Greetings and welcome to the Helios Technologies’ First Quarter 2022 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. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Tania Almond, Vice President, Investor Relations, Corporate Communications in Risk Management for Helios Technologies. Thank you. You may begin..

Thank you, operator. And good day, everyone. Welcome to the Helios Technologies First Quarter 2022 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 hl.com. You will also find slides there that will accompany our conversation today.

On the line with me are Joseph Matosevic, our President and Chief Executive Officer, and Tricia Fulton, our Chief Financial Officer. They will spend the next several minutes reviewing our first quarter results, discussing our progress with our accelerated growth goals, affirming our outlook for 2022. And then we will open the call to your questions.

If you turn to slide to, you will find our Safe Harbor statements. As you may be aware, we will make some forward-looking statements during this presentation and the Q&A session.

These statements applied a 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 were provided in our 10-K filed with the securities and exchange commission.

You can find these documents on our website or at sec.gov. I'll also 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 with non-GAAP measures in the tables that accompany today's slide. And with that it's now my pleasure to turn the call over to Joseph..

The strength of our balance sheet. Our ability to quickly deliver. Diversity of our revenue sources and geographies. Our innovative culture that is part of our DNA. Our leading market positions across our portfolios. Our pure play focus within the hydraulics and electronics industries. Our growth class people, without them, nothing else matters.

We believe all these qualities create not only the buffers that protect us when times get tough, but also create the opportunities to help us further accelerate our operating model.

Importantly, we have delivered on our promises for eight sequential quarters, and are on track to achieve the milestone that we have accelerated by two years of reaching at least $1 billion in revenue by 2023. I want to thank all of our global colleagues for the dedication and hard work in achieving these amazing results.

Now, I would like to provide some highlights on our most recent acquisition announcement, please turn to Slide 4 PME is an ideal demonstration of our board down flywheel acquisition strategy. They bring differentiated technologies that expand our hydraulic segment offering.

In fact, because the products are so complementary to ours, they have been partnering with our faster business to sell their products since October of 2020. So we already had an established working relationship with the team and it makes sense to bring them into the Helios family to further accelerate our combined efforts.

They manufacture rotating products that enable connections within the hydraulic system to eliminate leakage.

The combination of our cartridge belts, quick release couplings, and sweeter bodes create industry-leading solutions that are not only very high value and cost effective for our customers, but also have safety and environmental benefits as well.

We believe the potential of this bolt-on is significant and it further strengthens Helios in the hydraulics market as the leading pure play provider of highly engineered solutions to both. Well, OEMS and our distribution partners. As we continue to target system sales across our segments over time.

This type of technology enhancements only filled extends our differentiation to be the most trusted strategic partner for our customers. Let me now turn the call over to Tricia to review the financial results and discuss our upturn outlook in more detailed before I come back for some closing remarks Tricia please..

Thank you, Jeff stuff and hello, everyone slide five to nine I will review our first-quarter 2022 consolidated results. As Josef noted, we started the year off strong out of the gate, managing through the continued challenges of the global supply chain and broader macro environment.

Net sales for 17% over the prior-year period as we executed our growth plans and continued to take market share, we delivered strong organic growth of 14% during the quarter, even with a 4.7 million foreign currency headwind. First-quarter gross profit of 83.6 million increased 8.2 million or 11% over the prior-year period from higher volumes.

Our manufacturing strategy is driving results even though the benefits are being partially masked by the current macro environment. Our teams have spent a lot of time formulating plans for each business segment to maximize us in the region, for the region and make versus buy strategies.

As we integrate the acquisitions we have made over the last 18 months, gross margin was 34.8% in the quarter, down 200 basis points from the year-ago period. While volumes and pricing we're up, increases in logistics, raw materials, and labor costs, compressed margin.

Adjusted EBITDA was 59 million up 15% with associated margin of 24.5% compared with 25.1% from the same period a year ago. Higher volume was offset by the cost increases I just described. Our effective tax rate in the first quarter was 22.4%, compared with 23.2% in the prior-year period, reflecting levels of income in varying tax jurisdictions.

