Helios Technologies, Inc.

Greetings.

Welcome to the Helios Technologies second quarter 2021 financial results conference call. 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. Please note this conference is being recorded. I will now turn the conference over to your host, Tanya Almond, Vice President of Investor Relations and Corporate Communications. You may begin.

Thank you, Operator, and good morning, everyone. Welcome to the Helios Technologies Second Quarter 2021 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. On the line with me are Joseph Matasevich, our President and Chief Executive Officer and Tricia Fulton, our Chief Financial Officer. They will spend the next several minutes reviewing our second quarter results, discussing our progress with our accelerated growth goals, reviewing our recent NEM acquisition, updating our outlook for the rest of 2021, and then we will open the call to your questions. If you turn to slide two, you will find our safe harbor statement. As you may be aware, we will make some forward-looking statements during this presentation and also during the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from where we are today. These risks and uncertainties and other factors will be provided in our 10-Q to be 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 the reconciliations of comparable GAAP with non-GAAP measures in the tables that accompany today's slides. And with that, it's now my pleasure to turn the call over to Joseph.

Tanya, thank you, and good morning, everyone. Please turn to slide three, and I will summarize our highlights for Q2. Our team delivered another excellent quarter with strong sales and earnings surpassing our expectations at every level. I want to thank the entire Helios family for all of the hard work and tireless dedication to our customers. We have excellent operating momentum as we execute our augmented strategy and are on the right path to achieve our accelerated goal of $1 billion in revenue while delivering top-tier adjusted EVDA margins by the end of 2023. That is two years earlier than our previous plans. We have very strong double-digit organic growth driven by serving our customers well and diversifying our market. In fact, we believe we are gaining market share as we provide industry-best lead times. As we have been winning over the hearts and minds of our customers, we are focused on remaining flexible to meet their needs in this very volatile macro environment. In addition, we are bringing new products to the market at an accelerated pace to help make them more competitive as well. In total, we had 87% growth in the quarter with 37% organic growth. In addition to driving the top line, we are gaining traction with our manufacturing strategy as well. This helps drive solid operating and EBITDA margin expansion. In fact, we posted the best margin results we have had in three years. We are implementing targeted pricing strategies to help offset the continuing supply chain headwinds that the industry is facing, including higher freight costs, raw material price increases, and shortages of components. We are focused on cash generation with approximately $35 million of cash from operations in the quarter and 137% trailing 12-month free cash flow conversion. And true to our growth strategy, we can very quickly deliver the balance sheet while self-funding our bolt-on acquisitions. We are making excellent progress with our acquisition strategy, too. Our most recent success is NEM. which we closed in less than 30 days. NEM is an innovative hydraulic solution company providing customers material handling, construction, industrial vehicle, and ag applications to its global OEM customer base. NEM is ideally located in northern Italy in a region which happens to be among the world's most innovative and technology-friendly area in the hydraulic industry. NEM enhances our electro-hydraulic product offering and provides us geographic expansion with greater global presence. The addition of the manufacturing and engineering capacity also provides a scale to address new markets. Finally, NEM has very strong brand recognition in hydraulic valve technology and their deep application expertise will enable us to grow our OEM business. We could not be more pleased to have welcomed the NEM team into the Helios family. Given our outperformance, we are raising our full year outlook again, which we will review in more detail later in our remarks. On slide four and five, I will touch on some financial highlights for the quarter. Then Tricia will go into more detail during her prepared remarks. Our second quarter net sales grew to over $223 million, of which 60 million was from acquisitions. Our adjusted EBDA margin grew to 25.7% compared with last year, an increase of 310 basis points. Non-GAAP cash EPS was 120, an increase of 118% over last year, reflecting the better-than-expected performance of both segments. The second quarter demonstrated strong execution by the entire company. I am incredibly proud of the Helios team and the excellent momentum we are building as we execute our augmented strategy to drive growth, generate cash, and deliver top-tier adjusted EVDA margins. I will now turn the call over to Tricia to review the financial results and outlook in a little bit more detail. Tricia?

