Helios Technologies : Conference Call Transcript Q3 2021

Helios Technologies
Third Quarter 2021 Conference Call and Webcast
November 8, 2021	Nasdaq: HLIO

Operator: Greetings, and welcome to the Helios Technologies Third Quarter 2021 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tania Almond, Investor Relations and Corporate Communications for Helios Technologies. Please go ahead.

Tania Almond: Thank you operator, and good morning everyone. Welcome to the Helios Technologies Third Quarter 2021 Financial Results Conference Call. We issued a press release this morning, 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 Josef Matosevic, our President and Chief Executive Officer; and Tricia Fulton, our Chief Financial Officer. They will spend the next several minutes reviewing our third quarter results; discussing our progress with our accelerated growth goals; updating our Outlook for the rest of 2021 and then we will open the call to your questions.

If you turn to Slide 2, 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 reconciliations of comparable GAAP with non-GAAP measures in the tables that accompany today's slides.

With that, it's now my pleasure to turn the call over to Josef.

Josef Matosevic: Tania, thank you, and good day everyone. Please turn to Slide 3 and I will summarize our highlights for the quarter.

Our Helios team delivered outsized growth again this quarter across each line of our business by expanding our market share with our current customers, winning new customers, and diversifying the markets we serve. We believe this is a direct result of the strong execution on our augmented strategy for growth that is made possible by the passionate culture instilled in our team with shared values of integrity, inclusion, leadership, accountability, and innovation.

Every day we leverage our core values as we address the challenges of supply chain constraints and material costs head-on with flexibility, agility, and creativity. We are not immune to the logistical constraints everyone is facing with transportation challenges. We are prioritizing constantly to meet our customer's needs by partnering with our suppliers and identifying new sources to complete orders timely and maintain our top-tier lead times.

We have stayed focused on optimizing our manufacturing efficiencies and implemented multiple pricing strategies across our businesses to cover the inflationary pressures being realized. It's important to note that through all of this, demand remains robust across all our markets, and we believe we continue to take market share due to our responsiveness to our customer's needs.

In fact, we had 30% organic growth in the quarter reflecting strong demand and our operational flexibility to deliver. This was bolstered by winning new customers in diversified markets as well as the new products we have introduced that are being well received.

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Helios Technologies
Third Quarter 2021 Conference Call and Webcast
November 8, 2021	Nasdaq: HLIO

Additionally, we recently won an important new customer in the electric vehicle design and manufacturing space. We will provide edge-to-edge electric control displays over a multi-year period. This is a perfect example of a new customer win in a diversified market.

As you know, this quarter we have been integrating our NEM acquisition that I spoke about on our last call. We are very excited about how nicely we see their products filling out our good, better, best portfolio approach in our electro-hydraulic product offerings. We expect to start bringing these combined offerings to the market relatively quickly through the end of this year into early next year.

Just after the third quarter ended, we closed our acquisition of the assets of Joyonway. Both NEM and Joyonway are excellent examples of the effectiveness of our flywheel acquisition strategy.

Joyonway is an ideal addition for our Electronics segment. They complement our controls platform from our Balboa acquisition, further expand our reach into Asia, increase our manufacturing capacity, as well as help us better service 'in the region for the region', and strengthen our supply chain. They are another example of a strong standalone business that fits within the Helios business system like a glove and we will be able to create a multiplier effect.

Because of our strong cash generation this quarter, we have once again rapidly de-levered our balance sheet quickly getting back to our target two times (2x) leverage metric providing dry powder to continue advancing our acquisition strategy. And I should add that the pipeline continues to remain very robust.

Due to the strong quarter performance, the strength of demand in our markets and our team's excellent work on achieving manufacturing efficiencies, we are again raising our full year 2021 revenue and non-GAAP cash EPS outlook while holding margins steady even with the backdrop of this most unusual operating environment in the supply chain.

We are encouraged by what we are hearing from our customers and believe this sets us up for a solid 2022 as well.

Let me review some financial highlights on Slides 4 and 5 and then pass it over to Tricia for more details.

Our second quarter net sales increased over 80% to $223 million including $64 million in sales from acquisitions. Our adjusted EBITDA margin remains top tier performance at 25.1 percent. This was a 170-basis point expansion over last year.

Non-GAAP cash EPS was $1.07 more than double over last year, reflecting the strength of the economic recovery, our ability to capture a greater share of growth, and the addition of several excellent acquisitions.

