Helios Technologies, Inc.

Greetings and welcome to the Helios Technologies first quarter 2020 financial results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Karen Howard, Investor Relations for Helios Technologies. Thank you. You may begin.

Thank you, Operator, and good morning, everyone. Welcome to the Helios Technologies First Quarter 2020 Financial Results Conference Call. On the line with me is Tricia Fulton, our Interim President and Chief Executive Officer. Tricia was appointed to this interim role as announced on April 9th, upon separation from the company of our former President and CEO. Tricia also continues to serve as our Chief Financial Officer. She will review the results that were published in the press release distributed after yesterday's market close. If you do not have that release, it's available on our website at www.hlio.com. You'll also find slides there that will accompany our discussions today. If you look through the slide deck, on slide two, you'll find our safe harbor statements. As you may be aware, we will make some forward-looking statements during this presentation and also during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that can cause actual results to differ materially from where we are today. These risks and uncertainties and other factors are provided in the earnings release as well as in other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at www.scc.gov. I also want to point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable gap to non-gap measures in the tables that accompany today's earnings release, as well as in the slides. Tricia will summarize our financial performance and strategic progress during the first quarter of 2020, as well as her perspective on our outlook. After that, she will go through the details of our financial results for the first quarter before we open up the line for questions and answers. And with that, it's now my pleasure to introduce Tricia.

Thank you, Karen. Good morning, everyone. I will start on slide three. We were pleased with our first quarter results demonstrating strong top line revenue and operating performance. We realized consolidated sales of almost $130 million. Our backlog continued to support our sales and order levels were relatively stable throughout the quarter. Most of the quarter was business as usual for us until the COVID-19 pandemic conditions began to affect our operations in mid-March. The shutdown of our factory in Italy due to government mandates had about a $5 million unfavorable impact on first quarter sales. Our strong operational execution in Q1 was offset by a non-cash goodwill impairment charge for our faster reporting unit. This goodwill adjustment of $39.1 million was driven by the uncertainty of the longer-term impacts of COVID-19 and reduced EPS by 99 cents per share, resulting in a GAAP EPS loss for the quarter. However, from an operational performance standpoint, we realized a solid adjusted EBITDA margin and non-GAAP cash EPS relative to our sales levels. Please turn to slide four and I'll summarize our strategic business highlights for the first quarter of 2020. Despite lower sales, we reported gross margin expansion compared with the prior year, evidencing our ability to manage costs and continue productivity improvements. Recall that at the beginning of last year, we completed the facility consolidation project for our cartridge valve technology or CBT business. As we progressed during 2019, we experienced productivity improvements from that initiative and further continuation was evident in our first quarter 2020 results as well. We have completed the infrastructure of the CBT Engineering Center of Excellence and it is mostly operational. The final pieces of equipment should arrive and be installed by late summer. This facility will provide us with the R&D and testing capability needed for our new product development to feed our organic growth objectives for CBT as part of Vision 2025. Importantly, increasing cash flow and reducing debt have historically been focused goals for us, and we have made very good progress over the past couple of years. Additionally, in the first quarter of 2020, we reduced our net debt by over $11 million, expanding our already strong liquidity position and maintaining our 2.1 times net debt to adjusted EBITDA ratio. New product development has been and continues to be an important component of our Vision 2025 strategic plan. We intended to introduce our new ACE software tool and MCX hydraulic controllers at the ConExpo trade show in Las Vegas in early March. Due to safety concerns for the health and well-being of our employees, we were unable to attend this event. We believe this product is critical to our electro-hydraulic strategy and therefore did not want to delay its launch. Our team has been conducting significant virtual new product introductions and training for our channel partners and customers. ACE enables system experts with little to no software coding experience to create full-featured machine control applications efficiently. Paired with our new MCX