Greetings. And welcome to Helios Technologies Fourth Quarter and Full Year 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Tania Almond, Vice President of Investor Relations and Corporate Communications. Thank you. You may begin..

Thank you, Operator, and good morning, everyone. Welcome to the Helios Technologies fourth quarter and full year 2020 financial results conference call. We issued a press release yesterday afternoon. If you do not have that release, it is available on our website at hlio.com. You will also find slides there that will accompany our conversation today..

Thank you, Tania, and good morning, everyone. Please turn to slide three and I will summarize our highlights for Q4. 2020 was certainly a year that will not be forgotten. It was full of great accomplishments, even if we face the challenges of the global pandemic head on.

The Helios team pulled together and drove results that exceeded the plans we put in place in the second half of the year. We protected our employees and communities. We supported our customers, kept all operations running and executed on projects according to plan. We acquired a transformational health and wellness electronics company in November.

Balboa is diversifying our offerings and our end markets. It also prints technologies that we can throw the leverage to create new growth opportunities. Importantly, we ended the year on a strong note. We delivered solid financial results. All of our businesses exceeded our expectations in both revenue and profitability.

There is a strong demand across a number of our end markets, especially in ag, marine, and health and wellness..

Thank you, Josef, and good morning, everyone. On slide seven and eight, I will review our fourth quarter consolidated results. As Josef noted, we delivered significant growth in the fourth quarter supported by our focus on delivery, our expanding sales channels, strong end markets, and of course, the addition of Balboa.

Net sales grew 24% sequentially and 20% over the prior year period as we executed our growth plans. Fourth quarter gross profit of $52.7 million increased $5.8 million or 12% compared with the trailing quarter and $5.3 million or 11% over the prior year period from higher volume.

Cost of goods sold in the quarter included $1.9 million of inventory step up amortization related to the Balboa acquisition. While consolidated organic volume was higher than the third quarter, gross profit was also affected by the mix of products sold, Balboa’s gross margin profiles and the impact on operations from increasing freight costs.

We are working to offset the impact of these items with cost containment, adding shifts to reduce over time and working on our global supply chain efficiency programs. Gross margin was 34.8%, which reflects the 120-basis-point impact on gross margin of the inventory step up.

I should also point out that although Balboa’s business has lower gross margins, they have a lower SEA expense structure. So that allows Balboa to still deliver performance within our target operating margins.

In fact, Balboa well exceeded our greater than 20% target operating margins in its first two months given the high volume they have been producing to meet accelerated demand.

Even with changes in mix, adjusted EBITDA margin held steady at 23.2% compared with the same period a year ago and was down just 20 basis points compared with the trailing quarter reflecting our cost management efforts, productivity improvements and the contributions of Balboa.

Non-GAAP cash EPS improved $0.07 to $0.60 for the fourth quarter compared with the trailing quarter and was up $0.06 compared with the prior year period reflecting better than expected performance of the Balboa acquisition..

Thank you, Tricia. We are confident as we entered 2021 that we can drive growth and deliver strong margins. Our $1 billion revenue goal is not the end game but rather a milestone. We have our sights focused beyond that.

As a management team, we have recently defined the Helios purpose statement and we are implementing four value streams to augment our strategy.

We believe the value streams will deliver growth, diversification and market leading financial performance as we develop into a more sophisticated, globally oriented, customer centric and learning organization. The four value streams are, number one, protect the business and ensure the cash flywheel continues to spin.

We plan to drive the cash flow engine through new product launches, while we leverage existing products. We will cultivate customer centricity and are investing in expanding capacity, as well as productivity improvements. And we’ll continue to execute on our newly developed global manufacturing and operating strategy that will drive improved margins.

Number two, champion a global operating mindset to better leverage our assets, accelerate innovation and diversify our end markets. Number three, create great opportunities for growth, while reducing risk and cyclicality by diversifying our markets and sources of revenue.

