Earnings Call: Q2 2021

Aug 10, 2021

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. 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 athli0.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 And Tricia Fulton, our Chief Financial Officer. They will spend the next several minutes reviewing our 2nd 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 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 and 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 atsec.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 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 3, 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 their 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 $1,000,000,000 in revenue while delivering top tier adjusted EBITDA margins by the end of We had 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 helped drive solid operating and EBITDA margin expansion. In fact, we posted the best margin results we have had 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 $35,000,000 of cash from operations in the quarter and 137 percent trailing 12 month free cash flow conversion. And through to our growth strategy, We can very quickly deliver the balance sheet while still funding our bolt on acquisitions. We are making excellent progress with our acquisition strategy 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 vehicles 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. NAM enhances our electrohydraulic product offering and provides us geographic expansion with greater global presence. The addition of the manufacturing and engineering capacity also provides us 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 NAM 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 4 and 5, I will touch on some financial highlights for the quarter, then Tricia will go into more detail during her prepared remarks. Our 2nd quarter net sales grew to over $223,000,000 of which $60,000,000 was from acquisitions. Our adjusted EBITDA margin grew to 25.7% compared with last year, an increase of 3.10 basis points. Non GAAP cash EPS was 1.20, an increase of 118% over last year, reflecting the better than expected performance of both segments. All in, the Q2 demonstrated strong execution by the entire company. I am incredibly proud of the Helios And the excellent momentum we are building as we execute our augmented strategy to drive growth, generate cash and deliver top tier adjusted EBITDA 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 Slides 6 and 7, I will review our 2nd quarter consolidated results. Let me start by saying that we heard your request 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 2nd quarter supported by our focus on delivery lead times, Our expanding sales channels, strong end markets, managing our operations efficiently and our most recent Formative 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. 2nd quarter gross profit of $82,200,000 increased $6,800,000 or 9% compared with the trailing quarter and $37,500,000 or 84% for the prior year period from higher volumes. Gross margin of 36.8 percent was flat sequentially and year over year was impacted by improved Fixed cost leverage on higher volume, 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 act required to get products out the door. Our manufacturing operations are Adjusted EBITDA margin grew to 25.7 percent, up 3 10 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 $0.21 to 1 point for the Q2 over the trailing quarter and was up $0.65 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 2nd quarter was 17.6%, which was lower than expected due to the settlement of a transfer pricing dispute. Please turn to Slide 8 for a review of our Hydraulics segment's 2nd quarter operating results. 2nd quarter hydraulic sales of $133,000,000 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 $6,700,000 impact from foreign currency exchange rates. Q2 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 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 9 for a review of our Electronics segment 2nd quarter operating results. Electronics sales were $90,400,000 up from $17,200,000 in the year ago period, reflecting an increase of 4 26%. 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 Q2 was the most heavily impacted by the pandemic for this segment. Acquisitions contributed $60,200,000 in revenue to our Electronics segment sales for the 2nd quarter. In addition, Balboa continues to exceed our expectations. The capacity expansion investments we made Electronics segment gross profit of $31,200,000 in Q2 increased with the acquisition and higher volumes. Electronics gross margin was 34.5% 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 $19,600,000 increased $1,300,000 or 7.1 percent from the trailing Q1 and was up from $900,000 in the prior year period. Operating margin improved 30 basis sequentially to 21.7 percent and was up from 5.5% in the prior year period. The 2021 second quarter margin reflects the strong operating leverage inherent in this segment. Please turn to Slide 10 for a review of our cash flow. Cash from operations was $34,500,000 in the 2nd quarter, up from $25,300,000 in the prior year period. We are carefully balancing our working capital requirements with our efforts to provide timely deliveries to our customers amid significant demand. For the quarter, CapEx of 5 point $3,000,000 represented about 2% of sales. We are tightening our expected CapEx range to $30,000,000 to $32,000,000 for 2021, which remains approximately 4% of sales for the full year based on our updated outlook. Free cash flow was a strong $29,100,000 at the end of the second quarter, equating to a trailing 12 month Free cash flow conversion rate of 137%, as Joseph mentioned. 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 delever our balance sheet with a pro form a net debt to adjusted EBITDA leverage ratio of 2.16 times. This continues to improve from the 3x at the end of 2020. Total debt was 4 $37,000,000 atquarterend, reflecting total repayment of more than $15,000,000 during the quarter. At quarter end, we had $161,000,000 available on our revolving lines of credit with total liquidity of 196,000,000 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. We have been a consistent dividend payer over the last 24 years. We recently paid our 99th sequential quarterly cash dividend on July 20th this year. Now let's turn to Slide 12 and I will discuss our outlook for the rest of 2021. Our guidance for 20 21 assumes constant currency using quarter end rates as well as the assumption that our markets are not further impacted by the global pandemic. We are raising our revenue outlook for 2021 to the range of $800,000,000 to $830,000,000 which implies an annual growth rate of approximately 56% at the midpoint of the range. Adjusted EBITDA margin outlook is increasing fifty basis points to 23.5% to 24.5%. We continue to leverage our manufacturing efficiencies to offset stronger headwinds in the second half due to rising material