hydraulic controllers, ACE brings together the entire control system and intelligently integrates displays, power distribution modules, valves, actuators, joysticks, and engine data for robust and exceptional control. The game-changing speed and accuracy of ACE combined with the robust, highly configurable hardware of MCX controllers is unlocking a host of possibilities for our customers. The versatility of the products lends themselves to a variety of applications and end markets. Let's turn to slide five for our perspective on outlook in light of the COVID-19 pandemic before we review our financial performance in more detail. These are certainly unprecedented times. As a result of government mandates, our China operations were shut down for about six weeks beginning in February through mid-March. Production at our Italian facility was shut down for about four weeks in March and April, although customer shipping activities continued. After three additional weeks where our ability to manufacture at full capacity in that facility was limited to only certain government-approved activities, I'm pleased to report that as of yesterday, we are now able to engage in full production at our faster facility in Italy. All of our other significant operations were deemed essential and are running near full capacity. In all facilities, we implemented substantial procedures to limit the spread of COVID-19 and keep our employees safe and healthy while responding to the needs of our customers. Several of our customers' facilities were shut down under government mandates, especially in Europe. For the most part, our supply chain hasn't been significantly impacted. When we provided you with our business update at the end of March, we withdrew our 2020 guidance. At that time, most of our businesses had not yet been significantly impacted by COVID-19. However, the economic impact of the pandemic has negatively affected our sales and orders for April. We expect second quarter headwinds, but anticipate that the largest impact was in the month of April due to shutdowns of many of our global OEM customers. A portion of our backlog has been postponed from April to later in the second quarter, and a smaller number of orders have been canceled. In other cases, we do not have updated order schedules from OEMs due to their extended shutdown. Given this heightened uncertainty, we don't have sufficient visibility to comment on the remainder of the year. Accordingly, we have completed multiple planning scenarios for 2020 at varying demand levels. We have already instituted certain cost containment steps in an effort to mitigate the effects of the downturn. These include the following, a 20% temporary salary reduction for all corporate officers, permanent layoffs and temporary salary reductions at innovation controls, reduction in the use of contingent labor, a hiring freeze, deferral of some capital expenditures, and our board has agreed to temporarily reduce their compensation by 20%. We have identified additional actions that we could take if needed to further protect the health and liquidity of our business. These include actions such as postponing additional non-essential capital expenditures, eliminating our temporary workforce, reducing or eliminating overtime, applying additional salary reductions, reducing working hours to lower payroll expense, executing furlough programs and or additional layoffs, and further reducing discretionary spending. The extent of such actions will be determined by the magnitude and duration of the economic downturn. Our management team will continue to monitor and assess the impact of economic changes on our businesses and take the necessary actions. I will now turn to slide six to review the financial results for the first quarter in a bit more detail. Sales were down 15.3 million or 10% compared with last year's quarter, excluding a 2.1 million unfavorable currency impact. Approximately 5 million of the decline was attributable to the COVID-19 pandemic. On a regional basis, during the first quarter of 2020, our sales to APAC were about the same as last year's first quarter, despite a pause in China for COVID-19. Sales to the Americas and EMEA markets declined by 13% and 19% respectively. As a percent of the consolidated total, sales to the Americas, EMEA, and APAC regions were 45%, 28%, and 27% respectively in the first quarter. As I mentioned a few moments ago, our GAAP EPS looks distorted for the quarter, reporting a loss of 54 cents. It includes a 99 cent per share non-cash charge for goodwill impairment relating to our faster business unit, resulting from the uncertainty of our end markets in this COVID-19 environment. Despite lower revenue in the quarter, operational profitability remained relatively comparable with the prior year, with consolidated adjusted EBITDA margin at 23.5% versus 23.7% last year. In dollars, our adjusted EBITDA was down only 12% on the 12% reduction in consolidated sales. Non-GAAP cash earnings per share were 56 cents compared to 63 cents in last year's first quarter, an 11% decline. Again, solid