Q3 2022 Helios Technologies Inc Earnings Call
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Greetings and welcome to the Helios technologies third quarter fiscal year 2022 financial results call. At this time, all participants are in a listen only mode.
<unk> 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 call over to Tony Allen, Vice President of Investor Relations and corporate communication.
You may begin.
Thank you operator, and good day, everyone welcome to the Helios technologies third quarter 2022 financial results Conference call.
Issued a press release announcing our results. This morning, if you do not have that release. It is available on our website at H L. I O Dot Com you will also find slides there that will accompany our conversation today on the line with me are Joseph metastatic, our president and Chief Executive Officer and Tricia.
Alton, our executive Vice President and Chief Financial Officer.
They will spend the next several minutes reviewing our third quarter results discussing our progress with our strategy, providing our updated outlook for 2022.
And then we will open the call to your questions.
If you turn to slide two you'll find our safe Harbor statement.
As you may be aware, we will make some forward looking statements during this presentation and 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 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 slides.
Please reference slides three and four now with that it's my pleasure to turn the call over to Joseph.
Thank you and good day everyone.
This quarter again, our team has kept our heads down to deliver to our customers execute our plan and drive results.
Against the backdrop of a major hurricane rapid and measurable change in FX rates ongoing supply chain challenges effects on Europe from a prolonged war and a week and a strict to the economy in China.
We continue to innovate with new technology capture market share integrate our flywheel acquisitions, and diversify and applications and markets.
Nutshell, we are executing on our augmented strategy to continue to deliver on our long term growth plans with top tier margins.
Our steadfast dedication to our customers our technology innovation leadership, and our ability to leverage our unique vantage point as pure play in the hydraulics and then a chronic space provides us confidence that we will continue to outperform against our competition.
Protecting the business.
Our margins and cash flow our top priority in this environment.
As I mentioned on our last earnings call, we haven't been making great progress executing on our own manufacturing and operating strategy.
We provided some excellent examples of our strategy at work at our recent sell side analyst day.
For example, this includes leveraging the manufacturing expertise and operational footprint, we gained with the acquisition of bubble up.
We are moving into production of several product categories to our state of the art low cost operations in Mexico.
Our strategy addresses our in the region for the region approach that has enabled us to outperform on lead times to our customers and gain market share.
In addition, we are seeing our operating companies working closer together across R&D manufacturing as well as system sales.
Our transformation to an integrated operating company is happening.
This strategy provides the framework for a long runway of operational efficiencies that we are still in early innings of executing.
As we fold and more flywheel acquisitions over time and add new markets and products. There will always be something to optimize we outlined examples of several current projects. We have in process I encourage you to review the analyst day deck on our website to learn more about them.
Many actions, we are taking to drive efficiencies productivity and optimize our cost structure.
This quarter, we further demonstrated our focus flywheel acquisition strategy closing and de Mint products. They are an excellent complement to our hydraulics platform.
<unk> brings an established long term relationship with a diversified customer base, serving multiple end markets.
Additionally, they have a differentiated value proposition with a strong engineering team that serves a breath of applications across both.
And standard manifold design packages.
With the Helios business system, we expect to leverage them and put them up very successful small business to closer to 100 million dollar business over the next few years.
We're so pleased to add them to the Helios corporate family.
We continue to prove our innovation leadership.
Capitalizing on our expertise in the hydraulics and electronics, we created a breakthrough one of a kind solution did we expect to drive change throughout the markets we serve.
Our recently announced and adjourn solution grades electrical power by capturing wasted energy from a hydraulic fluids, which can be used to support the growing number of electrical applications required on any type of equipment.
This changes the paradigm and we are serving the mega trend of electrification or draw leaks by creating power where it's needed.
This is just one of many technology innovations that we have recently announced.
We held the science phase two are led by our engineers during our analyst day to highlight the large number of new innovative energy efficient products, we are bringing into the marketplace over the coming months as we execute on our innovation roadmap.
All we do remain centered and now intends to protect our business.
