Helios Technologies, Inc.
Q4 2008 Earnings Call Transcript

Published: 19 Mar 2009

[Operator:]

Good day and welcome to today’s Sun Hydraulics fourth quarter 2008 year-end conference call. Today’s call is being recorded. At this time, I’d like to turn the call over to Mr. Dennis Tichio. Please go ahead sir.

[Dennis Tichio:]

Good morning. Thank you for joining us for Sun Hydraulics 2008 fourth-quarter and year-end earnings 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 within the meaning of section 21-E of the Securities Exchange Act of 1934. For more information on forward-looking statements please see yesterday's press release. We will take questions once we have completed our prepared remarks. It is now my pleasure to introduce Allen Carlson.

[Allen Carlson:]

Thanks Dennis and good morning everyone. Sun had a tremendous year in 2008. The financial results were past any other year in Sun's history, but equally as important was our continued ability to reliably deliver highly differentiated quality products and services to our customers. We launched new products in April at the International Fluid Power Exposition, which were well received by the marketplace. New products are key to maintaining and growing our market share. 2008 started with strong demand that continued through the third quarter. However, in the fourth quarter, we began to see a precipitous drop in order rates and there was no good news on the horizon. Current order levels are now around what we saw near the end of 2003, and the beginning of 2004. We are cognizant of the impact this recession has already had on our customers and what a protracted global downturn will mean for our business levels going forward. We have taken steps to mitigate the financial impact of the weak demand. Over time in our factories has been eliminated in all shifts, and 2009 salary increases have been postponed for 30 members of our leadership team. Our manufacturing plants were temporarily idled around the holidays, and we have reduced discretionary spending on items such as consulting services, outside services and supplies. That said we will not sacrifice investments that will enable us to grow our business in the future. Our focus remains and being prepared for the next growth cycle, developing new products and enhancing productivity. Our balance sheet is strong and we have an ample cash to continue investing where we believe it is necessary. Sun prides itself on having a long-term vision and approach to running our business. We believe it is important to share our success with employees and shareholders. 2008 was an excellent year financially, and Sun’s board has elected to once again declare a share distribution. We first introduced the concept of the share distribution in March 2008. It allows for additional cash dividend for shareholders, and additionally retirement plan contribution for employees. Based on 2008 results, shareholders will receive a one-time $0.09 per share dividend later this month and employees will receive an additional 9% contribution to their retirement plans including the Sun Hydraulics ESOP. The cash dividend for shareholders is an addition to the normal quarterly dividend. The majority of employees will receive their share distribution in the form of Sun's stock. While the share distribution might not be available every year, we felt it was appropriate for shareholders and employees to benefit from the financial success Sun achieved in 2008. Tricia will now discuss the specifics of the fourth quarter and 2008. We will then take questions. Tricia.

[Tricia Fulton:]

