPS and EBITDA margins. We estimate pro forma 2018 GAAP EPS accretion of $0.15 to $0.25. Excluding all estimated amortization and transaction expenses, we estimate EPS accretion to $0.55 to $0.65, which is a slightly different methodology than we reported last week. Faster’s EBITDA margin is approximately 27% to 28%. Tricia will touch on the funding of the acquisition. With that overview, I will now turn the call over to Tricia to review the financial results for the year in a bit more detail.

[Tricia Fulton:]

Thank you, Wolfgang and good morning, everyone. As you may recall, we released preliminary 2017 numbers in conjunction with our equity offering processed about a month ago. As I progress through these slides, you’ll see that our actual results are in alignment with them. I am starting on Slide 7 with a review of our fourth quarter consolidated results. Fourth quarter sales were $84 million, up 69% compared to last year’s quarter. This includes $24 million for the Enovation controls business indicating that the organic business grew 31%. Most of our products do not have any price increase in 2016 or 2017, so pricing had an immaterial impact on comparability. Foreign currency translation had a favorable $1.1 million impact for the quarter. I will now touch on sales by region, which are designated here in the sales bar chart. We inserted a table in the back of the press release as well as the supplemental slide summarizing this information. As we previously noted, all geographic markets realized considerable year-over-year fourth quarter growth. In the Americas, sales were up over fourth quarter of 2016 to 46.7 million driven by the Enovation Controls business as well as organic growth. The Enovation Controls business is heavily weighted to the U.S. driving our sales to the Americas market up to 56% of the consolidated total. EMEA realized 41% growth to $18.8 million and the Asia-Pacific region was up 65% to $18.6 million. We have made investments in sales and marketing including additional sales application specialists in the field which we believe are generating sales to complement the market expansion. Regarding profitability, our consolidated adjusted EBITDA was up to $17.2 million, representing a 55% increase over last year’s fourth quarter. The increase was due to the increase in sales. However, we did experience some unanticipated cost which pressured the gross margin, operating margin and EBITDA margins. I will address those costs when we review each segment. Turning to the bottom-line, adjusted earnings per share were $0.27, up 49% over last year’s fourth quarter of $0.18. I want to mention a few items that impacted our consolidated results and that we added back for purposes of reporting adjusted EBITDA and adjusted EPS shown here. Please refer to the tables in the back of the press release or slides for reconciliations of GAAP to non-GAAP numbers. As we previously indicated, we combined our HCT operations into Enovation Controls. In conjunction with that, we incurred $1.5 million of restructuring charges, of which approximately $400,000 is included in cost of sales and $1 million is separately reported on our income statement. We also incurred $2.9 million for one-time operational item. I will provide more detail on those when I discuss each segment. Included in selling, engineering and administrative or SEA expenses, we had $1 million of acquisition and financing-related expenses. And finally, as separately shown on our income statement, we increased the contingent consideration associated with the Enovation Controls acquisition by $600,000 to the full amount under the acquisition agreement reflecting the business’s continued strong performance. Net interest expense of $1.1 million increased from $300,000 in the fourth quarter of 2016 with the increase primarily for debt to fund the acquisition of Enovation Controls. Finally, as a result of the Tax Cuts and Jobs Act, we recorded a $500,000 one-time tax charge in the fourth quarter of 2017. This included our transition tax charge for deemed repatriation of non-U.S. earnings partially offset by a tax benefit derived from revaluation of our net deferred tax liability at the new lower federal tax rate. Please turn to Slide 8 for a review of our Hydraulics segment fourth quarter operating results. Sales grew 31% to $59 million with particular strength in the APAC region continuing the turns realized earlier in the year. We saw 53% year-over-year growth for the quarter in the APAC region, 28% growth in EMEA and 21% growth in the Americas region. Gross profit increased by 27% to $21 million on the higher sales. So gross margin declined by 129 basis points to 35.9%. We’ve summarized the cost that pressured margin into two categories. The first category included one-time operational cost amounting to $1.2 million or 2.1% of Hydraulic segment sales for the quarter. These includes several items as follows