Our Helios team is the absolute key to our success, and I could not be prouder of their dedication and fortitude through the most unusual operating conditions of probably all our careers.

I will now turn the call over to Tricia to review the financial results and outlook in a bit more detail. Tricia?

Tricia Fulton: Thank you Josef, and good morning, everyone. On Slides 6 and 7, I will review our third quarter consolidated results.

As Josef noted, we outperformed and delivered outstanding growth in the third quarter supported by our focus on delivery lead times and managing our operations efficiently. We continue to expand our sales channels while our existing end markets remain robust.

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Helios Technologies
Third Quarter 2021 Conference Call and Webcast
November 8, 2021	Nasdaq: HLIO

We are focused on executing our flywheel acquisition strategy and our most recent transformative acquisition of Balboa exceeded our expectations again.

Net sales grew 82% over the prior-year period as we executed our growth plans and continue to take market share. As Josef mentioned, we delivered very strong 30% organic growth during the quarter.

Third quarter gross profit of $80.9 million increased $34 million, or 72%, over the prior-year period from higher volumes. Gross margin was a very healthy 36.2% and was impacted year-over-year by the difference from Balboa's margin profile. Throughout the quarter we captured manufacturing efficiencies and improved leverage of our fixed cost base on higher sales, which were offset by increases in logistics and raw material costs.

We have been and continue to implement multiple pricing strategies while also carefully managing the business to overcome the higher input costs. Manufacturing is performing well given the constant reprioritization we need to do to get product out the door. Maintaining extreme flexibility and agility in our operations has been a competitive advantage and is helping us take market share.

Adjusted EBITDA margin grew to 25.1%, up 170 basis points from the same period a year ago, reflecting higher volumes and our disciplined cost management efforts.

Non-GAAP cash EPS improved $0.54 to $1.07 for the third quarter over the prior-year period reflecting strong demand across all industries and better-than-expected performance of the Balboa acquisition.

Our effective tax rate in the third quarter was 25.5% compared with 20.7% in the prior-year period due to a reduction in available tax incentives and increased earnings in higher tax jurisdictions such as Italy, Germany, and Australia.

Please turn to Slide 8 for a review of our Hydraulics Segment third quarter operating results.

Third quarter Hydraulics sales of $133 million were up 36% over the prior-year period and benefited from broad-based improved demand in most of our end markets showing very strong annual growth in the Americas and EMEA. Annual organic growth in this segment was 31%. Sales included a positive $1.0 million impact from foreign currency exchange rates.

Q3 Hydraulics gross profit benefitted from higher volume while margin increased 150 basis points to 37.6%, primarily driven by fixed cost leverage on higher sales, manufacturing efficiencies and sales mix.

The 460-basis point operating margin expansion to 23.8% 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 9 for a review of our Electronics segment's third quarter operating results.

Electronics sales were $89.8 million up from $24.4 million in the year ago period, reflecting an increase of 268%. Annual organic growth in this segment was 26%. We are seeing strong demand from the health and wellness and recreational markets. Supply chain constraints limited sales in both end markets in the quarter.

Acquisitions contributed $59.0 million in revenue to our Electronics Segment for the third quarter. Next quarter we will observe one year since acquiring Balboa and it will be classified into our

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Helios Technologies
Third Quarter 2021 Conference Call and Webcast
November 8, 2021	Nasdaq: HLIO

organic growth category. We continue to be very excited by the potential this acquisition has brought to our business.

Electronics segment gross profit of $31.3 million in Q3 increased with the acquisition and higher volumes. Electronics gross margin was 34.9% and reflects the impact of mix primarily related to the different margin profile of the Balboa acquisition, as well as increased costs resulting from supply chain challenges to meet strong customer demand.

Operating income for the Electronics segment of $18.4 million was up from $4.7 million in the prior- year period and operating margin improved 130 basis points. The 2021 third quarter margin reflects operating leverage gained with Balboa's favorable operating margin profile and higher volume in the organic business.

Please turn to Slide 10 for a review of our cash flow.

Cash from operations was $32.5 million in the third quarter, compared with $36.7 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.

For the quarter, capex was $6.7 million, up from $1.9 million in the third quarter of 2020. Capex for the full year 2021 is expected to range between $25 million to $27 million. This is down from our range of $30 million to $32 million due to the timing of when certain investments will be available. On a year over year basis, this will be an increase of 78% from our capital expenditures in 2020.