Thank you, Al. All comparisons will be to the same period last year. I will first review the fourth quarter. A dramatic drop in demand led to the fourth-quarter decrease in sales of 20%, which resulted in a 52% decrease in net income. Foreign currency fluctuations were responsible for 5% or $1.8 million of the decline in sales. Basic and diluted earnings per share were $0.15, a decrease of 52%. The employee portion of the share distribution, which Al mentioned, accounted for additional expense of $0.06 in the fourth quarter. EPS before adjustment for this share distribution was consistent with our guidance at $0.21. Sales for the fourth quarter were down in every region across the globe. Sales to North America posted the smallest decline at 11%. Europe decreased 22% and Asia was down 46%, resulting primarily from a drastic slowdown in Korea. Turning now to the annual results for 2008, sales were up 7%, as net income rose 16%. Foreign currency had very little effect on the sales for the year. Basic and diluted earnings per share were $1.55, up 15% and 16% respectively. Sales grew in all regions for the year. North America increased 6%, Europe rose 9%, and Asia was up 2%. Please note that these numbers reflect sales to each region. The sales reported in the segment information of the press release represent sales from each geographic operating unit. Gross profit increased 7.8% to $59 million. Gross profit as a percentage of sales was up 0.5 point to 33.2%. Margin increases were achieved largely by the additional sales volume. 2008 margins were very strong in Q1 and Q2 at 35% and 37%. We saw some deterioration in Q3, when margins slipped to 33%, and a short decline in Q4 sales resulted in gross margins of 25%. Sun’s fixed cost base worked to our advantage over the last few years when we are able to leverage these fixed costs against consistently rising revenue. However, the inverse is true in periods of rapidly declining sales. FD&A increased 7% to $22.7 million. The increase was driven primarily by higher retirement plan costs related to the share distribution, professional fees, and compensation. Our effective tax rate was 31.8% compared to 35.6%. The lower tax rate is due to the decreased tax rate in Germany as well as R&D tax credit, manufacturing deductions, and temporary differences in the US. Net cash from operations was nearly $38.5 million, up $10 million from last year. The increase was due to higher net income of $3.6 million, offset by working capital changes. For the year, day sales outstanding was 30. We have not had nor do we anticipate any issues with collectability, even in this difficult economic environment. Inventory turns for 2008 were 11. Our manufacturing leaders continue to do a great job of managing inventory levels, which can be particularly difficult in a period of declining sales. Capital expenditures for the year were $10.9 million. These purchases consist primarily of machinery and equipment, but also include $2.5 million for land purchase in Sarasota. Capital expenditures for 2009 are estimated to be $7 million. Our quarterly cash dividend of $0.09 per share was declared in the fourth quarter and paid in January. The board also declared a share distribution on February 27, 2009, for a special dividend of $0.09 per share that will be paid on March 31st to shareholders of record on March 15. Taking a look at our outlook for 2009, first-quarter sales are estimated to be approximately $25 million with net income estimated to be on the positive side of breakeven. This represents a 49% decrease in revenue from Q1 last year. The effective currency on the Q1 estimate is approximately $2 million. While this is a substantial decline of both revenue and earnings, we know this business cycle will turn back up and we will be ready when that happens. When we look back at the previous business cycles, it is evident that the investments we continued to make throughout the cycle translated directly into new business opportunities. This resulted in market share gains that fueled both our revenue and earnings growth for the last five years. The first-quarter numbers are not where we liked them to be, but looking longer term, we know that when the business cycle turns back up it happens quickly, and we will be in a position to take advantage of the recovery. Thank you. Angel, you can now open the call for Q&A.

[Operator:]

(Operator instructions) And we'll take our first question from John Braatz from Kansas City Capital.

[John Braatz:]

Good morning Tricia. Good morning Allen.

[Allen Carlson:]

Good morning John.

[John Braatz:]

A couple of questions. Allen you referenced 2003-2004 and in 2004, when I go back and look at the numbers your gross margin was about 30%, and in the fourth quarter here, I think your gross margin was around 25%. I know you imply a lot of operating leverage, but when you compare 2004 to 2009, are you that much more leveraged operationally such that you know, while we have these tough times we will see that gross margin three or four or five percentage points little bit lower than in 2004.

[Allen Carlson:]

I will take a stab at answering this, and I don't want to turn it to over to the financial types, maybe that can provide a little bit more color to it, but in my mind I don't equate 2009 to 2004. I equate 2009 more to like 2001 or 2002. 2008 perhaps was maybe even the average of 2006, 2007, and 2008, might be more like 2004, but certainly 2009 is more like the bottom of the last cycle, which was at ‘01 and ’02, not ‘04. Okay?

[John Braatz:]

I think differently in this down cycle than in the last down cycle, any additional costs that you can take out the business or is it pretty much sort of similar in what you're doing compared to 2000-2001.

[Allen Carlson:]

I think the effects of the recession or the bottom of the cycle is very much like it was, and I think how we got there is a little different. In 2001-2002, we didn't do it to ourselves. In this downturn, I think we've done it to ourselves, but the effects are very much the same, and I think it is going to play out very much like it did in the previous cycle as well. We will come out of it and will come out of it strong.