[Wolfgang Dangel:]

Thanks, Tricia. Please turn to Slide 15. Leading indicators that are important to SNHY continue to signal ongoing growth. For example, US industrial production is expected to continue accelerating growth until at least the middle of 2018 and then continue growing for the remainder of the year, but at a slower rate. U.S. total manufacturing production and U.S. mining production were currently growing at accelerating rates. We noted that the U.S. Purchasing Managers Index fell in January supporting the theory of slowing growth in the latter half of 2018. All major global economies are in an accelerating growth phase except Mexico. This includes China, Western and Eastern Europe, Canada, India and Brazil. The economies in those regions are also expected to continue growing throughout 2018, but at a slower rate than 2017. Mexico’s growth is expected to accelerate in 2018. As our cartridge valves are important to the construction machinery sector, we look to the status of the U.S. construction market. Currently, expansion is expected in most of the sector through 2018 except for multi-unit housing starts. However, multi-unit housing is expected to start to recover from the recession it has been in. Year-over-year growth is anticipated across most of the manufacturing sectors in 2018. U.S. defense, capital goods and North American heavy duty trucks are expected to grow at the fastest rates. However, U.S. industrial machinery new orders are expected to contract in 2018. Finally, the U.S. Electronics business indicators point to growth in 2018 with ongoing volatility. As you have seen, this economic activity is benefiting us given our current concentrations in material handling and general industrial applications. Important to note, we have stated in accordance with our Vision 2025 plan, we expect to outpace macroeconomic growth. This will be driven by the investments we are making to expand our coverage in the field increase and broaden relationships with OEMs, penetrate regions where we have wide space and continue to introduce new and innovative products and solutions. Please turn to Slide 16 for additional thoughts regarding our outlook. We generally have visibility for about one quarter or so accordingly it is typical for us to predict an entire year. However, we developed our guidance conservatively based on current trends and economic indicators. We do want to remind you of few things. First, we are continuing to invest in our organic growth. Therefore, some of the margin generated from incremental sales will be reinvested in our business. This includes additional field application specialists and other sales and marketing initiatives, as well as aggressive new product development projects. Also, I remind you that our business is seasonal with the fourth quarter usually the weakest for both our Hydraulics and Electronics segments. Finally, when we announced that we have closed on the acquisition of the Faster Group, we will update our guidance at that time to include our expected contribution of that business for the remainder of the year. As we communicated last week, on a pro forma basis, we expect revenue growth of 16% to 16.5% in 2018 over 2017 and we expect 2018 pro forma adjusted EBITDA margin that approximates 2017 between 27% and 28%. Please proceed to Slide 17 where we summarized our guidance for 2018 compared with our actual 2017 results. Again, this is only the base SNHY business as it currently stands. We will update it to include Faster Group when we close on that acquisition. We are expecting revenue growth of 8% to 12% driven by growth in both of our segments at a similar rate. We are expecting an adjusted operating margin of 22.7% to 24% following our current reporting methodology. Net interest expense is estimated at a $100,000 to $200,000, which reflects the effects of our recent equity offering, but does not reflect the impact of the debt we will incur with the acquisition of Faster Group. Given the benefits of the Tax Reform Act, we estimate our effective tax rate to be between 24.5% and 26.5%. Our capital expenditures are currently expected to be between $15 million and $20 million driven by the completion of our new facility in South Korea, as well as ongoing investments to improve productivity. Depreciation will be between $11.5 million and $12.5 million and amortization will be between $8 million and $9 million. Again I reemphasize that these numbers will change once we complete the Faster Group acquisition. With that, let’s open up the lines for questions and answers.

[Operator:]

[Operator Instructions] Our first question comes from Mig Dobre with Robert W. Baird. Please proceed with your question.

[Mig Dobre:]

Good morning guys.