We will add technology, capacity and create differentiation that will make us tough to follow. And finally, number four, develop our talent through a culture of customer centricity, continuous improvement and embracing diversity, engaging the team, focusing on shared deeply rooted values and promoting our learning organization.

These four value streams are interlaced with our flywheel acquisition strategy, as well as our Helios shared corporate values. We plan to provide more detail and all of this at our upcoming Investor Day that we will host later this year. All of this makes the year ahead very exciting and we are just getting started.

We are excited about the many changes we are implementing to drive growth, profitability and shareholder value at Helios. I have great confidence in the ability of the Helios team to continue to lead successfully and believe it will show in our results. With that, let’s open up the lines for Q&A..

Thank you. Thank you. Our first question comes from the line of Nathan Jones with Stifel. Please proceed with your question..

Good morning, everyone..

Good morning..

Good morning, Nathan..

I’d like to start off talking a little bit about this John Deere Supplier Innovation Award and what that means to the company.

I know when Helios acquired Faster, acquired Enovation Controls that a big part of the thesis there was revenue synergies you were going to be able to generate by coming up with products that look specifically like that supplier award that you’ve got there.

And I know, Josef that you had said that that was something that you thought could -- you could accelerate over the next few years here. It is a big contributor to the 2025 goals.

Can you talk about where you are in that process? What kind of revenue you’re generating out of putting those businesses together and what you think it can add to growth over the next several years?.

Yeah. Certainly, Nathan. And I will start and Tricia can chime in as appropriate. So, look, this John Deere Award, when you step back and look at the long lasting relationship that I had with John Deere. You really screen for understanding a little bit more about the John Deere strategy and what are they really after.

And one of the key indicator was there also like many other OEMs trying to simplify their supply chain and versus having supplies coming in from gazillion of sources and having to manage that.

We pitched an idea of integrating and combining test the product with our CVT and some products and we presented that and they were just a good system solution for them to reduce a lot of complexity, to reduce supply chain costs and integration costs, and it worked out pretty much how we planned it, it would.

But on a more strategic level, Nathan, is when you step back and listen to seeds we planted over the last couple of calls. We have three different strategic objectives in terms of growing revenue into diversified markets.

One, if we take Balboa, for an example, they’re traditionally sold into the wellness market and laser focus and hot tub, swim spas and exercise spas. That product line really fits well in other industrial niche sectors that creates a potential additional revenue stream and that holds true for all the segments.

Enovation, for an example, largely a recreational supply chain driven customer here and we will expand those product lines in other niche markets and protect the margins.

But then as we combine the strength of the entire company, that’s where we see equal great opportunities to really get in as a system solution provider where appropriate and start increasing the penetration of new customers and new markets that we traditionally never participated in.

So those are kind of the three different channels of diversification of our end markets..

Yeah. I would just add….

Maybe just….

Yeah..

Okay. Go ahead, Tricia..

Yeah. I think I would just add on this is really a perfect example of a couple things. One, the synergies that we saw when we acquired Faster and how we could bring together CVT and QRC, but also, what we’ve been describing more recently as diversified end markets. This is an application that isn’t a traditional application.

So I think it’s been a really good eye opening experience for us to see what the opportunities are for us going forward and how we can bring these two technologies together for good customer wins..

And maybe when you think about the revenue synergy opportunity from putting all of these businesses together all the way through Balboa? Is there a quantification you can give us on kind of what you think that can drive in terms of market out growth over the next several years, just assuming market growth is going to be whatever it is, what do you think you should be able to outgrow the markets by?.

Yeah. I think, Nathan, we hinted in our prepared remarks that we have our sights set on something much larger over the years that we originally outlined. But I think it’s still a little bit early to quantify that. We certainly will provide more color in our Investor Day, the targeted customers by business segment and territory.

But for an example, maybe that could help you understand this a little better is, if you look at the Balboa acquisition, Nathan, and copulate with our Enovation segment, that technology can be readily available for other industrial markets.