And then globally diversify our markets and revenue sources and attract and retain talent, which is the backbone of our success.
Once again to all of the Helios colleagues this quarter for their tireless work and dedication to our company.
Let me now turn the call over to Tricia to review the financial results and discuss our updated outlook in more detail before I come back for some closing remarks Tricia.
Thank you Joseph and Hello, everyone on slides five through nine I will review our third quarter 2022 consolidated result, as Joseph noted, we are executing to drive growth through innovation and acquisitions.
Earnings in tough market conditions and support our future through the talent of our team.
First I want to address the most recent events in Sarasota with regard to hurricane yet.
With our Sun Hydraulics operations in Sarasota, close to where many of the predictive models, we're forecasting a potential direct hit we proactively shut down our operations for the safety of our team.
The majority of our cartridge valve manufacturing is located here ultimately over 14 shifts were impacted.
Thankfully I'm happy to report that our colleagues are all safe and our facilities unscathed from the event.
With an estimated $5 3 million impact of revenue unable to ship due to the hurricane and when we exclude the $8 2 million impact of foreign currency exchange rates revenue in the quarter was basically unchanged over last year. It's.
It's important to note that the sales impact from the hurricane it's not loss business.
Just shifts the timing given the number of labor hours that were impacted.
Geographically, the Americas were solid well EMEA and APAC, specifically, China, clearly reflected the economic conditions in those regions.
In terms of end markets, a recreational market growth was significant with strong double digit increases primarily driven by our new product wins that we're several years in the making.
Also had nice growth in the industrial market, driven by machinery and energy and the mobile market square as well.
The diversification, we now have in our end markets is much better than in the past.
The tough year over year comparison to the amazing performance or health and wellness market had last year is still having a drag on our results I will discuss this more in a moment.
Current pay this shows prevented the optimal operations in the quarter gross profit and margins declined on lower volume.
In fact, the hurricane had an operation FX rates and continued challenges with supply chain and logistics.
We are realizing benefits from our manufacturing operating strategy that partially offset the other items.
We are focused on cost containment and FDA expenses were down 3% over the prior year.
Adjusted EBITDA was $48 million and adjusted EBITDA margin was 23, 2%.
When normalizing for the Hurricane adjusted EBITDA margin would've been 23, 6%.
We continue to demonstrate we can provide top tier margins, even through a very challenging operating environment.
Our effective tax rate in the second quarter was 23, 6% up sequentially as expected and above the high end of our original guidance range, but down compared with a year ago level, primarily reflecting the impact of various tax jurisdictions.
Diluted non-GAAP cash EPS of 90 cents included a three point impact from <unk> and an estimated <unk> impact for the hurricane.
On Slide 10, you will find highlights of our hydraulic segment results.
Grew 8% on a constant currency basis, and normalizing for the estimated hurricane impacts.
The effects of sales related to foreign currency exchange rates with $7 9 million in the quarter.
In addition to the approximate $5 3 million shipment delays from the Hurricanes. We estimate there were $6 6 million of sales delays in this segment due to supply chain shortages.
This amount is up from 6 million last quarter.
Hydraulics segment gross profit was impacted by unfavorable FX of $1 9 million and an estimated $2 3 million from hurricane impacts.
Cost discipline resulted in a 7% reduction in SCA expenses over the prior year.
Please turn to slide 11 for a review of our electronics segment results.
Our electronics segment is more concentrated in the U S. The foreign currency has less of an impact on revenue.
We saw strong double digit growth in recreational industrial machinery as well as the construction market.
Our new product Rollouts could not fully offset the decline we are seeing in the health and wellness market.
Therefore, our net sales declined 15% over the prior year quarter.
We are not expecting improved conditions from the health and wellness market over the next year, given the global economic environment.
Ladies and electronics segment shipments because of supply shortages with an estimated $8 2 million, which improved from $9 1 million last quarter, we expect to continue to see this come down.
Electronics segment gross profit of $22 8 million and gross margin of 30% is a direct reflection of the slowdown in the health and wellness market.