[Tricia Fulton:]

Good morning

[Wolfgang Dangel:]

Good morning, Mig.

[Mig Dobre:]

Maybe, first, just sort of a earnings adjustment question. You’ve got two sets of adjustments and I think I understand once that, I am not so sure about the other, when you are looking at the Hydraulics, for instance, the $1.5 million associated with maintaining lead times I presume that that’s related to freight over time and so on. To me, that kind of looks as cost of doing business given what’s going on with broadly speaking capacity and demand and so on for many industrial companies. You sort of have a similar thing going on with the Electronics for $1.4 million. So I guess, what is your view as to why these costs need to be adjusted from earnings, particularly since you are mentioning that some of these cost will occur to some extent in 2018 as well?

[Tricia Fulton:]

Yes, some of them really – we do believe are one-time costs and that’s why we pulled them out and indicated them as such. We don’t expect those to be ongoing. We do have some cost that were resident in Q4 and that we do believe will lead into Q1 in the 2018 numbers, but these are factored into our annual guidance range. Those are things, specifically in the Hydraulics segment like, with the additional freight cost are likely continue as we are expediting products in and out material outsourcing to make sure that we are keeping up with demand and some additional temp labor costs. All of those points to maintaining our best-in-class lead times. But some of the items that were worthy unanticipated, we don’t expect to continue into 2018 and were really just resident in the Q4 numbers. On the Electronics side, again, we are seeing some higher scrap, normal scrap rates. A lot of that points to the installation of our new SMT lines which were put in, in Q4. And those additional cost for scrap did start in Q4 and have continued, but at lower rates as we are going into Q1. That’s a new production process that we’ve introduced. Those were products that we are outsourcing before. So, those should vain as we go forward as well and where we get up to speed on that process.

[Mig Dobre:]

Okay. Well, I don’t mean you sound picky, but you also mentioned mix and warranty on new products. I mean, again, I don’t if those are a meaningful component of that $1.4 million in the Electronics or not. But to me, mix seems like just that natural occurrence.

[Tricia Fulton:]

Yes, we do have mix in some quarters, some quarters it’s very negligible. It seems to point out a little bit more in the fourth quarter, especially on the Electronics side, and we did it higher than normal. I think used the way we phrase higher than normal warranty cost as well. So we haven’t added those back. We just were trying to use those to explain the differences in the fourth quarter.

[Mig Dobre:]

Okay. So, when I am looking at your guidance for 2018, just to be clear, is your guidance inclusive on any drags of this nature or does the guidance excludes whatever else may occur going forward?

[Tricia Fulton:]

Yes, it does include specifically the drag from some of the things that I just mentioned in the Hydraulics segment, the freight, the material outsourcing and the temp labor, specifically into Q1, we should see that vain over the year. But the guidance does include that and it also includes the elevation of normal scrap cost in the Electronics segment.

[Mig Dobre:]

Okay. Two more questions. Then, as we are thinking about gross margins for both segments through the year, how – clearly, we are going to start a little bit slower because of these drags, but can you sort of help us range the first quarter versus the ramp for the other three or front half, back half, anything that you can help us with?

[Tricia Fulton:]

Yes, so, in the first quarter, we will see some drag on the gross margins related specifically to these items. As we work through the other quarters, we should see improving margins in both of the segments at the gross margin level. Some of that’s coming from productivity and some of it’s coming from these additional cost that will go away.

[Mig Dobre:]

Okay. And then lastly, I am wondering if you can help us think about SG&A. There is a lot of investments here. How do you think about that line item for the full year and 2018 versus 2017? And from a price standpoint, you mentioned that, you didn’t get much price in 2016 or 2017, what are your assumptions for both segments in 2018?

[Tricia Fulton:]

Yes, I’ll let Wolfgang address the pricing issue. With regards to the SE&A, on a purely just SE&A cost basis without any of the additional cost of things like financing and M&A cost because we have pulled those out separately. We will see a slight increase in SE&A but it’s relatively small year-over-year and that leads to things like the addition of more field application specialists and additional marketing incentives globally that would be allocated to the additional SEA costs.

