Greetings and welcome to the Helios Technologies Second Quarter 2019 Financial Results Conference Call. At this time all participants are in a listen only mode the brief question and answer session will follow the formal presentation if anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Karen Howard, Investor Relations for Helios. Thank you. Ms. Howard, you may begin.

Thank you, Jerry, and good morning, everyone. Welcome to the Helios Technologies second quarter and first half 2019 financial results conference call. On the line with me are Wolfgang Dangel, our President and Chief Executive Officer, and Tricia Fulton, our Chief Financial Officer. Wolfgang and Tricia will be reviewing the results that were published in the press release distributed after yesterday's market close.If you do not have that release, it's available on our website at www.heliostechnologies.com. You'll also find slides there that will accompany our discussions today. If you look through the slide deck, on Slide 2 you'll 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. 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 are provided in the earnings release as well as in other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at www.sec.gov. I also want to point out that during today's call we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance.You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP to non-GAAP measures in the tables that accompany today's earnings release as well as in the slides.Wolfgang will get started with summarizing key highlights for the second quarter of 2019. Tricia will go through the details of our financial results for the quarter and first half of the year, and then we'll turn it back to Wolfgang for his perspective on our outlook and 2019 guidance before we open up the lines for questions and answers.And with that, it's now my pleasure to introduce Wolfgang.

Thank you, Karen. Good morning, everyone. I will start on Slide 3. We reported sales of $144 million, a 6% increase over last year's second quarter. Our Custom Fluidpower or CFP acquisition drove the growth as the change in organic sales of our 2 segments, excluding currency, resulted in a 2% decline this quarter. Organic sales of our Hydraulics segments were flat, while our Electronics segment contracted by 7%.Currency also had an unfavorable impact during the second quarter as Tricia will report to you later. We anticipated stronger sales from our Hydraulics segment as we had strong backlog going into the quarter. And overall, our order rate remains solid. We also increased installed capacity of our Sarasota facilities in the line with our expectations. However, the sales mix of CVT products did not align with maximizing that capacity.Basically, we have capacity constraints related to specific product families which impacted our productivity and resulting pace of output. Accordingly, the revenue realized by that operation was lower than we expected, but we do anticipate sequential and year-over-year improvement next quarter. Despite this, we were very pleased with the quality of earnings generated this quarter. Tricia will provide more detail compared with the prior year, but allow me to comment on the sequential improvement over the first quarter of 2019.Our consolidated result, as well as both operating segments, reported improved gross margins and operating margins on lower sales than the first quarter. We have been focused on improving our profitability from a cost management perspective as well as productivity perspective.Turning to the bottom line, we reported $17.3 million of net income. On a non-GAAP cash net income basis, that represents $20.7 million or $0.65 per share, up 5% and 3% respectively over last year on a comparable basis. Adjusted EBITDA was $34.7 million…

Thank you, Wolfgang, and good morning, everyone. Let's begin on Slide 6 with a review of our second quarter consolidated results. Sales were up $7.6 million or 6% compared with last year's quarter. CFP drove that growth, contributing $12.6 million. Our organic business sales declined 2% excluding the impact of changes in currency rates.Currency had a $2.6 million unfavorable impact. The decline in organic sales was net of $2 million of price increases. I will now touch on sales by region, which are designated here in the sales bar charts on the left. There is a table in the back of the press release as well as the supplemental slides summarizing this information.As you can see, during the 2019 second quarter, APAC realized year-over-year growth whereas the Americas was virtually flat and sales in the EMEA market declined. With the addition of CFP, the APAC region is now a larger contributor to our sales base. Sales to the Americas, EMEA and APAC regions were 47%, 27% and 26% of the consolidated total, respectively in the second quarter. In the prior year quarter, this was 50%, 32% and 18% to the Americas, EMEA and APAC, respectively. Regarding profitability, our consolidated adjusted EBITDA margin remained strong at 24.1%.Turning to the bottom line, non-GAAP cash earnings per share were $0.65, up compared to last year's second quarter. The adjustments to arrive at non-GAAP cash earnings consist primarily of acquisition-related amortization of intangible assets in this year's second quarter, as reflected in the reconciliation tables in the back of the slide deck and release.Last year's quarter included additional acquisition-related charges. Please turn to Slide 7 for a review of our Hydraulics segment second quarter operating results. Consistent with prior periods, I want to point out that acquisition-related costs, including amortization, are not included in…