[John Braatz:]

One last question, and I'm being a little bit lazy here. Did you pay a dividend back in 2000-2001, and if so during downturn did you cut the dividend scale back at all?

[Tricia Fulton:]

No. We did pay a dividend. We've actually paid a dividend every quarter since we've gone public in ’97. We did not decrease the dividend, at that time it was a flat dividend. Through that period, we didn't increase it. We did toward the end of the last downturn, but we did not decrease the dividend at all during that period.

[John Braatz:]

Okay. Thank you very much.

[Operator:]

And next we will go to Kristine Kubacki of Avondale Partners.

[Kristine Kubacki:]

Good morning everybody.

[Allen Carlson:]

Hi good morning.

[Tricia Fulton:]

Hi Kristine.

[Kristine Kubacki:]

I just have a couple of questions, in terms of the investments. I was wondering if you could give us a little bit more color around that and in terms of both people and plant, and then how are you looking at capacity ahead of the next cycle.

[Allen Carlson:]

Okay. In terms of investments in people, we've got a lot of training going on, cross training in production areas, some outside training in machining courses. The State of Florida has some coursework that's available for manufacturing people. That's the investments that we are making in our people besides, you know, maintaining the workforce so that as we come out of it, we have a full slate of production ready people and better people. We are rolling out of wellness program, so that as we come out of this, again we'll have not only more capable and more capacity, but our employees will be healthier employees, which will also help us with our healthcare costs going forward. Those are the kinds of people investments that we are making. The second part of your question I think had to do with what other areas we are making investments. Was that right Kris?

[Kristine Kubacki:]

Yes, and then also – and then I guess on the back end of that would be, how do you – how are you looking at capacity. Is that part of the investments that you're looking at in this downturn?

[Allen Carlson:]

Exactly, our approach on capacity really hasn't changed for nearly 10 years. We take a look at what the constraints are, where they might be. We do some look forwards, you know, this happened what would our capacity constraints be an especially for today because you don't see any constraints at all, but you have to do a little bit of role-playing to you know, predict if this happened, where might you have capacity constraints, but we are always looking at, you know, constraints, root cause, corrective action, and where we have limited capacity making an investment, but only after we have checked with the marketplace to make sure that, you know, that capacity is going to be required going forward. That's the approach. We don't do a theoretical capacity planning per se, a classic capacity planning. We saw in the last business cycle that we would have exceeded maybe by a factor of two times our theoretical capacity, and we did that by addressing constraints in our system.

[Kristine Kubacki:]

Okay, and then kind of a bigger picture question, trying to focus on maybe finding something positive. Globally is there any market that you see out there that is perhaps not as worse as the other. Then what kind of markets can you kind of see globally, their geography or by end-market that perhaps would – we look to see recovering and a return of economy.

[Allen Carlson:]

We continue to do very well in China as an example, even though our business in Asia is down. That was primarily the result of what is going on in Korea, but business in China continues to be strong, and we continue to see growth in that area. Is there a bright spot, probably, you know, I would have said three or four months ago in the energy sector, but I'm not even sure that the energy sectors have a bright spot right now with the price of oil dropping to where it is, and you know, I think it will come back and I think those investments that are being made. The stimulus package is going to have an effect on infrastructure type projects, and any time that something is being built or torn down, our products are used in that activity. So, you know, if there is a bright spot. It's the stimulus package when it plays out to investments and infrastructure projects around the world. You know, China also passed its own version of the stimulus package, and I believe theirs is going to take effect quite rapidly and it's almost all on infrastructure type of projects.

[Kristine Kubacki:]

Any guesses into when you would see any impact in the US stimulus?

[Allen Carlson:]

You know, I don't know. I'm not very qualified to make that prediction, but my gut tells me that you know, we are well into this bottom of the cycle, well into it. We are like probably six months into it, and typically these cycles last about a year. I don't think this one is going to be significantly different, and so if you kind of look at it from that perspective, we should start seeing some changes in momentum, sort of around midyear third-quarter and going into 2010. By the way, that's also pretty consistent with what I've read by a lot of the economists. Lot of what's going on right now is a psychological factor, and we've got to get beyond the psychological factor and I believe once we do, the economy will start going forward. That's my view.