SCA expenses were managed well down 9% in light of the weakness in sales.
Please turn to slide 12 for review of our cash flow.
Cash flow was strong in the quarter as we generated $30 million in cash from operations.
Capex came in at 4% of sales for the quarter and 3% year to date, we continue to expect capex for the year to be in the range of 3% to 4% of sales.
Free cash flow was again nearly $22 million in the quarter, we have generated over 52 million of free cash flow year to date.
As we have noted before we are intentionally investing in working capital to meet customer demand outpaced the competition and deliver on our commitments.
In the quarter, our cash conversion rate was 105% back above 100%.
You can see on slide 13, we have a strong balance sheet and significant financial flexibility to execute our strategy for growth.
Total liquidity at the end of the quarter was $168 million.
Our net debt to adjusted EBITDA leverage ratio was one nine times.
We believe this puts us in a solid position to capitalize on current market conditions to make selective bolt on acquisitions.
Now, let's turn to slide 14, I want to take a moment to review our longer term growth plans, we set at our Investor Day in June 2021, and put some perspective around the health and wellness market.
When we acquired Bell Boll water group in November 2020, their annual revenues were north of $100 million in.
In 2021, they nearly doubled their revenue significantly outperforming our M&A model and accelerating our return on investment timing on the acquisition.
They capitalized on the pandemic trend of consumer investment well people, we're not traveling as much.
Deal was perfectly timed for helio shareholders to benefit from the market trends.
In addition to adding a new end market to our business. They brought complimentary technology as well as the state of the art low cost manufacturing facility in Tijuana, Mexico.
As Josef described we are leveraging that facility at our manufacturing and operating strategy and expect several benefits from it over time.
Actually no that industry is currently going through a normal market correction coming off such a boom cycle, which is impacting our 2022 performance and comparisons.
We continue to remain on our trajectory path to achieve our original destination of at least 1 billion in revenues by the end of 2023, which we had accelerated by two years, we have executed on several high quality flywheel acquisitions, along the way to help us reach our goal.
We continue to have a very active pipeline of potential acquisitions and feel confident in our ability to take advantage of an unstable market environment to continue to advance toward our long term financial goals.
Please turn to slide 15.
We are adjusting our 2022 outlook down to accommodate for known factors. We are cautious given inflation the decline in consumer spending China restrictions the war in Ukraine and FX.
High inflation may continue to slow the global economy, and it's also causing a pullback in consumer spending which is directly impacting the health and wellness market.
Weakness in the economy in China, driven by continued restrictions is negatively influencing demand in that region.
Significantly rising energy costs in Europe , driven by the prolonged war has slowed the economy in EMEA for our end markets and driven a fixed cost of our manufacturing facilities.
The strength of the U S dollar negatively impacts results generated in currencies other than U S D.
These issues of course are all driving the widely discussed global recession.
As noted we are reducing revenue and adjusted EBITDA and while expecting a slightly lower adjusted EBITDA margin. It should remain in top tier performance.
Higher interest expense and a higher effective tax rate will also impact the bottom line.
Despite all of this we believe we can protect the business cash flow and earnings and that the Helios a business system provides the structure and discipline to execute our long term plans.
Against these headwinds we remain confident in our ability to achieve our accelerated longer term growth targets.
This will be accomplished through a combination of the diversification of our business.
To bring innovative products to market and the progress on our manufacturing and operating strategy.
We are focused on our continued evolution into system sales as we become an integrated operating company as well as our active acquisition pipeline to drive growth.
We believe we are in a unique position to be opportunistic because of the strength of our balance sheet and our significant liquidity.
With that please go to slide 16, as I turn the call back to Joseph for some final comments.
Thank you much Trisha.
Clearly we are all in this challenging global times together.
When companies would've been critically focused on their purpose and mission stay incredibly close to their customers and partners and keep investing in their people and technology will be the long term winners I believe the helix team is up to the challenge and the value proposition of our augmented strategy.