Thanks, Tricia. Please turn to Slide 14. There are several macroeconomic factors impacting our current outlook. Perhaps the most significant is the uncertainty surrounding several geopolitical regions, most notably relating to the U.S./China trade war and the future of Brexit. Foreign currency exchange rates have certainly been significantly impacted, with the U.S. dollar strengthening against many global currencies.We believe that the uncertainty is impacting decision making and slowing economic activity which is affecting some of our end markets and geographies to varying degrees. On a sequential basis, from the first quarter of this year, several end markets such as global mining and U.S. construction, still demonstrated resilience. However, several of our other end markets, including recreational and material handling, have further softened.European agriculture remains weak as does oil and gas in the Americas. Most recently, we have started to see a decline in the construction equipment market in South Korea. Historically, that market has been a bellwether for our business. Leading U.S. indicators currently suggest that we are in a slowing growth phase confirmed by last week's interest rate cut. But the good news is that economic sources that we track continue to predict a soft landing.Around the world, nearly all major global economies are already experiencing either a slowdown of growth or negative growth. Specifically, Western Europe is in a mild recession and economic growth in China has decelerated. Again, the good news is that similar to the U.S., all the global economies are currently expected to recover relatively quickly.I want to remind you that as we have said before in accordance with our Vision 2025 plan, we expect to outpace macroeconomic growth. This is being driven by the investments we have been making to expand our coverage in the field, increasing and broadening relationships with OEMs, penetrating regions…

Thank you, we’ll now be conducting a Q& A session. [Operator Instructions] The first question is from Brian Drab, William Blair. Please go ahead, sir.

Hi, good morning, thanks for taking my questions.

Good morning Brian.

Just on the capacity constraints that you had in the business first, I'd just like to understand, you know, how good is your visibility to the favorable mix shift in the second half of the year that's going to enable you to utilize that capacity better? And also, can you add capacity for the product categories that experienced the constraints?

Yes, let me start with the second question, Brian. So the answer is yes, we still can and we still want to add capacities obviously where we have the capacity constraints. So far, in general just to refresh the memory, the Sarasota manufacturing site consolidation project was aiming at two significant goals.The first one was to increase capacity by 15% by the end of this year. We are well underway to accomplish or exceed that rate. Obviously the second goal was to streamline manufacturing and to improve productivity and at the end of the day also margins. Now we are seeing sequential margin improvement, but not to the degree that we had expected due to this mix. This mix is simply a situation where in some of the high-volume series manufacturing, we didn't see the fully load compared to the lower volume and higher mix portion of the business.Over time, I think we expect that this will balance itself out, but that was not the case in the second quarter. And we will continue to address the capacity constraints, coming back to your second part of the question, in those areas where we - in the high - in the low volume, high mix areas. That's an integral part of basically getting to a total of 15% capacity increase by the end of the year.

Okay, okay thank you. And then, I know that in your longer-term goals, you had incorporated a mild recession. I guess we're getting it here and do you at this point view the 7% growth that you were targeting for each of the businesses to be, you know, are those goals a little more aggressive at this point? And do you still, specifically for the Electronics business, do you still envision that that will be a $200 million revenue business as you look ahead to that long-term 2025 target?

Yes, I think first of all we know that we operate in a volatile environment here, Brian. So the compounded growth numbers that we've outlined in between now and 2025 are still very realistic. There is no reason to move away from that. Neither for the Electronics business you are referring to, nor for the Hydraulics business.As you quite correctly said, we factored in a mild recession in between 2018 and 2025 anyhow. I think we have to see how this thing shakes out in the near term. I think visibility is a little bit more difficult because of the extraordinary volatility I think that we have seen over recent weeks. But overall, we are very confident in the CAGR rates that we laid out.

Okay, I’ll save the rest of my questions for later. Thank you.

Thanks Brian.

The next question is from Joe Mondillo, Sidoti & Company. Please go ahead, Sir.

Hi, good morning, everyone. I first wanted to ask, just curious about the September 1st tariffs. How you're thinking about those, how much are they affecting you, what's baked into the guidance? Any color that you can provide on that, that would be great. Thank you.

Yes, I mean, Joe, those specifics - directly those specific new rounds of tariffs to go into effect on September 1 are not impacting us. However, it creates a lot of turmoil in the overall economic environment as we have already seen. So obviously, machine builders are very cautious now with triggering investments and probably taking a second look at a lot of the CapEx investment activity. So it's the trickle effect I think of this uncertainty that is created with the next round of tariffs.And obviously, I mean we still live to a high degree from export, we are concerned about the currency situation as well because as we saw over the last two days, obviously it is shifting more from a trade conflict into a potential currency conflict. And as we pointed out in the script, we have some currency exposure there that would have a negative impact.We feel, I think confident that based on the guidance that we have given now that all of those factors and the degree of uncertainty the way that we can see it at this point in time is embedded in the new guidance. So I feel comfortable that with the ranges that we have given that we can accomplish those.