Diluted EPS improved to $0.94 up 34%, while diluted non-GAAP cash EPS improved to a $1.18 up 19% for the first quarter over the prior-year period, reflecting higher sales, operational efficiencies, and strong operating leverage. Please turn to Slide 10 for a review of our hydraulic segment results.

first quarter hydraulic sales of $137.1 million were up 15% over the prior-year period and benefited from improved demand and market share gains in the Americas and EMEA, despite the $4.5 million headwind from foreign currency exchange rates. Organic growth in this segment was 10% over the prior-year period, while acquisitions added $6.4 million.

This is strong growth despite an estimated $6.6 million of sales delays due to supply chain shortages in this segment. Q1 hydraulics gross profit increased 12% and benefited from higher volume.

Gross margin of 37.1% versus 38.1% last year benefited from price increases and fixed cost leverage on higher volume, offset by increases in material, logistics, labor costs, and unfavorable FX.

Operating income increased 13% due to strong leverage and cost discipline, while margin modestly declined 50 basis points to 23.1% from the prior year period. Please turn to Slide 11 for review of our electronics segment results. Electronics sales were $103.4 million in the quarter, an increase of 21% over the year-ago period.

Organic growth in the segment was up 20% in the first quarter. We're seeing strong demand from the health and wellness and recreational markets, and the growth was seen across all regions. For the quarter, we estimate that approximately 11 million of sales were delayed due to supply chain shortages.

Electronics segment gross profit of $32.8 million in Q1 increased 9% from the prior-year period on higher volume. Electronics gross margin of 31.7% was down from 35% in the year-ago period, reflecting price increases and fixed cost leverage on higher sales that were more than offset by increases in raw material, rate logistics, and labor costs.

Operating income for the electronics segment of $20.5 million was up 12% from the prior-year period, although operating margin contracted 160 basis points. The operating margin reflects the flow-through of gross margin, partially offset by fixed cost leverage on higher sales and disciplined cost management.

Please turn to Slide 12 for review of our cash flow. Cash from operations was $14.7 million in the first quarter compared with $15.1 million in the prior-year period. We are carefully balancing our working capital requirements with our efforts to provide timely deliveries to our customers amidst significant demand and material shortages.

We have increased inventories to address our backlog and maintain our top-tier lead times, which is helping us take market share. For the quarter, CAPEX was $5.6 million or 2.3% of sales compared with $5 million or 2.4% of sales in the year ago period. We are currently expecting CAPEX in 2022 to be between 3% to 5% of sales.

Free cash flow was $9.1 million in the first quarter. Our free cash flow conversion rate was 76% for the trailing 12 months ending first quarter of 2022. This is lower than our more typical rate which was consistently over 100% from 2018 to 2020.

We have made a conscious decision to invest in, and grow inventory, where demand dictates and this strategy is reflected in our working capital needs regarding our capital structure. On slide 13, we consistently demonstrate our ability to rapidly delver our balance sheet.

Our strategy is to flex up leverage for strategic disciplined acquisitions and then quickly be levered using cash generated from operations. Our proforma net debt-to-adjusted EBITDA leverage of 1.79 times remains below our long-term goal of two times. We will continue to use cash to pay down debt as we reload for future acquisitions.

Cash and equivalents were 33 million at the end of the first quarter compared to $28.5 million at the end of 2021. Total debt at quarter-end was $438.1 million compared with $445 million at the end of 2021, reflecting repayments net of borrowings on our credit facilities of $4.3 million in the quarter.

Total liquidity at the end of the quarter was $192 million. As a reminder, our capital priorities remain debt reduction, organic growth through new products and technologies, acquisitive growth and distributions to shareholders.

Now let's turning to slide 14, even in the face of much greater macro uncertainty, just two months after we first establish this full-year outlook, we are maintaining our guidance for 2022, which assumes constant currency using quarter-end breaks.

We are considering the war in Ukraine, which has no clear timeline, broader, extended lock downs in major regions in China, the pace of inflation, timing and size of a potential recession, and the actions yet to be taken around the world by central banks. We will not include KMI in our expectations until the acquisition closes in the next few months.