If it’s the HPC market or even if it’s the commercial foodservice market or exercise in home equipment, with some really minor investments needed in Tedros, BJN acquisition that will help us integrate those two pieces of technologies and get us to the markets very fast and we have targeted our top three customers and one of them is pretty much in a prototype testing phase as we speak.

So still a little too early to outline the full opportunity, but clearly, there’s a great path for us to penetrate that technology into the new diversified markets, which are truly new markets for us..

I’m sure we’ll hear a lot more about it at the Invest Today. So I look forward to that now. I’ll pass it on. Thank you..

We look forward to seeing you..

Our next question comes from the line of Mig Dobre with Baird. Please proceed with your question..

Yes. Thank you for taking the question and good morning everyone. I’d like to stick with Nathan’s line of questioning here. And I guess, I’m thinking back here of the strategy that you guys have laid out even before you joined Josef.

And as I always understood it, it was this evolution from being a narrow -- relatively narrow Hydraulic components supplier to migrating more and more towards system sales.

And the idea was that you’re not only going to have a more comprehensive Hydraulic product, but that you’ll be able to have the Electronic portion of it to essentially moved from within the vehicle to actually in the cab as it were, in terms of displays, controls, things of that sort.

So, it strikes me that the Hydraulics side of the businesses where you have had several years worth of investment in product development and it seems like it’s manifesting itself with Faster. But I’m kind of curious as to the Enovation aspect and how that is tying in with the Hydraulic product.

Because for your comments, it sounds like you’re finally starting to see some breakthroughs here with customers that are buying Hydraulic product, but they’re looking to migrate some of your Electronics offerings on a platform as well.

So, can you give us some context here and maybe the follow up to this is, you are going to start bumping up into larger competitors that essentially employ this strategy? Are you able to handle those competitive dynamics? How is the market handling you sort of becoming a more broader player as it were?.

Good morning, Mig? Thanks for the question. So, look, I think, you answered the question for me, as you outlined our strategy here. But, clearly, we are integrating our electrification into the Hydraulics sector as well.

One interesting thing that we heard, as we start engaging with our customers more closely and did a customer study is, we are truly being considered a pure play company, meaning we have an Electronics division. We have a Hydraulics division and test with the investing that’s what we are focusing on.

And every competitor, we have will over time just make us stronger and a better company, because we can learn. But they also have many other things going on in their own portfolios that may not allow them to be as agile as is laser focused in investing in the areas like we do.

So the electrification components into a system sale is starting to get very interesting for us and we’re investing in this area. And I forgot, Mig, what your second question was, I’m sorry..

Well, look, I mean, I was trying to understand where you are in terms of progress. I mean, can you credibly walk into an OEM and someone like Astra AOG or John Deere, and say, hi, look, I have a full solution. It’s developed and I want to get on the next platform.

Do you have that capability today?.

Got it. So we have -- in many areas we have the system capability to support them over the next 12 month to 24 months. What we do not have is their innovation pipeline also calls out for adjustments and for electrification in certain areas.

And that’s what drove the acquisition of BJN and that’s what drove that augmented strategy on combining our Electronics segment to our Hydraulics segment and being ready with new products to deliver and to answer that, Mig, is our customers switch over to the new modeling in 2023, 2024 and 2025. So are we ready with current demands and needs? Yes.

Will we be ready as the customer switches over the next 12 month to 24 months? Also yes..

Okay. Then, I guess, the switch -- maybe shift gears here a little bit. Tricia, I’m trying to better understand your -- the moving pieces of your outlook. If I look at the topline, I think, the midpoint base in something like 32% growth.

Can you help us understand how much of this is coming from Balboa and my math is something like 22% from this acquisition alone? And how do we think about core growth for Electronics and in Hydraulics, that’s baked into this outflow?.

Yeah. Mig, we’ve suspended guidance back in March of 2020 and this is really our first reintroduction of guidance coming out of COVID. We think it’s prudent to provide overall Helios guidance at this time and not at the segment level, per se.

I think you can get a good feel for the numbers that we gave you for the first couple months that we own Balboa of what their capabilities are going forward. But we aren’t going to provide individual guidance at the segment level at this time. We want to wait a little bit, as we’re continuing to come out of COVID.