Okay, and then a question on the CVT backlog. I thought that - I was expecting the second quarter to be a little stronger considering your, I guess commentary on the first quarter call related to this backlog. But maybe some of it didn’t come through in the second quarter. But it sounds like the back half you're a little more positive than maybe I was expecting and I guess it's because of the backlog. I'm wondering what - how have the new order trends actually been at that business over the last several months? How have they trended through the month of July?

Yes. So first of all, I reconfirm what you are saying. I've also been kind of disappointed, I expected a better manufacturing output in the second quarter. But due to the mix, I think the mix situation, as I explained, the output is what it is. We were still very pleased with the sequential improvement of margins that we are seeing which leads us to believe that the project is leading us in the right direction.Now evaluating the backlog, coming back to your question, we still have a firm backlog. And I mean order rates are still reasonably high. They are softening and they are slowing down, no question about that, but I always prefer to do the comparison to 2016, to the second half of 2016 when the economy started and diversified industrial business started to see acceleration of growth. And compared to those levels, we are still talking of elevated order levels. The other thing obviously we are looking at destocking. So destockings are actually quite reasonable at this stage. There were more than in the first quarter, so they are certainly increasing, but it's not to a degree where we are getting concerned.

And when you compare the order rates to 2017, are those also still up year-over-year?

Yes, we are still above the order rates of 2017.

Okay and then just a last question. I just wanted to clarify the Sarasota capacity expansion and reorg, just so that we're clear. Because this reorganization sort of plan or project was finished at the - I think around April or May time period. But that - you're still focusing on trying to expand the capacity. Could you just clarify what exactly is going on there? Because I wasn't anticipating many issues related to capacity at this point in time.

Yes, so basically, the move from three manufacturing facilities down to two was physically finalized by the end of the first quarter or early April. But we are still finetuning those lines obviously to improve and streamline manufacturing, improve throughput and get productivity up. But that was anticipated. There is nothing of the extraordinary. The lower output in Q2 is due to a mix issue.As you know from previous discussions, Joe, I mean we can really generate great margins if we can fully utilize the installed capacity. And in the high volume, the large series manufacturing environment, we were not able to do that during Q2.

Okay, and the timeline to improve that is sort of by yearend, correct?

Yes, the timeline would be by yearend, so we want to be at the 15% additional installed capacity and then hopefully have a better balance. The better balance of course has to do with also orders coming in over the next two quarters. So it depends on the category and the type of orders that we are receiving. But there will be continuous streamlining and continuous improvement. And I think the sequential margin improvement in Q2 over Q1 is a sign in the right direction there.

Okay great. Thanks a lot, appreciate you taking my questions.

Sure.

The next question is from Jeff Hammond, KeyBanc. Please go ahead, sir.

Hi, good morning, this is Brad on for Jeff. Just going back to that last point, just going back to the mix surprise, do you expect sequential margin improvement in the third quarter? Is there any kind of push out of revenue from the second quarter to third quarter related to those constraints? Just anything round that, that we should be thinking about as we model the Hydraulics segment in particular?

Well, Brad, the only thing we need to take into consideration there is output was a little bit below expectation. Obviously, we couldn't deplete the backlog to a degree we have hoped for. So the answer to your question is yes, that will be shifted in terms of output and revenue for Q3 then.

Okay, and then I wonder if you can just talk about how Faster performed in the quarter. It seems like a lot of the weakness concentrated in Euro Ag. you know, are you seeing any kind of OEM pushouts in that region specifically?

Well, considering the circumstances Faster has entered, you know two thirds of the business is tied to the agricultural markets. Faster actually has done reasonably well I have to say. We are happy with the performance of Faster from an operational perspective, but also, I think from a sales and marketing perspective. Because they are continuously digging up new OEM opportunities, planting new seeds for business where we will be able to harvest them down the road.The Ag market is very tough as you know and yesterday's news of China basically stopping all U.S. agricultural imports is not helping. As you know, 35%, 38% of our total revenue for Faster is generated in the United States. But overall, the company is very well positioned and we are in I would say a lot of encouraging engineering discussions with OEMS for projects down the road. So we are not worried about the current situation. We are positioned very well for the future here.

Alright I appreciate your color.

Sure.

We have a question from Mic Dobre, Robert W. Baird & Company.

Yes, thanks, good morning. It's actually more than one question. If - I'm looking to maybe get some more color on the guidance and kind of what you have embedded in the outlook. On Hydraulics specifically, can you help me understand what sort of FX drag is baked into your full year outlook at this point? So as you look at the growth number.

Yes, high percentage of the decrease in guidance is related to that. It clearly depends on where the exchange rates come in at, but you know, anywhere from 35% to 50% of that could end up being currency. We’re just talking about Faster and while Faster's business is doing very well, the currency is definitely hurting them in the translation from euros back into dollars for reporting purposes. So that's a pretty big challenge for us to try to forecast going forward. But we're looking at the current exchange rates as holding for the remainder of the year when we're making our assumptions.