[Kristine Kubacki:]

Thank you very much for your time.

[Allen Carlson:]

Okay.

[Operator:]

And next we go to Chris Weltzer of Robert W. Baird.

[Chris Weltzer:]

Good morning everybody.

[Allen Carlson:]

Good morning.

[Chris Weltzer:]

I was wondering if you could talk a little bit about your distributors’ inventory levels and whether the, you know, the 49% revenue decline you are expecting this quarter is in any way, you know, function of inventory destocking going on there.

[Allen Carlson:]

We don't have any hard numbers. We will towards the end of March. We do that inventory analysis quarterly. There was a slight dip towards the end of the year, but it wasn't significant. So I don't have any hard numbers to share with you, but I can tell you that I have just come back from an industry Association conference, the spring National Fluid Power Association conference, and it was an opportunity to talk with many manufacturers in the fluid power industry, many of the distributors and the suppliers, whether there are our distributors of some other brand distributors, and the sense that I got from those conversations was that, yes indeed, there was destocking going on. It is one of the few levers that distributors have at their disposal during tough times. It is – they have two things. They have inventory and they have employees, and they would rather cut their inventory than cut their good employees. So I believe there is destocking going on. When I talked to other manufacturers in the industry, it would seem that Sun’s drop in sales was sooner, and probably deeper, faster than what we've seen with – what I saw in the conversations with other fluid power manufacturers. And one of the big differences is that we have a distributor channel. That distributor channel typically reacts quickly, on the way down as well as on the way up. So, I have some hard numbers around the end of the month, but my sense is that there is some significant destocking, and by the way it is just not in North America. I believe it is taking place in Europe as well.

[Chris Weltzer:]

That's very helpful. It is a good segue to my next question. I mean, can you talk broadly about how the industry is reacting to this slowdown. Have you seen competitors getting more aggressive on pricing because you know, I realize not everyone is quite as nimble as you and able to cut production as quickly.

[Allen Carlson:]

The competition to some degree is more severe. Pricing is obviously in a down economy, whether you're selling you know, groceries at the grocery store, hydraulics at the hydraulics market, pricing is more of an issue in this kind of economy. Having said that, you know, our approach has always been to sell a premium product and provide a quality service and a quality product at a fair price. And so, you know, we don't play a lot in the pricing game, because of our approach to market. We don't discount. The analogy I like is the automotive analogy, while Ford, Chrysler, and GM are discounting everything, some of the upscale like BMW and Audi and some of the others, they don't shave their prizes during the downturn because they can command a premium for their products. It's a fair price. Kind of where we are positioned in the marketplace. That's, you know there is always a few exceptions to that rule but for the most part that's it. The other thing that's happening in the market, I guess is a positive thing. There have been a fair number of our competitors who have disappeared. That happens in a down market, the strong survive and the weak don’t, and we know that there are some innovation going on in the marketplace.

[Chris Weltzer:]

So that's very helpful as well and then just a real quick one. Do you have expectations for tax rate in ’09?

[Tricia Fulton:]

We are looking somewhere between 32% and 33%.

[Chris Weltzer:]

All right. Thank you very much guys.

[Operator:]

And next we will go to Joe Mondillo of Sidoti and Company.

[Joe Mondillo:]

Good morning guys.

[Tricia Fulton:]

Hi Joe.

[Allen Carlson:]

Hi Joe.

[Joe Mondillo:]

Two quick questions. A lot of my questions were covered already, but first off, do you have a sense of where – how must the aftermarket is associated with your sales.

[Allen Carlson:]

Almost none.

[Joe Mondillo:]

None.

[Allen Carlson:]

No. The only aftermarket that we have per se is when a customer decides to completely revamp a machine, let's say he takes 30, 40-year-old piece of equipment and the frame and the basic equipment is okay, but it needs to be refitted completely with hydraulics. Oftentimes cartridge valves and manifold systems are used for that retrofit, but as a drop-in [ph] replacement, our products typically don't fail in the field.