We feel really good about 2021 across a lot of our businesses and end markets, but I don’t know that we’re prepared to tie ourselves down to something specific at this point from a growth perspective at the segment level or the end market level..

Well, then, I guess, my follow-up and maybe last question is on Electronics, leaving Balboa to aside, it seems to me like you’re pretty optimistic on the vehicle technologies portion of the business, marine is doing well.

Although, I’d like a little more color on some of these supply chain disruptions that you kind of call that and how you think those work themselves through. But I’m also wondering what you’re seeing in a power control side of the business, because that’s where you have a lot of sort of industrial stationary applications off-highway vehicles.

At least in theory, those end markets should be rebounding pretty strongly in 2021 and I’m curious if you see it differently? Thank you..

Yeah. On the power control side, which is the more that the non-vehicle technologies business of animation. Oil and gas is still a challenge for them from an end market perspective, but definitely seeing opportunities on the mobile equipment side in that part of the business. Going forward into ‘21 there is quite a few opportunities.

As you might recall, when we rollout products that we tend to rollout new product introductions for Enovation in the recreational space and then they flow into the -- what we used to call power controls business or the end markets outside of recreational.

So we’re starting to see some of that happen, but we do have a lot of recreational rollouts for recreational vehicles coming this year that will trickle down into those other end markets as well. From a supply chain perspective.

Yeah, I mean, we do know just like everybody else, we probably will have some supply chain challenges on the Electronics side for both Balboa and Enovation. And we’ve already started addressing those, we’re doing blanket POs for multiple years to make sure that we’re covering our supply.

We’re buying ahead where we can for certain components that seem to have shortages or that are critical to some of these specific products and rollouts that we have.

So it’s going to be challenging, and it has been challenging, but I think it’s something that we feel we have a pretty good grip on at this point and we’re trying to stay ahead of the curve to make sure that we can get products out the door and meet the demand of our customers in 2021, which on the Electronics side appears to be very strong..

Appreciate it. Thank you..

Our next question comes from line of Josh Pokrzywinski with Morgan Stanley. Please proceed with your question..

Hi. Good morning, guys..

Good morning, Josh..

Hi, Josh..

Just a couple questions here.

Maybe to pick up the thread from the last question, Josef, what do you think of as kind of the big markets that are still under earning that you’re looking forward to recover? Because, I think, Hydraulics versus Electronics probably doesn’t slice the end markets quite fine enough to see where the real opportunity is? And then sort of related to that, anything that could necessarily help those from a stimulus perspective, I’m thinking like an infrastructure bill or something like that.

Given that you guys don’t necessarily do the bigger equipment in either of those businesses? Just trying to calibrate sort of where is the easiest comp and where could the dollars flow from some sort of incentive package that would drive incremental demand?.

Yeah. Certainly, Josh. Great question. So, look, and think to your first question, the construction side is would be my answer to your first question. We are seeing a recovery. It’s actually trending in a very nice direction.

So that would be one area that we would continue to watch very closely and I feel optimistic that it will continue to do what it says it’s going to do. In terms of the stimulus, when I look at across all of our companies here. We really don’t have anything baked in into our plans in terms of a potential upside.

Like Tricia mentioned earlier, we feel very good, very strongly about 2021. We issued a -- what we feel a very strong narrow guidance here. And if there are additional investments in infrastructure, roads and bridges over time, obviously, this will be an upset for us.

Since we don’t have it baked into our plans, and as we continue our strategy of system sales, where appropriate and protect our margins, that’s where I see the biggest opportunity as the infrastructure starts kicking in, and the roads and bridges are taking off with the demand of enough the terraces of the world, of the networks of the world.

So that’s where we can participate. But that would be an upset for us, Josh..

Got it. And then, I guess, sort of related to supply shortages or any sort of bottleneck..

Okay..

Anything that you can share with us even anecdotally on how you feel customer inventories are? And I understand it’s not….