Free cash flow was a strong $25.7 million at the end of the third quarter equating to a trailing twelve-month free cash flow conversion rate of 103%. We are confident we have significant financial flexibility to further pursue our flywheel acquisition strategy.

Regarding our capital structure on Slide 11, we continue to rapidly de-lever our balance sheet. This quarter we hit our target range of pro-forma net debt-to-adjusted EBITDA leverage of 2.0 times. This improved from the 3.0 times at the end of 2020.

Total debt was $471 million at quarter end. We also had $121 million available on our revolving lines of credit with total liquidity of $169 million.

As a reminder, our financial strategy is to increase leverage for disciplined acquisitions and then generate the cash to quickly pay that down. Our capital priorities remain debt reduction; organic growth through new products and technologies; acquisitive growth and distributions to shareholders. In fact, with our next dividend payment, we plan to join an elite group of public companies that have paid dividends for 25 years straight.

Now let's turn to Slide 12 and I will discuss our outlook for the rest of 2021.

Our guidance for 2021 assumes constant currency using quarter end rates, as well as the assumption that our markets are not further impacted by the global pandemic.

As a result of our outperformance this quarter, we are raising our revenue outlook for 2021 to the range of $840 million to $860 million, which implies an annual growth rate of approximately 63% at the mid-point of the range. We are holding Adjusted EBITDA margin outlook steady at 23.5 to 24.5 percent. We continue to leverage our manufacturing efficiencies to offset stronger headwinds in the fourth quarter due to rising material costs.

This implies we are raising our expectation for Adjusted EBITDA dollars to the range of $197 million to $211 million, or a 68% annual growth rate at the mid-point of the range. Additionally, we

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Helios Technologies
Third Quarter 2021 Conference Call and Webcast
November 8, 2021	Nasdaq: HLIO

continue to invest, through non-capex related items, into our manufacturing strategy to reap the rewards of margin improvement over the long term.

Relative to our margin guidance, we are reflecting inflated material and freight costs continuing through the remainder of the year, the challenges of obtaining parts and supplies even as we build inventory as well as the difficulties in staffing and balancing production lines.

We are tightening our interest expense outlook to $16 million to $17 million at current borrowing levels and rates.

The expected effective tax rate for 2021 remains in the range of 22 to 24 percent.

Depreciation is now expected to be between $21 million to $22 million, while outlook on amortization is unchanged at approximately $32 million to $33 million.

We are raising our Non-GAAP Cash EPS outlook to between $3.75 to $4.10 per share, or a 75% increase over the prior year at the mid-point of the range.

The increase in our guidance for 2021 is driven by the strong end market demand we had so far during the year and expect to continue throughout the remainder of 2021. We expect that we can leverage our fixed cost base and maintain our strong margins even given the headwinds on the supply chain, material costs and logistics. The spread in our ranges this far into the year is an indication of the highly unusual operating environment we all find ourselves within.

With that I will turn the call back to Josef for some final comments.

Josef Matosevic: Thank you, Tricia. These are certainly fascinating times. We have exceptional demand for our products while also having to be very agile to meet that demand. Our team has proven we are up to the challenge, and we remain very excited about how we are shaping and driving our future forward!

With that, let's open the lines for Q&A.

Operator: [Operator Instructions] Our first question is from Nathan Jones with Stifel.

Adam Farley: This is Adam Farley on for Nathan. You called out your really strong lead times a couple of times on the call and you called out share gain opportunities as well. Could you provide a little bit more color on what the share gain opportunities have been so far?

Tricia Fulton: Yes. I think we've seen a lot of opportunities on an individual basis coming through from a market share gain perspective, where we have had a customer reach out to us and say, "Hey, I can't get this from one of your competitors," and we've been able to satisfy the need for that customer.

In some cases, it's a one-off, but in many cases, we believe it's a long-term share gain for us. We've seen a lot of those in the Hydraulics space over the last few months; maybe a little bit less on the Electronics side, but part of that is supply chain related, because that's hitting the Electronics side a little bit harder than Hydraulics. We've been able to really maintain our strong lead times on the Hydraulics side and take market share.

Josef Matosevic: And Adam, probably the other data point would be that we had our distribution come from meeting here just about a week ago and that kind of confirms what Tricia just said with the feedback we've received from the distributors, and it's all apparent that there were previous customers who did not purchase from us that we are now supplying. So, those are the 2 key drivers.

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