[Joe Mondillo:]

Okay, and then in terms of CapEx, do you have a sense of where that could be for this year and what your maintenance level is?

[Tricia Fulton:]

It's going to be around $7 million for 2009, maintenance on that is a small percentage of the total.

[Joe Mondillo:]

Okay. All right, thanks a lot guys.

[Allen Carlson:]

Okay.

[Operator:]

(Operator instructions) Next we will go to Fred Russell of Frederick Russell Investments.

[Fred Russell:]

Good morning everyone.

[Tricia Fulton:]

Hi Fred.

[Fred Russell:]

Hello, Tricia and Allen.

[Allen Carlson:]

Hello Fred.

[Fred Russell:]

Good morning. You say, I think you may be unnecessarily harsh on yourself, but you say that we have done it to ourselves this time.

[Allen Carlson:]

I'm referring to the economy in general.

[Fred Russell:]

Okay. All right.

[Allen Carlson:]

My comment had to do with the last recession. We were heading south prior to 9/11, but 9/11 you know, really sort of put the nail in the coffin. This particular recession writing has been triggered by banking problems, and I would say to some degree our own government’s actions over the last 20 years or maybe even longer.

[Fred Russell:]

What do you mean by government actions. It sounds like a sweeping indictment of both parties. What do you mean?

[Allen Carlson:]

I don't think it's good to get it from my political philosophy over this call.

[Fred Russell:]

Okay. All right. We'll reserve that one for in visit, okay. You've got a lot of cash. You're in wonderful position, about $35.3 million on the balance sheet. Are you tempted to buy back stock or would that be more exciting, more succulent to make an acquisition and if so where would that be?

[Allen Carlson:]

First of all, in terms of the stock buyback, there are no plans for a stock buyback. That's at the discretion of the board. So, I'm really not in a position to comment as to whether or not that something the board would entertain. Relative to opportunities going forward, we have been making investments and acquisitions. We've got one scheduled for later this year, early next year to complete, which is the High Country Tech acquisition. You know, we are finding that in today's world, electronic controls and hydraulics are partners on many, many pieces of equipment. Oftentimes, the hydraulics takes the lead but oftentimes the electronic controls take the lead in terms of how the machine is designed and laid out. So we want to be able to position ourselves to play on both platforms, hydraulics and electronics, and to collaborate on the integration of the two technologies for our customers. So, I think you will see more activity in that area.

[Fred Russell:]

So would that suggest that the growth rates for electronic controls would be more dynamic, more powerful than it would be for the traditional cartridge valve.

[Allen Carlson:]

Yes, you know there has been a study done that shows for every dollar spent on a piece of hydraulics, on a piece of machinery. There is four dollars spent on electronic control.

[Fred Russell:]

Looking at some of your competitors that are falling by the wayside, Sun’s competitors, are there – is there any commonality to them, are they in a particular – servicing a particular industry with a particular nature, particular strategy, or is it – or is the failure across the board.

[Allen Carlson:]

I think it's – generally speaking they don't have a strong enough balance sheet to survive this part of the business cycle.

[Fred Russell:]

I see. Well, it is not Sun’s problems. That's good. What happened in Korea? China is very strong but Korea little disappointing. Can you – are you able to elaborate on that.

[Allen Carlson:]

Sure. It's a very simple story. Our company in Korea, we have owned them now since ’98. It has had four major customers, and they are in construction equipment, and those four major customers all went south at the same time. Now, we have known that they were vulnerable and have been for the last 10 years finding new markets and new customers. That continues to be what they are doing and they are making progress in that area, but it is very difficult when, I don't know 70% of your customers, their business goes down 50% or more.

[Tricia Fulton:]

And we started seeing that last June and August.

[Fred Russell:]

Right. Okay, okay. This is not your conventional question, but I applaud your efforts in this area. What specifically are you providing, that Sun provides in its wellness program for its employees. I think it's a great idea.