Yeah..

… your product going through distribution, it’s more about maybe finished product for your customers or your inventory add customers, anything that would sort of speak to the health of that supply chain….

Yeah..

… and where customers are sort of catching up on their own backlogs?.

Yeah. Certainly. I will start and Tricia will add a little bit more color here. Obviously, we saw that coming and we anticipated coming out of COVID here that as everyone is trying to ramp up. We anticipated a supply chain shortage if it’s national or international. So in many cases, Josh, we did a -- we had a pre-buy program.

We had some hedging going on the Hydraulics side in particular with our distribution partners. They’re seeing the inventories coming down. So they will drive an additional element of buying.

But I mean, look, overall, we’re going through the same thing that probably everyone else is going through where we have the risk our portfolio is, in particular on the Hydraulics side 90% of our supply chain is pretty much located in the Midwest and been with us for 30 plus years.

So that relationship drove some substantial compensation of protecting our manufacturing operations plans globally and we put ourselves in a pretty good position. Now, if something else happens in over time that obviously we will communicate this accordingly.

But as we stand right now, there is a good path for us and meeting the guidance we have issued this morning..

Yeah. I would just add one….

Okay..

… Josh on the supply chain side. We recently appointed Rick Martich to SVP of Manufacturing and Operations. One of the key things that he is focused on is supply chain optimization, specifically on the Electronics side.

There has been a lot of work already between Balboa and Enovation looking at their common suppliers and where we can share products if needed and bring together from a cost perspective the -- what we’re buying from each of the suppliers. So we’re definitely focused on that and there has already been a lot of work done.

It clearly takes some time to do that. But it seems to be working well from the get go..

Got it. That’s helpful. Appreciate the time guys..

Thanks, Josh..

Our next question comes from line of Jeff Hammond with KeyBanc. Please proceed with your question..

Hey. Good morning, everyone..

Hi, Jeff..

Good morning, Jeff..

Jeff Hammond:.

, :.

Yeah. So, if we look at the organic growth piece that we have embedded in the guidance. We’re looking at high single digit growth for the organic and Balboa had very -- had a very strong end to Q4. They definitely are seeing demand remain strong in their end markets.

I’m not sure that we’re ready yet to extrapolate that eight weeks into what the full-year would look like. But they should have a very strong first half that coming out of that with given the backlog that they have..

Okay. And then just on the Balboa -- so it sounds like Balboa margins in the fourth quarter were accretive to the overall margin.

Is that something that can sustain?.

Yeah. They were creative to the profitability. They were accretive to margins. At the EBITDA level, they’re at or above what our target is in our guidance.

That’s also something that we’re working on to be able to make sure that they have the capacity and they’re able to generate the margins that we think they can over time, as we work through the first year of ownership..

Okay. So then just on the EBITDA guidance margins. So you did 23% and you’re saying 23% to 24%.

But it seems like you are going to -- you should get good incrementals on high single-digit organic growth and if double is additive, it just seems like you would have more lift based on kind of just your historical incremental, is there something temp costs coming back, investments, inflation that I’m not thinking about?.

Yeah. So clearly the investment part, Jeff, will play a key role into this, as we continue to invest in our manufacturing plants. We are going to add another layer of low cost manufacturing and start leveraging this outside of just our Mexico operations.

So one answer to your question would be, there is an investment planned throughout 2021 that will ultimately pay off with improved margins, getting the equipment upgraded in many cases, getting some automation in our Hydraulics side of the business. And then, secondly….

Yeah. The -- Jeff, there are some costs add backs. Clearly, we were able to take costs out of the business throughout COVID, some of it because we couldn’t travel. But discretionary costs came out of the business last year and we have said that most of those were temporary, and we’ll come back.

The first quarter, first half of the year still seems like travel is going to be a little bit limited. But we are very anxious to get back in front of customers as soon as they will let us and we will start that as soon as we can. So we will see those costs coming. Back to Josef’s investment comment, clearly our first investment was BJN.