costs. This implies we are raising our expectation for adjusted EBITDA dollars to the range of $188,000,000 to $203,000,000 or a 61% annual growth rate at the midpoint of the range. Additionally, we continue to invest through non CapEx related items into our manufacturing strategy to reap the rewards of margin improvement over the long term. We are being cautious as we look at the second half of twenty twenty one. While demand across all of our served markets continues to be robust, we recognize that the supply chain challenges could disrupt our ability to continue to deliver at the pace that we have been. As a result, we are increasing the size of our guidance range from what was a $10,000,000 range to now a $30,000,000 range. Relative to our margin guidance, we are reflecting inflated material and freight costs continuing through the The challenges of obtaining parts and supplies even as we build inventory as well as the difficulties in Staffing and balancing production lines. Interest expense outlook at current borrowing levels and rates remains unchanged and should be between $16,000,000 to $18,000,000 Due to a favorable shift in the mix of earnings into geographies With tax advantaged economic incentives, along with the favorable resolution of uncertain tax positions, The effective tax rate for 2021 is now expected to be in the range of 22% to 24%, down from 24% to 26%. Depreciation is now expected to be between $22,000,000 to $23,000,000 and amortization is now We are raising our non GAAP cash EPS outlook to between $3.60 to $3.80 per share or a 65% increase over the prior year at the midpoint of the range. The increase in our guidance for 2021 is driven by the strong end market demand we had in the first half of the year and expect to continue throughout the remainder of 2021. We are able to leverage our fixed cost base and maintain our strong margins even given the headwinds on the supply chain, material costs and logistics. With that, I will turn the call back to Joseph for some final comments. Thank you, Tricia. Again, we are driving excellent performance, and I am extremely proud of our team. We are stepping up to the many challenges we are facing while driving amazing execution of our strategic plan. We are uniting efforts across the organization to deliver outsized growth and are confident in our ability to meet our long term At this time, we will be conducting a question and answer session. And our first question is from From Mig Dobre 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 your initial guidance had about $10,000,000 range. The range has actually widened to $30,000,000 in your updated guidance. And at least to me, it's a little bit counterintuitive since we're only dealing with 6 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 when I'm thinking of the midpoint, the $70,000,000 increase at the midpoint, Maybe what contributed that, if you can bucket it by the various segments or business line? Hi, Mig. Yes, thanks for the question. So in the guidance, we did expand to the range quite a bit, which We agree with you. It's 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 electronics 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 and that we need to turn around the shipments In the 3rd Q4. And I think it is important to remember that the demand is there. It really It 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 'twenty two. 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. Yes. 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 electronics in particular, I'm wondering. And can you also Help us out with any of the buckets as to the $70,000,000 of revenue increase. Was that mostly Electronics or was that hydraulics as well? That'd 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 electronic or on the hydraulic side. Some of it's components, some of it's 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 it's material cost, steel is 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 Just the revenue traction that this business has had this year has been considerably higher than I think What we expected or modeled. And I'm sort of curious here in terms of what's driving the growth and how sustainable do you see this And is there any seasonality here to be aware of back half of the year relative to the first half? Thank you. Good morning, Mig. Look, during our investor meeting here a few weeks ago, we Pretty much laid out exactly what the path will look like for each of our businesses. But in particular to Bolivar, certainly, The large piece comes from pent up demand. But then you also heard us saying that we want to diversify into Other markets and with the acquisition of BJN coming to our family here, they work collaboratively You know, with innovation to develop the next generation products and really have a good better best strategy and enter other markets That we're starting to see slowly but surely some traction. So to summarize your question, Clearly, backlog and pent up demand combined with some diversification in new end markets And your customers. And on the seasonality question, Joseph? Yes. Look, as far as we can see right now, we had everything baked into our guidance As we honestly get further educated with that business, we'll communicate accordingly, but we don't I see the seasonality quite honestly at all right now. Okay. Thank you for taking the question. Thank you. Thanks. And our next question is from Nathan Jones with Stifel. Please proceed with your question. Yes, good morning. This is Adam Farley on for Nathan. Hi, Adam. As you noted a couple of times that you're picking up market share by providing best in class lead times. Could you describe how you're able to maintain that advantage? And how does UHIS believe it is generating better lead times than the peers and competitors? Yes, look, on the great question actually. On the hydraulic side, north of a year ago, we took In our efforts here to clearly understand our investment strategy in manufacturing and what were the bottlenecks, If it's operations or supply chain or material flow, and we really heavily invested not only in improving the processes, But also bringing some additional talent and we knew that's an area that we can Separate ourselves from the competition. So the investment part, following by talent And education and lining up the supply base with our core competencies and really having a strategy that Collaborative working through this process got us to a point where we have folks actually at our suppliers Stationed on a weekly basis, we invested in that area. We knew we need to get better in that area and We are holding extremely strongly times, and we have also put ourselves in a position to clearly And where our customers are going and what will require for us to maintain our market share and gain market share. But the notion of the strategy is the investment into manufacturing operations drove that result. Okay. And then switching over to price costs. I know Some contracts on the price side can be