[Allen Carlson:]

We are in the process of bringing in a nurse practitioner on site. The nurse practitioner is able to dispense, I believe it is 50 of the most common drugs directly. So the drugs are purchased in bulk. Our employees then don't, let's say they get a cold or sinus infection or something minor that they would have to go to the doctor for it. They can go directly to our on-site nurse practitioner, and she can dispense the drugs or determine whether or not an office visit is actually necessary. It saves time for our employees, it saves our employees cost, and it saves a significant amount of cost for us. That is just one example of the wellness program that we're rolling out. There are other elements of it, and we are very convinced that it's good for everybody.

[Fred Russell:]

I think that's right. Okay. Thank you very much. That's it from me.

[Allen Carlson:]

Thank you Fred.

[Fred Russell:]

You're welcome, thank you.

[Operator:]

And next we'll go to Mr. Brett Hendrickson of Nokomis Capital.

[Brett Hendrickson:]

Hey, thanks for taking my question. I just want to know if you know in the past I think you guys have gained market share in the downturn with the thought that maybe the way time to get your products versus the competitors products goes down, and so therefore people choose your product. Do you see that happening right now?

[Allen Carlson:]

We don't see it as this part of the cycle per se, but we will see it as we come out of the cycle. I don't think we're losing market share. We might be gaining a little bit of market share because you know, some of the competition perhaps is in a strong, enabled to respond even at the downturn, but we continue to make investments in our employees, in our processes. Our products continue to get better. We had capability, we had capacity, and as we come out of the downturn, we come out of it very strong. Many of our competitors actually come out of it crippled.

[Brett Hendrickson:]

The hydraulics divisions of both (inaudible), would you call them direct competitors. Sorry, that is probably a dumb question but …

[Allen Carlson:]

I don't know that they are direct competitors. They are a competitor in certain areas. There are also very good customers around the world. When they run into challenging applications, where they need additional products that they don't have, they are great customers of ours. So I'm not sure to classify them as a competitor.

[Brett Hendrickson:]

And then two things I think I just missed. One, you said you’d lean towards acquisitions versus share buybacks right. Did I hear that right?

[Allen Carlson:]

I said the share buyback is at the discretion of the Board, and that there are no plans at this time. I can’t tell you that the management team, and myself included are very much involved, and looking for acquisitions that are strategic and the right fit for Sun.

[Brett Hendrickson:]

Okay, and then another thing just in the beginning of the call. You say you see this cycle much like other cycles, I think in terms of length.

[Allen Carlson:]

I believe so. You know, I guess it will play out and we'll see but when I look back over the last 30 to 40 years, typical recessions have lasted anywhere from 8 to 16 months. I believe that this is going to be very typical. We are about eight months into it, maybe a little longer depending upon geographically where you live or what are – you know, if you're an automotive, it will be a lot longer than eight months, but overall I think we are in our 8th or 10th month, and it plays out like other ones. We are looking at 16 months as the average. Maybe, a little longer, maybe a little less.

[Brett Hendrickson:]

I hope you're right. From my perspective this seems like quite a goosey.

[Allen Carlson:]

This is a 100 years storm. This is –

[Brett Hendrickson:]

I'm sorry.

[Allen Carlson:]

I said this is the 100 years storm.

[Brett Hendrickson:]

I would agree. And then last question, just on your new business in Europe. Can you characterize, how much of it might go towards Eastern Europe for all the infrastructure that they were building there versus central and Western Europe. Do you have a good sense of the end markets for your customers there?

[Allen Carlson:]

We have a sense for it. I don't know how precise we can be, because a lot of the products that is produced ultimately going into Eastern Europe might be produced in Italy or Germany or Austria. So it is very difficult, but my sense is that Eastern Europe might be 10% or 15% of the market.

[Brett Hendrickson:]

10% to 15% of your Europe business?

[Allen Carlson:]

Yes. I think that's a fair number and probably growing, I mean it was – 10 years ago it was essentially zero, and it is 10% or 15% now, and as their economy grows and becomes stable, there are opportunities for our product.

[Brett Hendrickson:]

Okay, great. Well thanks for your time today and good luck.