performance on a 12% reduction in sales. The adjustment to arrive at non-GAAP cash earnings consists primarily of the goodwill impairment charge in this year's quarter, and amortization of intangible assets in both years, as well as some other non-recurring items and the tax impact of these adjustments. These are shown in the reconciliation tables in the back of the slide deck and release. Please turn to slide seven for review of our hydraulic segment first quarter operating results. Consistent with prior periods, I want to point out that acquisition-related costs, including amortization, and the goodwill impairment charge are not included in our operating segment numbers. They are accumulated in our corporate and other segment reported in the tables in the back of our earnings release and slides. Sales for the hydraulic segment declined 9%, excluding currency, which had a $2 million unfavorable impact. The COVID-19 pandemic reduced sales by approximately $5 million in the quarter. From a geographic perspective, excluding the effects of currency, we saw 3% year-over-year growth for the quarter in the APAC region, which was offset by a 10% decline in the Americas and an 18% decline in the EMEA market. The primary drivers for the decline in the Americas and EMEA regions were softer end-market demand and the impact of regulatory mandates associated with COVID-19. Due to the lower sales volume, gross profit declined 7% for the quarter, but gross margin grew by 160 basis points. The gross margin expanded as improved productivity and cost management efforts more than offset unfavorable foreign currency, and the government mandated closure of the facility in Italy due to COVID-19. Hydraulic segment operating income decreased $2.3 million due to lower revenue in the quarter. However, cost management efforts drove a 600,000 reduction in SEA expenses, which together with the gross margin expansion resulted in a 30 basis point increase in operating margin to 20.7% in the quarter. Please turn to slide eight for review of our electronic segment first quarter operating results. Revenue was down 16% compared with the first quarter of last year. The decrease was due to continued softer demand in the recreational and oil and gas end markets, as well as the impact of the customer contracts that we renegotiated last year. Foreign currency and COVID-19 pandemic had a minimal impact on electronic sales this quarter. First quarter gross margin improved 180 basis points to 47.5%, reflecting continued cost management efforts and a non-recurring benefit from the release of contractual obligations. Due to the lower revenue, operating margin in the first quarter of 2020 was 18.7% of sales compared with 21.4% in the first quarter of 2019. Please turn to slide nine for review of our cash flow and capitalization. In the first quarter of 2020, we generated over 15 million of net cash from operating activities and over 12 million of free cash flow, up from 11 million of free cash flow in the first quarter of 2019. Our CapEx for the quarter was 2.9 million, down from 8.8 million in the same period of 2019 due to a conscious reduction in light of reduced end market demand in the COVID-19 pandemic. Due to the current economic conditions and uncertainty of future cash flows, capital expenditure projects are being evaluated and several have been reprioritized and deferred. We are currently only proceeding with high priority and critical projects. Regarding capitalization in the first quarter, we reduced our gross debt by $6 million and our net debt by over $11 million. At the end of the first quarter, our net debt to adjusted EBITDA remained at 2.1 times consistent with year-end 2019. We continue to have ample liquidity. At the end of the quarter, we had over $195 million available on our revolving credit facility. We also have a $200 million accordion, which is subject to certain pro forma compliance requirements. Our scenario analyses consider the impact on cash flows and we believe that we have sufficient liquidity to cover our operating cash needs for at least the next 12 months. These analyses also indicate that we maintain compliance with the covenants under our credit facility and remain cash flow positive for the year under all scenarios. Please turn to slide 10 for our conclusion before we open the lines for Q&A. While we are faced with significant near-term uncertainty, which may require adjustments to the timing of some of our investments, we remain committed to our Vision 2025 strategy. Our goal is to achieve global technology leadership in the industrial goods sector by exceeding $1 billion in sales while maintaining superior profitability and financial strength. We have confidence in the abilities of our operating unit presidents to lead their businesses through this economic downturn and drive long-term organic growth. We are fortunate to have well-respected brands, a dedicated global employee base, and ample liquidity. Leveraging this solid foundation, we believe that we will emerge as an even stronger Helios organization. Now let's open the lines for Q&A.