Provides the framework for us to win.
We are driving market share protecting our margins, creating innovative solutions, leveraging our earnings power and delivering on our long term goals.
Where there are challenges there are always opportunities because of this I strongly believe we have line of sight to continue to drive scale and achieve our accelerated milestone of reaching at least 1 billion in revenue, but 'twenty to 'twenty three with top tier margins.
With that let's open up the lines for Q&A. Please.
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Okay.
Yeah.
Our first questions come from the line of Jeffrey Hammond with Keybanc capital markets. Please proceed with your questions.
Hey, Good morning, everyone. This is David on for Jeff.
Hey, David Hi, David.
Can you just walk us through the electronic weakness, specifically regarding the health and wellness declines a little bit more like are you seeing a more aggressive destock in North America similar to other residential markets are there more moving parts and then I guess on this just how do you expect this to progress near term.
Okay.
Yeah.
As we talked about on the last few calls we started to see inventory levels rising in Europe , primarily from goods that were being shipped out of China and in Europe and that market slowed first.
We throughout the quarter started to see the slowing also in the Americas, but certainly not to the degree that we saw in Europe or in APAC.
Theres, probably some destocking going on in the Americas.
But the majority of that destocking needs to happen.
M B a as we go forward, we're still getting some good news for 2023 from our North American customers it really seems to be.
More on Europe , but it.
With the economy the way it is interest rates the way. They are I I think that's going to be probably a few more quarters than we had anticipated before we start to see that market turn back up but we know that it will turn back up. This is a short term problem that we're having right now with it but.
Certainly I think there's a lot of opportunity going forward and we saw that we are coming off of a record year last year in that market and we were able to take advantage of that very well I think so this is just a normal market correction we believe.
Okay, Great and then I guess kind of staying on that topic, just can we parse out the headwinds in electronics between kind of the health and wellness and supply chain and then relative to these headwinds how should we be thinking about new products as an offset to some of the weakness in supply.
Headwinds.
Okay.
Yeah, we had a.
David just a few weeks ago and.
I think the folks got a very good sense for you know what products will be introducing to the market in 2023 and beyond.
And you know if it was well invested and well planned over the last two years we knew.
It would be in a correction stage, especially in the health and wellness.
With working with our customers very closely and the Rand or customer perception study a couple of years back and continue to follow up with you pretty much got to hunt.
And over the last couple of years heavily.
Nested inside of it and that's just going to be complementary to what you're doing but you were clearly helps us diversify.
Two other application other markets and most importantly get us assistant sales capability, and we are really act and making it very sticky so a few specific examples.
You know in the health and wellness.
We are with.
You know, having our heliocentric engineering excellence working together with innovation in both of our teams.
Now we are bringing products in out of the market over the next few quarters, there were clearly diversify above and beyond their health and wellness industry.
More into the specialty vehicles area.
And other applications that we clearly laid out in our analyst day. So.
Look we feel pretty confident yet a pulled back we do believe that.
Nearing in many areas.
And in the health and wellness and we should start seeing.
Like the recovery you know.
Asia, obviously is a C.
The wildcard that we have.
You know a substantial growth opportunity there as well.
The new products over the next couple of years in electronics segment in the health and wellness and on the innovation side will.
Were more than upset with you currently see.
Okay.
Great. Thanks, everyone.
Thank you.
Thank you. Our next question is come from the line of Big Dobra with Baird. Please proceed with your questions.
Thank you good morning, everyone. So Mig.
You know Trish I appreciate the context on on Balboa, a 200 million or of revenue were close to it in 2020 one.
If we're if we're looking at Q3 and your Q4 guidance.
Sort of revenue level of revenue run rate from about before about boys implied in our Q4 guide.
[laughter], yeah, I'd be electronic side, certainly oh.
Affecting the Q4 numbers were still seeing a lot of strength.
And you talked about new product rollouts that they've had and recreational markets are still going very well for us both in marine and vehicle. So the impact that you're seeing on Q4 pretty much all being driven by the demand.