[Allen Carlson:]

Thank you.

[Tricia Fulton:]

Thank you.

[Operator:]

(Operator instructions) Next we'll go to Chris Weltzer of Robert W. Baird.

[Chris Weltzer:]

Hi everybody.

[Tricia Fulton:]

Hi Chris.

[Chris Weltzer:]

A quick follow-up. The $0.06 contribution on employee retirement accounts. Did that all fall in the US segment?

[Tricia Fulton:]

No. It was across the board. It will go to – the retirement portion of the share distribution will go to all employees. So it was obviously with the majority of the employees being in the US, majority of the cost was in the US.

[Chris Weltzer:]

Okay and remind me, does that all end up in SG&A or some of that in COGS as well.

[Tricia Fulton:]

Most of it is in cost of good sold, a smaller portion probably 20% to 25% is in FD&A and 75% to 85% is in cost of good sold.

[Chris Weltzer:]

I think that is very helpful. And then, I mean you talked broadly that the weakness you saw in the 4Q as far as orders continued into January and February. Can you talk about any difference, you know, international versus domestic. I mean it looks like the US was holding out a little bit better on a relative basis in the fourth quarter. Is that changed in all?

[Tricia Fulton:]

No, it's about the same. We are pretty much saying everybody down. If you're looking at December order rates versus January and February, there are spread about the same geographically.

[Chris Weltzer:]

Okay, very helpful. Thank you guys.

[Operator:]

And with the follow-up question we go to Kristine Kubacki of Avondale Partners.

[Kristine Kubacki:]

Thank you for taking my question. Just two quick questions, in terms of trends from the fourth quarter into the first quarter, and what you have seen sequentially January to February, has there been any improvement or is it stayed pretty stable in terms of incoming order rates.

[Tricia Fulton:]

January order rates were higher than what we are seeing in December, but February order rates dropped again off of what we saw in January.

[Kristine Kubacki:]

Okay.

[Tricia Fulton:]

And then –

[Allen Carlson:]

Let me comment a little bit on that. Yes, that's true, but when you dial in the noise that's out there with the distributor destocking, I'm not so sure that that's – that’s really the trend, I mean it could be but there is so much noise out there and the difference between February over January wasn’t huge. So my answer to that question would be I don't see a lot of difference between the last three or four months. We are kind of bumping our heads along the bottom.

[Tricia Fulton:]

There is a lot of consistency from week to week per se. So his comment about bumping along is a good one.

[Kristine Kubacki:]

Okay, and then in terms of how you are looking at the US dollar or if it is important at all into your forecast. The dollar has risen pretty quickly here. I was wondering if, you know, how do you expect it to impact your business in terms of top line, and then even on the operating side.

[Tricia Fulton:]

Well, on the top line, if you're looking at Q1 estimate we can compare that with the exchange rates that we had in the last few ones, and it does have a downward effect of about $2 million built-in for that $25 million for Q1. So, it's pretty substantial effect at least on the top line. On the bottom line, it affects us primarily in Germany and Korea from the standpoint that they buy from us in US dollars. So as the US dollar gains against the euro and the won, their cost of good sold goes off.

[Kristine Kubacki:]

Okay, I appreciate that. Thank you.

[Operator:]

And with no further questions, I'd like to turn the call back over to Allen for closing remarks.

[Allen Carlson:]

Thanks Angel. I thank you all for dialing into our fourth quarter and year-end conference call this morning, and for your continued interest in Sun Hydraulics. We know we are in a cyclical business, and we find ourselves today at the bottom of the cycle, and we are prepared well for what we are currently facing. Nonetheless, these are difficult times. Nearly every customer in every market and in every geography has been severely affected. However, it is times like this that good companies get even better. Our approach is quite simple, to set and maintain a steady course, to invest in our employees, our products, our processes, and our capabilities, and to position Sun to take advantage of the better times that are ahead. Thank you again.

[Operator:]

That does conclude today's conference. You’re now welcome to disconnect your lines. Have a wonderful day.