[Wolfgang Dangel:]

On pricing, Mig, we have – first of all, last year, when we met with customers and general partners around the world routing out pretty much to strategic plan and all the initiatives. We committed at this point in time, of not increasing prices for the first half of 2018. I think now, looking at the overall trend, we see in the industry and obviously also some pressure on the commodity side, we are analyzing the situation and we could see probably a price increase during the second half of 2018.

[Mig Dobre:]

Okay. Thank you guys.

[Wolfgang Dangel:]

Thank year-over-year, Mig.

[Tricia Fulton:]

Thank you.

[Operator:]

Our next question comes from Jeffrey Hammond with KeyBanc. Please proceed with your question.

[Jeffrey Hammond:]

Hey, good morning.

[Tricia Fulton:]

Good morning

[Wolfgang Dangel:]

Good morning, Jeff.

[Jeffrey Hammond:]

So, just to go back to the 2.9 on the anticipated costs, can you just give us a sense of what that number looks like in 1Q? And how long it takes to kind of get that on back to normal in terms of expedited freight, et cetera?

[Tricia Fulton:]

Yes, I mean, those are moving targets right now. So, I can’t give you a hard number of how much of that to expect in Q1. We have a lot of initiatives underway to mitigate all of those additional cost that we saw in Q4 and exiting up along the scrap in the Electronics segment is they have twice daily walks related to scrap to make sure that we fully understand where those are happening and why and what we can do to mitigate them. So, I believe that things like those initiatives will drive down those costs from what we saw in Q4. But, as an ongoing effort, I think it’s too difficult to estimate exactly what the impact is going to be to Q1 relative to what we saw in Q4.

[Jeffrey Hammond:]

Are there some clear caution that 2.9 that go away or write away like this – like the higher medical or the warranties?

[Tricia Fulton:]

Yes, really the only ones that we see that are going to be ongoing are in the Hydraulics segment, the things that are related to maintaining our best-in-class lead times, the freight, material outsourcing and temp labor portions. The things like you mentioned related to medical reserve and annual inventory count, excess inventory and sales mix, probably to go away. As Mig pointed out, we do – we always have some variance of mix that plays apart in each quarter, but it was just notably higher in both segments in December. So, things like warranty would also likely go away.

[Jeffrey Hammond:]

Okay. And then, in the Electronics outlook, you cite ongoing volatility. Can you just kind of expound on that comment or some volatility, I think you put?

[Wolfgang Dangel:]

Yes, Jeff. We are pretty much looking at two indicators there. As you know, over 80% of the business is North American based. So we look at the North American sales of semicon and PCBs, so printed circuit boards and on the PCB side, we are looking at the book-to-bill ratio. And both indicators, I mean, they suggest that we are going to see growth in 2018. However, they are volatile because the book-to-bill ratio has been changing here from month-to-month. That’s where the comment about volatility comes in. We also look at sales growth for Electronics manufacturing services. That is holding up very steady and remains strong.

[Jeffrey Hammond:]

Okay. And then, just lastly, you said synergies are running ahead and I think you described some of the things you are working on for Enovation, but, can you just talk about what’s been the surprise to the upside? Is it better revenue synergies? Are you finding more cost synergies? Thanks.

[Wolfgang Dangel:]

First of all, it’s much more revenue-driven. When we announced the acquisition back in 2016, so we pretty much set ourselves a goal that we will get to $5 million in EBITDA by 2020. We’ve had the first year, that means 2017, we would need to align things and get the projects going and then ramp up the curve in 2018, 2019, 2020 respectively. So the comment was referring to, I think the collaboration between the teams is probably going better than anticipated. I thought it would have taken a little bit more time to get aligned. So we are seeing lots of joint activities that probably will accelerate the generation of those synergies. But they are 75% revenue-driven and 25% cost or expense-driven.