Although it is not material in size. Our outlook currently assumes our markets are not further impacted by inflation, the global pandemic, or the geopolitical environment. We are responsibly taking into consideration all these current events as we look forward.

We continue to expect revenue in 2022 to be in the range of $930 million to $950 million, which implies an annual organic growth rate of approximately 8% at the midpoint of the range. In terms of quarterly revenue flow, our first quarter exceeded our expectations. There is less visibility as we look at the second half of the year.

While we have the benefit of pricing strategies coming into play, we want to remain cautious until we get further into the year and our visibility comes more into focus. Our adjusted EBITDA margin outlook remains 23.5% to 25%, which at the midpoint approximates our adjusted EBITDA margin for the full-year of 2021.

We will continue running our manufacturing strategy playbook, as Josef described, to find ways to offset the macro impacts. This implies that our expectations for adjusted EBITDA dollars remain in the range of $219 to $238 million or roughly a 7% annual increase at the midpoint of the range.

We expect interest expense to be between $14 to $15 million at current borrowing levels and rates. The effective tax rate for 2022 is expected to be in the range of 21% to 23%. Depreciation should be between $24.5 million and $26.5 million. While outlook on amortization is approximately $28 million to $29 million.

Our expectations for diluted non-GAAP cash EPS remain between $4.35 to $4.60 per share in 2022. This represents a 5% increase, over our 2021 results at the mid-point of the range. We're driving forward with our augmented strategy and delivering accelerated and profitable results while maintaining top quartile industry margins.

As we address the highly unusual operating environment we're in, we are encouraged by the progress we are making in the success we're having with that, I will turn the call back to Josef Matosevic for some final comments..

Thank you much, Tricia, these are unique times, yet I believe we are extremely well-positioned to execute at high levels. It is very important to us to continue to do what we said we're going to do. We believe taken a cautious stance on the second half of the year right now is part of us being good stewards of the business.

As I said last quarter, I am very optimistic that our potential as an organization will be further unleashed as we move beyond this inflationary and macroeconomic challenges. Over the last two years, we developed and have been executing on our augmented strategy that has taking us from a holding company to an integrated operating company.

It has been perfect timing to make this transition considering the changes in the world around us. It is providing tremendous leverage and will continue to do so over time as we get further into executing and implementing our operating and manufacturing plants.

Our business is significantly more diversified today as we continue to grow and cover more white spaces. Our R&D and sales teams are collaborating more than ever across all of the businesses. Our innovative product solutions that we are creating are stickier with our customers.

In addition, our investments in manufacturing operations have contributed to top-tier industry lead times, which we have been maintaining throughout this volatile environment.

We also very focused on our corporate sustainability efforts as part of this strategies, we're working to better articulate our ESG metrics and activity and recently rolled out a new website with our ESG section to highlight those details.

We are super excited about our future and hope you share Internet excitement with that, let's open up the lines for Q&A, please..

Thank you. We will now be conducting a question-and-answer session. [OPERATOR INSTRUCTIONS]. One moment, please, while we poll for questions. Our first question comes from the line of Jeff Hammond with KeyBanc, please proceed with your question..

Hey, good morning, everyone..

Good morning Jeff..

Morning Jeff..

So I was hoping -- one if you could give us price in the qUarter and to just update us on how you're thinking about price cost progression through the year as your kind of push some of these price increases through..

On the price cost, we did get pricing in Q1, I think we talked about that on the last call. It wasn't fully active throughout Q1; we do expect that it will be fully in our numbers by the end of Q2.

From a price cost perspective, we're trying to remain neutral by the end of Q2 on that and we are seeing some pricing pressures in areas that we maybe didn't anticipate, but we're also seeing, as we pointed out, really strong demand so we're very encouraged by that..

Okay. And then, yes, I just wanted to understand within the context of holding the guide and I understand the high-level macro headwinds, but you mentioned tougher visibility.

Maybe just speak to that and talk about what your backlog did in order trends through the quarter because it sounds like demand remains strong and I'd expect with the shorter lead times you'd continue to outgrow..