Thank you, Joseph, and good morning, everyone. On slide six and seven, I will review our second quarter consolidated results. Let me start by saying that we heard your request for greater transparency on acquired revenue and are pleased to give you what you need to better understand our strong performance. You will find in our press release a table that shows organic revenue by quarter and the contributions of acquisitions. As Joseph noted, we outperformed and delivered outstanding growth in the second quarter, supported by our focus on delivery lead time, our expanding sales channels, strong end markets, managing our operations efficiently, and our most recent transformative acquisition of Balboa, which exceeded our expectations again. Net sales grew 9% sequentially and 87% over the prior year period, as we executed our growth plans and continue to take market share. Second quarter gross profit of 82.2 million increased 6.8 million or 9% compared with the trailing quarter and 37.5 million or 84% for the prior year period from higher volumes. Gross margin of 36.8% was flat sequentially and year over year was impacted by improved fixed cost leverage on higher volumes, the difference from Balboa's margin profile, as well as supply chain challenges and increased material and freight costs. We are implementing multiple pricing strategies while also carefully managing the business to overcome the higher input costs. Manufacturing is performing well given the juggling acts required to get products out the door. Our manufacturing operations are extremely flexible and agile in balancing available materials and staffing to ship products to our customers. Adjusted EBITDA margin grew to 25.7%, up 310 basis points from the same period a year ago, and up 60 basis points compared with the trailing quarter, reflecting our disciplined cost management efforts, productivity improvements, and the contributions of Balboa. Non-GAAP cash EPS improved 21 cents to $1.20 for the second quarter over the trailing quarter and was up 65 cents compared with the prior year period, reflecting strong demand across all industries and better than expected performance in the Balboa acquisition. Our effective tax rate in the second quarter was 17.6%, which was lower than expected due to the settlement of a transfer pricing dispute. Please turn to slide 8 for review of our hydraulic segment second quarter operating results. Second quarter hydraulic sales of $133 million were up 30% over the prior year period and benefited from broad-based improved demand in most of our end markets, showing growth in all geographic regions. Sales included a positive $6.7 million impact from foreign currency exchange rates. Due to hydraulics gross profit benefited from higher volume, while margin increased 160 basis points to 38.3%, primarily driven by fixed cost leverage on higher sales and production labor efficiencies. These drivers were partially offset by rapidly increasing freight costs and efforts to provide deliveries on time to customers. The 280 basis point operating margin expansion to 24.3% compared with the prior year period reflects operating leverage on higher volume as well as our disciplined execution on our manufacturing strategy. Please turn to slide nine for a view of our electronic segment second quarter operating results. Electronic sales were 90.4 million, up from 17.2 million in the year-ago period. reflecting an increase of 426%. Notably, we had very strong organic growth in this segment year over year. We are seeing the positive impact of the new product rollouts in the recreational market that we have been discussing for some time. And by comparison, last year's second quarter was the most heavily impacted by the pandemic for this segment. Acquisitions contributed $60.2 million in revenue to our electronic segment sales for the second quarter. In addition, Balboa continues to exceed our expectations. The capacity expansion investments we made have enabled Balboa to meet the ongoing growth in demand. We are very excited by the potential this acquisition has brought to our business. Electronics segment gross profit of $31.2 million in Q2 increased with the acquisition and higher volumes. Electronics gross margin was 34.5% and reflects the impact of MIPS, primarily related to the different margin profile of the Valboa acquisition, as well as increased costs resulting from supply chain challenges to meet strong customer demand. Operating income for the electronic segment of $19.6 million increased $1.3 million, or 7.1%, from the trailing first quarter and was up from $900,000 in the prior year period. Operating margin improved 30 basis points.

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And our first question. is from Mick Dolbert with Robert W. Baird and Company. Please proceed with your question.

Good morning, everyone. Thank you for taking the question. I figured maybe I would start with your updated guidance, your top-line guidance. So, you know, your initial guidance had about a $10 million range, the range has actually widened to $30 million in your updated guidance. And at least to me, it's a little bit counterintuitive since we're only dealing with six months left in the year. So I'm kind of curious as to what's embedded in here in terms of the high end versus the low end. And I'm also curious Curious, when I'm thinking of the midpoint, the $70 million increase at the midpoint, maybe what contributed that, if you can bucket it by the various segments or business line?

Hi, Mig. Yeah, thanks for the question. So, in the guidance, we did expand the range quite a bit, which we agree with you is a little counterintuitive at this point. But given what we're seeing in the market, we thought that we needed to give ourselves a little bit of room Certainly on the high end, it shows the strong demand that we have in all of our end markets and all of our businesses. And we're very pleased with where we are on order intake and the demand levels and where the market seems to be going. But because of the supply chain challenges that we're seeing across the businesses, but probably a little bit more on the electronic side, we felt that we needed to give ourselves a little bit of room in the event that we aren't able to get the parts in that we need to turn around the shipments in the third and fourth quarter. And I think it is important to remember that the demand is there. It really just is a supply chain constraint problem that we're dealing with. Our supply chain teams are doing an excellent job of getting product in the door, but it is hand-to-mouth a lot on the parts for what we need to make in any given day. And we're happy with where we are, but we don't see those clearing up Before the end of the year, there's been some report that we may see some of them still into 22. I think we have a pretty good handle on it, but there's still logistics issues and a few supply chain issues that are holding us back from being able to say that our top line is going to be at the high end of that range for sure.

Yeah, that's helpful, and that makes a lot of sense. Are there any areas of your business where you're seeing more of a constraint? I'm thinking, you know, electronics in particular, I'm wondering. And can you also help us out with any of the buckets as to the $70 million of revenue increase? Was that mostly electronics or was that hydraulics as well? That would be helpful. Thanks.

It really was across the board, hydraulics and electronics. The split between the two segments for the first half is at the higher end of the range, what we anticipate that split will be for the second half as well. Where we're seeing supply chain constraints is across all the businesses, but specifically in electronics, I think we've had probably more challenges than on the hydraulic side. Some of its components, some of its things getting tied up in ports We had shipments get lost in transit that were then found, but we aren't able to get those products in time to make the product according to the schedule that the customer wants from a delivery perspective. So while we're seeing all of those things happen on the electronic side, I don't think we're any different than anyone else in that regard. And we're really pushing the supply chain teams to come up with creative ways to get us the products that we need. We're going out to the broker market when we need to. On the hydraulic side, I think the constraints, some of its material cost, you know, steel's going up, so that has some effect. The constraints, though, are really that our suppliers are very busy because all end markets right now, whether It's ours or in other industries are very strong. So the suppliers are very busy as well.

I see. Okay. And last question for me is on Balboa where, you know,