[Jeffrey Hammond:]

Okay. Thanks a lot.

[Wolfgang Dangel:]

You are welcome.

[Operator:]

Our next question comes from Brian Drab with William Blair. Please proceed with your question.

[Brian Drab:]

Good morning. Thanks for taking the questions. I just wanted to, first of all, make sure that I understand and that everyone is clear on the accretion from Faster and why that you are communicating it. Maybe you could just repeat those accretion numbers. And then, I think you are clear, but, does your accretion estimate include an add-back for amortization? Or does it not include an add-back for amortization? Then if you could specify whether we are talking about all amortization or a deal-related amortization?

[Tricia Fulton:]

So, in the adjusted numbers, we’ve added back all of the amortization. So the 55 to 65 range includes all amortization that which was on their books before and the expected incremental increase.

[Brian Drab:]

So, and you are – and I think it’s clear, I am relatively new to the story, but I think one thing that I do understand is that, you add back deal-related amortization in the calculation of your operating income – adjusted operating income. But you do not add back that amortization in the calculation of your adjusted EPS. So, I think what would be most useful is, if the number, the accretion figure that is apples-to-apples with the way that you calculate your adjusted EPS, does that makes sense?

[Tricia Fulton:]

Yes, it does. Again, these are estimates. So we felt it was easier to pull everything out, but when we are reporting, you are correct in the way it is reported, once they are part of our business.

[Brian Drab:]

Okay. So, the number that we would add back to your EPS to get, or then – sorry, the accretion estimate that we would use with respect to adjusted EPS should be something less than the figure that – than this $0.55, $0.60 number that you are mentioning now. Is that right?

[Tricia Fulton:]

So, you are saying for the adjusted one. So, when we report adjusted EPS each quarter, yes, we aren’t doing it in the same manner as they way we are doing this after calculation.

[Brian Drab:]

Okay. So, if a consensus estimate today was, I don’t know exactly what it is at the moment, but let’s say it was $1.90, you wouldn’t add back –you wouldn’t add $0.55 to that to get the adjusted EPS expectation for 2018. You’d add back something closer in my calculation to $0.35 to $0.40. Okay.

[Tricia Fulton:]

Yes, we are looking at something probably closer to $0.30 to $0.35 on that.

[Brian Drab:]

Okay. Okay, that’s helpful. And then, just maybe one other question since I took a quite a bit of time there. The new product introductions, I think, is it double-digit number on new product introductions on the Electronics side coming in 2018. Can you talk in a little more detail about the potential impact to revenue from some of those or any of a major potential to move the needle?

[Wolfgang Dangel:]

Yes, we have about – I mean, it’s close to ten, depending how you look at it, it’s close to ten product introductions as such. Normally, it always takes a little bit of time until we see a real impact. However, last year, as you know, and that’s why we had this 33% growth in that very segment. Some of the introductions really were extremely successful and you tell them quite nicely. But on an ongoing basis, I mean, it’s normal that we have between, I would say, round about ten product implementations, product introductions in Electronics as we seeing in the years. So 2018 doesn’t stand out. It’s just a continuation of, I think the innovation of the business segment there. So, it’s contributing to the growth that we are showing here, but I think we are looking at it more – I think conservatively in my opinion.

[Brian Drab:]

Okay. Thank you very much.

[Wolfgang Dangel:]

You are welcome, Brian.

[Operator:]

Our next question comes from Charley Brady with SunTrust Robinson Humphrey. Please proceed with your question.

[Charley Brady:]

Hey, thanks, good morning. I don’t want to beat a dead horse here. But on these unanticipated costs, and I understand that it’s a moving target, I guess, as production goes forward. But can you help sort of back out from the known costs that aren’t going to repeat. You mentioned, warranty likely not going to repeat the healthcare stuff, so that we can at least get to a net number that is going to repeat and we can try and figure out how to allocate that, however we are going to do that.