Good morning. Just summarized it well. We are seeing continuous strong demand pretty much across our entire portfolio. Still paying very close attention to Asia, obviously in Europe, Asia for an example, on electronic side is slightly up on the hydraulic side is slightly down.

We did anticipate in our Kunshan factory then they shut down we're fully open our again. Close eye on Europe is I mentioned and then overall just entire supply chain. We continue to see softer spots in some areas so we're just been really cautious and careful.

As you know, our business model of how we run to -- how we like to run the company is, we want to really do what we said we're going to do. We don't have 100% confidence on the second half yet. So this would drive a little cautionary step in our tone. But in terms of orders and demand and our backlog, it remains to be very strong..

And are you seeing any -- is this Asia -- the Asia decline in hydraulics, was that more around the lock down or some underlying slowing in demand?.

It was purely around the lock down, we do not see, well, we saw a little bit of slow down, but in material in Ted area, it was largely tied into Telac Donja..

Okay. I'll get back in queue. Thanks..

Thank you..

Our next question comes from the line of Chris Howe with Barrington Research. Please proceed with your question..

Good morning. Thanks for taking my questions..

Morning, Chris.

Hey, Chris..

Hey, good morning. Just wanted to follow-up on some of the segment level commentary you had on Electronics. It was highlighted that the Health and Wellness market did well as well as some other markets.

Perhaps you could break down your performance in the quarter for Health and Wellness and how you anticipate Health and Wellness progressing through the year versus your expectations, in addition to some of the other end markets that are performing well in Electronics..

Yeah, Chris, so there's, you can have a little bit more detail and she sees fit. But our strategy has been from the number one to really create the leverage within the electronics segment. If it's with innovation, oil bobo up products or joining way in China.

So would you starting to see it's really gross system sale and penetrating a broader market by just leveraging our products. We have very heavily invested in new products and new innovation. Some cases simplified our products. In other cases, just added feature to be really able to diversify [Indiscernible] solve your question on electronics segment.

We are pretty confident to be going to continue to move the needle as we get further into rolling out our new products and that goes not just with North American market, but it goes for the global market. Still, a higher level of confidence in that area..

I think also we pointed to the recreational markets, which remains very strong on the electronic side, especially in the U.S. markets. We're seeing really strong demand and a lot of good discussions coming out of our customer meetings that are really encouraging for the future and going forward for that end market as well..

Okay. That's helpful. And my next question, or then I'll hop back in queue. As we think about these environmental constraints. Your -- you mentioned your facility in China is back operational after a 10-day shut down nonetheless, the direct and indirect impacts from this region are ongoing.

As we think about that, and also challenges around raw material, freight, logistics, and labor costs.

How should we think about the sequential second quarter versus the first quarter as it relates to these challenges?.

Chris, we have obviously paid very close attention to what's going on in the global markets and incorporated both the data points we need to. But quite honestly, we are not dwelling too much on what the market conditions are versus doubling down on our customers in our manufacturing strategy, in our new product introduction.

Though, I think it would be fair to say that we feel comfortable where we are in our journey, and despite the supply chain challenges, which in many cases still -- we cannot go hand-to-mouth and then we make it at the last couple of weeks.

In other cases, the supply chain has been flowing extremely well, although our lead times are exactly where we wanted to be anywhere between six and seven weeks, far, far greater than any competitor in the market. So we continue to take greater market share, balancing Ted with supply chain, balancing Ted with the macro-economics here.

What's going on is what you're hearing here in our tone, being a little bit more cautious, but I really don't see a reason why we would not maintain the level of performance we currently are talking about..

I also think one of the things that upsetting up some of the issues that we're seeing in supply chain, is what we're doing on the manufacturing and ops strategy that continually opening up capacity and improving our processes, as well as moving around some of our production to the most efficient place for us to make product.

So that's really going to help continue in the long-term to drive margin as well..

Thanks for taking my questions and good to be on the call..

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

Yes. Thank you, and good morning, guys. I got to admit I'm a little bit confused as to older moving pieces here and what's happening. l guess where I'd like to start is, Trish, you commented that you expected price costs to reach neutrality exiting Q2. That's what I heard.