We have an investment in a great group of talented engineers that are going to help us accelerate our moving into the diversified end markets that will ultimately result in a lot of growth on the topline and profitability. But for right now that is an investment..

Okay. And then just last one, you mentioned, Tricia, I think, a lot of new product rollouts driving growth and I think a lot of discussion about the Deere Supplier one and some of the synergies.

But is there anything baked into your guidance from Balboa growing outside of its kind of core health and wellness or is that something that starts to hit in 2022, 2023?.

Yeah. I mean, some of the new product rollout is already baked into the forecasting. But we can foresee that we will have others that come along as we’re working through bringing together the Electronics businesses to create the good, better, best product strategy and be able to roll that out to customers.

We have some as well on the Hydraulics -- that was mostly focused on Electronics. But we have product rollouts also new things coming out in both QRC and CVT as well on the Hydraulics side..

Okay. Thanks..

Thank you. Our next question is a follow-up from Mig Dobre with Baird. Please proceed with your question..

Thank you for taking the follow-up. Just a little more color on pricing if you would. I hear history here at Tricia would have you raising prices quite nicely in 2021 in Hydraulics at least as volumes rebound. I’m curious what you have announced already for 2021.

I don’t know if I missed that in your prepared remarks and how you’re sort of thinking about the year as a whole.

And related to this price cost, do you think you’re in a position to be balanced for 2021 there or should we be thinking that price costs can actually be a headwind for you and that’s kind of what’s reflected in the guidance -- the margin guidance?.

Yeah. We have not taken any pricing action so far in 2021. There probably are some opportunities there. We have not raised pricing in some of the businesses in a while. But given the COVID headwinds, and at times in the past, our deliveries were not on par with what we wanted them to be. So pricing was difficult.

But I do think we have some pricing opportunities in general in 2021. But also when you’re looking at the price cost, if we start to see cost increases on the material side, we should be able to get some of that in pricing as well.

We need to look at that and evaluate that as we go along and evaluate what where we are seeing those material costs increases. We’ve tried to mitigate those as much as we can so far and I think we’ve done a pretty good job at that. But there’s definitely some opportunity..

And do you think -- I’m sorry, do you think it can be neutral or balanced from a price cost perspective in ‘21?.

Yeah. The goal is to be neutral at a minimum on that for 2021..

Great. And then lastly, you talked about you kind of going out and trying to protect your own supply chain and ordering out several periods in advance, because you knew that there were going to be some disruptions as we were coming out of COVID. That’ll make sense.

And I guess, I’m wondering, are your own customers taking a similar approach? And I’m thinking back here to 2016, 2017, when we’re kind of seeing ordering in advance, which is why you kind of build backlog? Are you seeing something similar? Thanks..

From our customer perspective, we have a lot of long-term agreements in place, both with our customers and with our suppliers. So in many cases, pricing is set with at least the OEMs on the sales side and with our larger suppliers on the supply side.

Where we have a little bit more flexibility is with the customers where we don’t have long-term contracts in place per se. And we’ve seen some of our customers are increasing prices as we’re heading into 2021. So we’re also taking that opportunity to go back to them to get increases..

Right. I wasn’t asking about price. I was simply asking, if your customers….

Yeah..

… are trying to secure production….

Yes..

… slots from you in advance and they’re double ordering?.

Yes. We have seen steady flow here. Nothing out of that nor make so far. We have seen a slight uptick in the Electronics segment. In that segment and building a little better backlog than originally anticipated, but nothing really significant enough to really the wins here, I guess..

Okay. Thank you for taking the follow-up.

Good luck?.

Thanks, Mig..

Mr. Matosevic, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments..

Thank you, Operator. Well, thank you much for joining us today. We really appreciate your interest in Helios and look forward to updating all of you on our first quarter in May. We have a great company and we are super proud of the accomplishments we have made as a team over the last year and look forward to our future growth.

Thank you to the entire Helios family around the globe for your tireless efforts supporting our partners, our communities and each other. Have a great day and stay healthy..

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..