[Tricia Fulton:]

Yes, so the things that won’t repeat, we pointed out product mix for both segments. We had some FX material cost that we don’t expect to repeat in the Hydraulics segment. Medical reserves would not repeat. Warranty – additional warranty is likely not to repeat.

[Charley Brady:]

Okay, could you quantify those as a percentage of what that was in Q4, because I mean, for Electronics that unanticipated causes 560 basis points of margins, pretty big number and I don’t have any sense as to how much of that continues and how much of it does not continue.

[Tricia Fulton:]

Yes, just a second, let me try to get that number. We haven’t done the calculation in that way before.

[Charley Brady:]

Maybe while you are doing that, I’ll ask another question then. How do you sense, you are adding these people in the field that generate more sales, it’s something that’s working pretty well. And I know it’s very hard to quantify, but any sense as to kind of how much growth they are adding to – organically to the business by having these people versus not having them previously?

[Wolfgang Dangel:]

Yes, Charley, normally, we are a little bit more prudent and conservative with that type of approach. So we would not expect these people to immediately generate revenue, because it takes time to get acquainted with the company, with the business and so forth. With those regional application specialists, we put into the Americas territory so that’s Northern Latin America over the last two years. They came up to speed very quick. Those were very experienced people either coming out of the industry or coming from OEMs who were application engineers for a very long time. The majority of the additions we are making this year and moving forward are probably outside of the Americas. So more in the emerging markets and those people we need to give a little bit more time, because we bring them in for intensive training, acquaint them here with the product portfolios in the U.S. in both segments and then send them back into the designated geography. So normally, by rule of thumb, we’d say, it takes about three years, until somebody breaks even. So, there can be differences, but in general, it takes two full years to bring them onboard, train them and so forth and then third year onwards, they contribute and pay for themselves.

[Tricia Fulton:]

Charley, to answer your earlier question, we expect 55% to 60% of those cost will not repeat. The remaining cost may be at the same level, but we may have an ability to reduce those through the first quarter as well and we are still working through those to be able to enter that with regard to how much they could be reduced or if they’ll stay the same.

[Charley Brady:]

Okay, so 55% to 60% of the unanticipated cost incurred in Q4 don’t slide into 2018, am I hearing correctly?

[Tricia Fulton:]

Correct, yes.

[Charley Brady:]

Yes, thanks, that’s very helpful. Appreciate it, thanks.

[Tricia Fulton:]

Okay.

[Operator:]

Our next question comes from Jon Braatz with Kansas City Capital. Please proceed with the question.

[Jonathan Braatz:]

Good morning everyone. Tricia, just back to that previous question, when you look at the cost that will repeat into the first quarter, is there a possibility that those costs will rise in the first quarter, or will worsen a little bit?

[Tricia Fulton:]

I would say, they would not rise. We have a lot of initiatives underway to address those and fully understand where we could possibly do something different. I would say that wouldn’t rise.

[Jonathan Braatz:]

Okay. And then…

[Tricia Fulton:]

Hopefully, we’ll be able to mitigate some of them and they will – would go down. I just don’t have a good estimate for what that looks like yet for where we are. We’ve only closed January at this point.

[Jonathan Braatz:]

Right. Okay. Would you anticipate that these costs might bleed into the second quarter and into the third quarter too?

[Tricia Fulton:]

It’s possible that some of them could bleed into the second quarter. Historically, it’s a pretty high seasonal uptick for second quarter in both of the segments. So, there is possibility that some of those cost, especially related to maintaining lead times in the Hydraulics segment could continue.

[Jonathan Braatz:]

Okay, how do your – you are speaking about lead times quite a bit. How are your lead times relative to your competitors at this time?

[Wolfgang Dangel:]

Significantly better, Jon. Good morning.

[Jonathan Braatz:]

Good morning.