So if that's the case, then I guess that implies the price costs was negative in Q1, it will get better in Q2.

So going back to the prior question that was asked here, how should we think about Q2 relative to Q1? Are things getting better or are things getting worse? And then if you catch up on price costs, what does that mean for margin in the back half of the year relative to 2021, right? Because I mean, 2021 had its own set of challenges, especially late in the year in the fourth quarter.

Maybe we can start with some clarification there..

So we are going to appraise cost for the end of Q2. Demand is very strong. So as long as we're getting supply for the orders that we need, we believe that we can drive a very strong Q2 as well. But there are some constraints there, as you know. Volume is really what is helping to drive margins as well.

And we had a much higher Q1 than we anticipated on the volume side, which helps us get the tremendous leverage that we can to the margin level and I think that we can continue to do that.

I think what you're hearing is that there's just some unknowns there and I don't think are unknown there any different than anyone else's but we've been fighting these challenges for quite a while and I think our results over the last eight quarters where we've outperformed, have shown that we do a very good job in mitigating what those pressures are on us and we will continue to do that not only in Q2, but throughout the rest of the year, where in the back half we just have a little bit less visibility than we have right now..

You're essentially sand that your margins are going to be flattish for the full-year, right? You started the year in a whole 60 basis points down in Q1 obviously, it has to get better from here in order to get the that guidance. Presumably the fourth-quarter is where you have the biggest tailwind, right? Because that's the easiest comparison.

But is it fair for investors to expect flat or better year-over-year margin starting with Q2, or is this purely a second half of 22 occurrences? Based on your operating plans.

And what you know right now?.

I think Mig would be fear is exactly what we said is as we see it right now, we're taking a little bit more for cautious than as we learn more and we will certainly learn more over the next few weeks, fit tone obviously could also change in a much more positive direction. We're not saying that the managed is dropping off what the saying is.

Clearly, we don't have enough visibility at in the second half and once we get comfortable with all the data, we will communicate accordingly. So transparency of our tone and our structure here is very important to understand..

I see maybe a question for you, Josef.

You highlighted the fact that demand is good, you're trying to be conservative with reiterating the guidance I understand that, but when you're talking about evaluating risks for the back half of the year, can you give us a sense of what sort of risk you're talking about because as far as demand goes, everything you told us is that things are quite good.

So what are some of the risks in your view that you're trying to balance here within the outlook..

Yeah, certainly mix so number one is obviously been China opening back up to its fullest. We are continuing to see strong demand. And just to give you a slight example, we had our Kunshan factory shutdown for ten days and folks were not even allowed to leave the building.

The good news was they were able to operate and built wells and the bad news is we couldn't ship it. And there has been slight indications that that could happen again. Now our factories fully open now, and we are shipping products -- we are shipping product at a lower rate as the ports are so backed up.

The whole China nation needs to get back that contract to the extent that we can have a stronger data point and lot more confidence in our ability to ship product. So that's number 1. Number 2 is Europe. Yes, the orders are very strong. Where we get really cautious on is, we have seen continuous increase in terms of pricing pressure and raw material.

Supply chain has been relatively decent, but now we've seen increase in energy costs. And until that works itself out of the system, this would be another data point. The North American market has been very strong for us. Our lead time really drive a continuous market share gain. But every once in a while we see a blip in our supply chain.

So we just make to somewhere as we are want to get ahead of follow-ups, keys, and over-commit and under deliver. And that's what you hearing..

Understood. Than if I may one last one I know Jeff asked about pricing. I'm going to try this question again because if I look at your guidance, even at the high end of revenue, it would imply that growth for the rest of the year is somewhere around call it 6, 7%.

And given what we're seeing in pricing, pretty much across the end markets that you're serving in some of your peers and so on. To me at least it would imply that there's very little volume growth that you are baking into the guidance for the subsequent quarters here. And the lift that we're seeing is mostly price.

Am I correct on that? And if I am, then why are we not seen a little more volume coming through? Is it still? supply chain or is it some other factor of conservatism baked in? thank you..