Demand cycle.
Right, but just look I'm I'm not clear as to what the revenue run rate is here is this business now reverted back to kind of 100 million dollar base that you had when you initially acquired at a is that the sort of revenue run rate here or is it different.
Yeah, we don't really like to give out specific business unit targets, we're looking at the electronics and hydraulics segment as a segment.
Especially after enrolling acquisitions into that certainly.
The run rate is significantly lower than what we saw in 2020.
Because I.
I think this is the thing that we're all grappling with here.
And you know David was asking about this earlier on to is we're as we're trying to hum.
Sort of rightsize, our our estimates for 2023.
We're really trying to understand the magnitude of the headwind is coming from this health and wellness market, what's kind of baked into the pie for the second half of this year and what might still be on the come in the early part of 'twenty. Three so I don't know if you can help at all.
With where would that dynamic.
Yeah.
Yeah.
Well make it.
Yeah.
Okay.
And I think a fair way of answering your question here.
Actually when we acquire a quote boy in particular, we're just north of 400 million.
You know did the revenue obviously jumped up because you know almost double its size and now it pulls back.
You know more into the.
150, <unk> hundred 60 million type of range.
And we.
I think that in.
Some cases, we are seeing the bottom and seeing some slight recoveries in particularly in North America.
The old waiting for data points.
From Asia, and we will be in Europe , actually next week or week long.
And getting a good.
Good feel for where the markets are trending in your old well.
You see well bore falling back to the levels that we have.
Acquired company, we don't see that.
We are right now somewhere in between those two numbers you know when we acquired them versus when we peaked.
I think that the.
Those facts and the way we can answer your question at this point.
Okay. That's helpful. Then.
Thank you.
Yeah go ahead.
Maybe just at the same time as you saw.
And they we have developed new products in particular on the wallboard side considering.
The energy costs in Europe .
You know under heat pump put an example, as you saw.
It will help us mitigate some of the headwinds in Sydney.
As with the sales in Europe .
But you should have a very good feel for where these products are going.
And what's the opportunity so we are really not.
The awarded not too concerned we got plenty of feedback from our customers.
Direct feedback.
You know.
It was a few days here in a couple of weeks, where the orders actually peak quite nicely.
We just need the Asian market to open up and Europe to stabilize a little bit more in.
You should be well well in Norway.
Understood.
My My final question.
Again, if I look at your implied fourth quarter guidance revenue EBITDA earnings.
Yeah.
Shouldn't we think of.
This has been really probably the baseline run rate for 2023, any variances relative before Q4 that you would call out for us Trish.
Next year. Thank you.
Okay.
I think that the run rate.
I don't know that we want to look at it necessarily as the run rate for 2023, but possibly heading into it and in the first quarter I do think that with all of the new product coming out.
Okay, and electronics and hydraulics, we're going to be able to drive additional top line revenue in 2023 that will get us above that run.
Run rate.
As we go forward certainly could hold true for 'twenty or for Q1.
Not for the full year of 2023, given new products plus the new product Rollouts that we have.
<unk> coming out.
And which have been really yours and coming with the relationships we have with them.
Great. Thank you.
Yeah.
Yeah.
Okay.
Thank you. Our next question will come from the line of Nathan Jones with Stifel. Please proceed with your question.
Good morning, everyone.
Monday night.
I guess I'll follow on for me, maybe we can talk about the parts of the electronics business that aren't Balboa, you talked about strength in marine and in recreation, obviously exposed to consumer spending trends there.
I think generally generally speaking are in the U S. At least there's a lot of complaining about inflation, but it hasn't really stopped since you've been spending at all yet.
So what are you guys thinking about the risk of those market slow down as the fed continues to raise interest rates and inflation is generally kind of bought into consumer sentiment. What's the risk that you see a drop off in those businesses going into 2023 and year over year.
Yeah.
You know Nathan on the innovation side, knowing what you know now you know folks that having a really strong year.
And.
Again, with Doosan said, Italy, our you know our investments over the last two years.