[Wolfgang Dangel:]

I mean, there is, as a matter of fact, that I think the gap has widened. If we look at standard lead times across the board amongst the peer group two years ago and compare it to today, so we are running late probably by about a week. So our standard lead times are four weeks around the world irrespective the way you order the products from we commit to bring it to you within four weeks for the entire product portfolio, which is pretty wide on the Hydraulics side. Right now, we are about a week late, maybe one-and-a-half week and competition is probably out there somewhere in the range between eight and 26 weeks right now.

[Jonathan Braatz:]

Okay. Is that…

[Tricia Fulton:]

Jon, to address real quick back to your previous question, any increases that we think or these costs that we think are going to continue are built into our estimates for 2018.

[Jonathan Braatz:]

Right, okay, okay. Now, Tricia, your guidance for next year, the adjusted margin, I think it was 23% and 24%. That excludes any one-time cost. As it stands now, as it stands now, when you look at the quarter, are you anticipating any one-time costs that - in the first quarter?

[Tricia Fulton:]

No, not a lot. We may have some acquisition-related cost that we pull out of there.

[Jonathan Braatz:]

Okay.

[Tricia Fulton:]

We have already accounted for that.

[Jonathan Braatz:]

Okay, okay.

[Tricia Fulton:]

Mostly that the amortization have to be adjusted.

[Jonathan Braatz:]

Okay, okay. And lastly, Wolfgang, Enovation had a wonderful year, last year in terms of top-line growth and I don’t think anybody expects it to continue to be like that. But, when you look at the growth stepping down a little bit sort of the 12% to 15% area. And I think you talked a little bit about the market conditions, but was there any new product development, new contract wins that are a little bit of a – or let’s say a headwind going into 2018 that might account for some of the slowdown in the revenue growth at Enovation?

[Wolfgang Dangel:]

No, I mean, I can’t point out to any individual headwind to pointing out of any contract negotiation, Jon. I mean, this is – first of all, I still think this is superior growth. I mean.

[Jonathan Braatz:]

Sure, yes.

[Wolfgang Dangel:]

Guiding at - 11% to 13% growth is still superior, it’s not 33% last year, but it’s definitely still taking market share, I think. And I think it’s preview to the overall economic environment that we are seeing and that we have I think reasonably well explained.

[Jonathan Braatz:]

Okay, all right. Thank you, Wolfgang.

[Wolfgang Dangel:]

Thank you. Jon.

[Operator:]

Our next question comes from Daniel Marcus with LH Capital Markets. Please proceed with your question.

[Blaine Marder:]

Hey guys, it’s Blaine Marder. How are you? Accentuating the positive, the revenue growth on the Faster business is 16% is well above the long-term CAGR that you gave us at 10%. Could you perhaps just expand a little bit on the drivers of that? And how you expect them to play out through 2018 and also beyond? Thank you.

[Wolfgang Dangel:]

Sure, Daniel. Very good question. I think the main reason and the single answer to that is the Ag market has been in a downturn for a number of years and has recovered in 2017 for the first time and we are seeing accelerated growth there. So that’s probably the only end-market where I would say, where we see probably double-digit market growth and that’s the main reason why we are coming in and guiding at probably 16% to 16.5% revenue growth for Faster Group. I would say the Ag market probably expected to grow 10%, so that means they are destined to take some market share of that – there as well and it’s purely due to this lumpy Ag market has been seeing over the last three to four years and now we are seeing really an accelerated growth phase. That answer your question, Daniel?

[Blaine Marder:]

Yes, thanks.

[Operator:]

Thank you. At this time, I would like to turn the call back over to Wolfgang Dangel for closing comments.

[Wolfgang Dangel:]

Thank you. Thanks again for your participation this morning and thanks to all of you for the hardworking Sun employees here who are driving these results. So we are looking forward to updating all of you when we close on the acquisition of Faster in the second quarter and then on our first quarter results in May. Thank you very much and have a great day.

[Operator:]

This does conclude today’s teleconference. You may disconnect your lines at this time. And, thank you for your participation.