It's a couple of things. Number 1, it is still a supply chain issue. On the other hand, is we are also rebalancing our capacity to be able to absorb more volume and spend more products. So to say, the market share gain in some areas has come much quicker than actually anticipated. And couple of things with supply chain challenges.

We decided to end capacity in our [Indiscernible] facility as well. So we are undergoing a little bit of a transformation by adding more capacity and be able to ship the product..

Okay. Thank you..

Thank you..

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

Morning, everyone..

Good morning, Jon..

Good morning, Jon..

Continuing on that line of discussion. Josef, when you look at maybe the volume for the second half of the year, for the last nine months.

What end-markets maybe concern you the most, and might begin to be a precursor to a change in the volume outlook as you look out towards the end of the year, what end markets are you -- are most concerned about?.

Yes, conclusion in market, Jon, is the China construction and China egg markets.

Those are the two markets to be watching very closely just by virtue, what is going on in -- with the still increased pandemic stages, but other than that, when we look at across our -- we watched this obviously very closely, but when I look at across of all of our other markets, they're all pretty much point with the green arrow up.

So to answer your question, China construction and China egg is to want to do watching very closely..

Okay. Secondly, Tricia, you mentioned that the acquisition that you just announced yesterday, not really material, but I was reading about what they do and it sounds interesting, and two questions.

Number 1, can it become material going forward? And number 2, did they have a lack of capital to really take this -- take their product line forward and that may be behind them now?.

Yeah, they definitely can become material. One of the benefits that we see from this is that it enables us to get further penetration into the hydraulics systems market and certainly with the applications that we have through both faster and CBC, we believe that that business can grow pretty significantly.

I don't think it was necessarily anything to do with their capital, I think they just saw the opportunity for it to be much bigger than it is by partnering up with someone like Helios, that is a very strong hydraulics segment player and the idea there is to make one plus one equals three or four or five..

True.

Trisha, how unique is their product line?.

It's very unique and it's different from other people in the industry, so it is more of a niche player in the swivel technology. They use a ball of swivel, which is different, most of the industry does not use the ball of swivel, and we -- they believe that this technology is a much better one and more sustainable, it doesn't have to be replaced.

There actually are some very good YouTube videos about their technology. If you have some free time we would like to look at them, but it does help explain what their products do and why they're important, especially in certain industries like forestry..

Okay. Thank you very much..

Thanks, Jon..

[Operator Instructions]. Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question..

Hi, good morning. This is Adam Farley on for Nathan..

Hey, Adam..

Hey, Adam..

I wanted to turn to the electronics segment. You called out at 11% headwind from supply chain.

So what are the biggest issues there, imagine it's mainly electronic components?.

Yes, it's primarily electronic components. We have quite a few that come from the APAC region, and we're seeing a little bit of a slowdown there. But overall, I think in electronics, the supply chain has gotten better over time and we are starting to see things free up. But then with the China shutdowns, it slowed down a little bit again.

But I think we have a pretty good handle on what's coming in and what the timing is of where it's going to be coming in..

Okay.

And then in terms of the backlog within electronics, do you think your customers are over ordering in an attempt to get in line? And if they are doing that, how do you manage your customer orders to avoid over ordering?.

I don't think they're over-ordering, each of our businesses has a little bit different definition of backlog.

In the Balboa business, we can see a little bit more of an order book than in -- at enovation where it tends to be a little bit shorter order book time frame, but we don't have any indication that they're over ordering, if anything, there's still calling everyday saying, when can I get my product, when can I get my product.

We're doing our best to get the product out the door as quickly as we can. We did have significant past due in that segment at the end of the quarter, but it is improving over what we saw from a past-due perspective at the end of the year because of some of the supply chain freeing up over the first quarter..

Okay. Thanks for taking my questions..

Thanks, Adam..

We have no further questions at this time. [Indiscernible] I would now like to turn the floor back over to you for closing comments..

Great and thank you, everyone for joining us today we really appreciate your interest in Helios and look forward to updating you on our second quarter results in August, please feel free to reach out to me with any follow-up questions. Have a great day and please 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..