fixed, especially in electronics. So how is Helios able to negotiate Any type of pricing from raw material inflation? And do you have any price increases planned or announced for the second half? Thanks. We do have pricing for the back half in all of the businesses to some degree. And like you said, those end up being a negotiation, especially on the fixed price contracts. But We've been with many of our customers for so long that we have been able to go to them and get pricing even on the fixed price Contracts related specifically to the material cost increases that we're seeing, some of those go through as a price increase, Some go through as a material surcharge, some are temporary, some are permanent. But certainly, we have been able to have those tough discussions and get The pricing or surcharges through, so that we can try to cover some of these increased material costs In the back half of the year, and I think that's important to maintaining our strong margins. Okay. Thanks for taking my questions. Thank you. And our next question is from John Ratz with Kansas Citigroup Capital, please proceed with your question. Good morning, everyone. Good morning, Brian. Good morning, Brian. Trish, In your commentary, you talked a little bit about the new platforms contributing to revenues at in the Electronics segment. And we've talked about that for the last 6 months, 9 months. How do you see that unfolding over the next 6 to 9 months? Are we just sort of seeing the tip of the iceberg in terms of the new platform contributions? Yes. At this point, we are just seeing the beginning of those rollouts. In the 1st year of any rollout, we clearly haven't reached a maturity Level on that product, we roll them out slowly, make sure that we're meeting the commitments to our customers. And over time, those become very Significant, especially on the electronics side. We've seen that with Enovation specifically because they have model year rollouts related to their recreational And we have had a couple that have started rolling out this year, but we have more to come In the back half of the year, and we're making sure that we have the parts in place to be able to make those products. That's been a Key focus of the supply chain team. And I think that we're ready and ready to go on those and we'll see them roll out. But for the year, The total percent of revenue that they're adding is not high. It's low single Digit, but certainly as those mature, it will become a bigger contributor to revenue. How many different platforms Do you see over the next couple of quarters? Over the next couple of quarters, we have Significant roll what we would consider significant rollouts, probably 3 to 4 For the rest of this year. We do have others that are smaller and they're important as well and important to get them right. But from a revenue perspective, they have a little less impact. Okay. Josef, on the improved lead times, I would take that the improved lead times allowed you to take share From others, because you're able to deliver the product. As the lead times improve maybe For your competitors, do you think you'd be able to retain that business, that new market share? Yes, certainly, John. Look, I mean, we know, especially on the hydraulic side, most of our products It shift to distribution. So we know our customers extremely well and we believe currently with Anywhere between 6 to 7 week lead time, we clearly have job at hand, and we feel comfortable we will Maintain those lead times and in some cases, improve those lead times too. On the OEM side, we also have very strong lead times if it's on Faster Business or our Electronics business. And the differentiation there is, John, once you get specked in Into debt process, you are in for the next 3 to 5 years. So it's very difficult To get out. So we really invested wisely as a company in that area knowing that we could have a differentiation there And also protect our margins. So to answer your question, we feel comfortable that we will maintain those lead times, but also we have other Areas that we are working on, they will further separate us from the competition. Okay. Josef, thank you very much. You bet. Thank you. Our next question is from Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question. Hey, good morning. This is David Tarantino on for Jeff. Good morning, Dave. Hello. So just starting out, you had pretty healthy incrementals of about 40% in the quarter despite all the headwinds out there, but guidance implies a Modest step down in the second half. Could you just go through the puts and takes in this outlook and how all the headwinds out there and seasonality of the business informs guidance? Yes. I think it's difficult to say that there's seasonality this year, to be quite honest. It's With all of the demand in the markets that we are seeing across our end markets, I am not sure that It's a normal seasonality year. And certainly, we had good incrementals, especially with what we saw on the supply chain side. In the back half of the year, there are a couple of things at play. We have less work days. In the back half of the year, we're seeing some supply chain Challenges that we believe are probably going to keep us from being able to perform at the level that we did at Q2. But the positive part of that, again, is really the demand that we're seeing in the end markets and The growth that we expect to continue in those end markets, but it really is driven primarily by supply chain when you look at what the expectations are from a margin perspective and A revenue perspective on the back half of the year. Great. Thank you. And then we you Talked about a little bit, but could you quantify the amount of price you took in Q2 and what you're expecting for price cost for the rest of the year? Thank you. The price we did put through a few selective price increases on specific products in the first half of the year That really helped cover some of our costs that we were seeing on the cost increase side, but It's low single digit millions for the year to date pricing impact. So, it's not a significant contributor to the first Half of the year, it will likely be a larger contributor in the back half because we have a few price increases that are Not rolling through until August, September, October timeframe. So there will be some impact there. But it really those price increases really are put Drew Moore to help us offset the material cost increases and supply chain constraint issues that we're having. Great. Thank you. Thank you. And we have reached the end of the question and answer session. I'll now turn the call over to Joseph Matosevic for closing remarks. Thank you, operator. Well, thank you much for joining us today. We appreciate all of your interest in Healios and really look forward to updating all of you on our Q3 in November. We remain super confident in our ability to continue to grow and deliver value for all of our stakeholders. Have a great day and stay healthy. Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.