In that product line.
And that diversification gives us a very strong confidence level that this journey will.
We'll continue.
You know the products stood up being rolled out in 'twenty to 'twenty three as you know that business becomes very sticky for a minimum of two to three years.
And then there's a red refresh and then it continued so.
We really feel very confident.
Ovation will continue to.
Grow.
With zero margin.
And have a very solid year as it stands right now.
So your view is that the the Bakken share gains from new product.
Rollouts in twenty-three can upset any end market weakness that you saved renovation.
Yeah.
He commented to you Nathan for folks to understand is as I mentioned this during our analyst day traditionally.
You know in a basin has been you know in marine and recreational customers.
Supply and now we are really diversifying this into many other applications with that product line and that is the strength of innovation going forward.
It's no longer just to keep market it's been expanded.
Broader market offering with much stickier solution Liberty team the entire technology play off.
Oh boy.
H E N innovation and on top of that you would have to hydraulics couple of being on the system sales side.
It's.
It's really a good deal here, so I don't I.
See the headwind.
But I think we are very very comfortable saying that dental base and we'll continue to succeed.
Throw margins.
Just to add on that a little bit Nathan it where we're already starting to see some really interesting opportunities could be open view.
Plays that we have had a couple of press releases about through innovation and those are brand new opportunities.
One thing we couldn't have got with our existing product line under the good better best strategy. So we're very encouraged by what we're seeing from the marketplace related to that specific new product.
And in particular Nathan to it.
Two areas that you will see probably you folks would see probably sooner than later is.
You know diversification into the energy market and a general industrial what we call it that.
We all applications will.
Please go ahead.
Clearly gaining market share in a market that you weren't in before is all incremental maybe we could just go on and talk a little bit about Damon and I know you guys were very excited when we were down there in September .
Can you talk about you know the revenue and financial profile of the business now what it adds to the fourth quarter.
What the financial targets off prepayment over the next three to five years, I know you'd talked about getting into a $100 million of business and how you get from point a to point b on that.
Yeah, certainly so.
As you stated you know they are really very excited about the product offering, but more importantly, the people and the technology.
Technology and engineering capability.
A very sound business very profitable.
First if I may.
Markets that we were not in before.
Sound relationships our financial.
Performance for this year is really not material as we just.
Close this.
What do we expect over the next year as we continue to.
To develop a very focused go execute a very focused augmented strategy in terms of having center of excellence.
Diversifying and really closing in on the system sales.
The case and we feel we can leverage that with Rollick segment.
With electrification.
And get to the 100 million dollar number as we outlined.
You know press release so.
Next year, you will see.
You know like baseline run rate of.
Yeah.
Anywhere between.
35 to.
45, 50 million type arrangement and it continues from there.
Yeah.
And the strategy to get to that did that 100 million, how you're leveraging the footprint.
Legacy businesses et cetera.
In order to get to that 100 million what drives the growth to get there.
Yes, its two fold one is.
Organic application it would be.
Sure.
You know just.
Continuing to execute on manufacturing strategy with a center of excellence.
And in the region for the region leveraging.
Our first the brand from Europe into North America, and then coupling our system simplification.
Your weekend.
To assist them with in the Damon.
Brent.
And leveraging their engineering capabilities.
We'll do more into the diversified markets and couple in other products in the hydraulics and electronics within the damage was to get into the.
Applications in markets. They're currently serving so it's a combination nathan between organic new products.
It could be another flywheel acquisition.
It would be at for electrification.
To speed the process itself.
Great I'll pass it off thanks for taking my questions.
Thank you.
Okay.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Okay.
There are no further questions at this time I would now like to turn the call back over to Tony Allott for any closing comments.
Great. Thank you operator, and thank you everyone for joining US today. We appreciate your interest in Helios and look forward to updating all of you on our fourth quarter results next year. Please feel free to reach out to me I come out of the day with any follow up questions have a great day and stay healthy and take care.
Yeah.
Okay.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.
The rest of your day.
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