So, what I'm really trying to get at here, I'm trying to understand exactly on a core basis, excluding acquisitions, and excluding foreign exchange, what your guidance is for the year for Hydraulics. And I'm trying to understand how you are essentially thinking about the second half of the year compared to what we have seen in the first half in reported numbers, Tricia.

So I'm not sure what you mean excluding acquisitions. Are you saying excluding Faster in the entirety or just for the period that we didn't own them?

I mean organic growth.

Are you talking about organic growth?

I'm talking about organic growth. I'm trying to understand your organic growth guidance.

Yes so, so on our organic basis, we're down slightly, flat to down slightly on the Hydraulics side. We really are challenged by some of the end markets and challenged by what Wolfgang was talking about, a little bit on the mismatch of the sales on the mix side.

If you back out, Mic, if you back out the acquisition impact and the expected foreign exchange impact, the organic Hydraulics sales would be in the range of 0 to -1% for the second half of the year.

To 0 to -1% for the second half of the year. Okay, that's helpful. In an environment in which you have 0 to -1% growth in the second half of the year, how should we think about gross margins? Compared to what you've done in first half or on a year-over-year basis, however you want to frame it.

I think overall, as we outlined here and as we have seen already in Q2, I mean you see sequential improvement in margin. We continue obviously to streamline manufacturing. As I pointed out, we will still see productivity improvements. We have a couple of additional levers I think that will be beneficial for us. So from a margin perspective for the second half of the year, we would still pretty much feature in the same range where we are in the first half of the year.

So in the first - I'm sorry to put a finetune on this, but I'm trying to understand this. In the first half combined or in the second quarter?

In the first half, yes, in the first half, Q1 and Q2, Mic.

Understood. And then on this question on backlog, I mean is there a way to help us understand exactly how large your backlog is? And I'm asking this because per your own comments, and obviously for us that track your end markets pretty closely, we all know that there is deceleration going on here. And it seems to me that your guidance is essentially supported by your backlog comments. So obviously backlog is important. How large is the backlog, first and foremost? And how has the backlog progressed year to date? Is it up sequentially? Is it down sequentially? What's going on here?

Backlog has plateaued. You're talking about Hydraulics here, right?

Right.

So backlog has plateaued during the second quarter of this year. With regard to the absolute backlog number, we will not, I will not give you any particular number there. We are not revealing those, detailed information.

Well, fair enough, but just from a color perspective so that we gain some level of comfort here, I mean my understanding of your business is that, on the Hydraulics side at least, is that this is a very short cycle business still. You don't normally operate out of backlog like some of the machinery builders.And that has changed a little bit over the past maybe call it 18 months or so given what's been going on with capacity constraints. But I'm trying to understand if the size of the backlog here is such to where you can actually ride out a slower market environment. I mean do you have half a quarter's worth of production in the backlog? Is it more than that? Is it less than that? I mean how big is this figure?

Well, it's a mixture of both. When you say ride it out for the balance of the year, so obviously the backlog, as I indicated before, is solid enough to ride it out even if the order trends continue to soften. Obviously if the order trends continue to soften beyond a certain degree, then you're eating too fast into your backlog as well and then we would struggle. But we anticipate based on the latest economic environment that we are seeing in those particular end markets that the backlog is solid enough plus an anticipated order intake rate over the next two quarters will take us to the numbers that we have reflected in guidance here.

Okay, got it. Last question for me, in Electronics, so if I'm looking at this segment, essentially your sales were kind of flattish sequentially, second quarter versus first. And your margins were - gross margins were a little bit better sequentially, so that's good. When I'm looking at your guidance for the back half, it implies a sequential step down in revenue. So from a cost perspective, how do you think about the impact on absorption here? What should - how should we think about gross margin on this maybe slightly lower revenue base sequentially in the back half? Thank you.

Yes, as we said, Mic, I mean, gross margins are really at a superior level in the Electronics business. If you saw, they were around 46%. That's probably peaking. I mean it's unrealistic to expect any further improvement right there. To your question, we expect that those margin levels will hold up. Maybe not right at 46%, but they will hold up in an elevated range, probably somewhere in the range of 43% to 45% if we want to quantify that. Then the other factor that comes into play here is definitely we see more softening in the recreational end markets end markets and the oil and gas markets that the Electronics business is particularly exposed to than we are seeing on the hydraulics side of the business. So that's factored into this new revenue guidance for the Electronics segment as well.

That’s very helpful thank you.

We have a question from Nathan Jones, Stifel. Please go ahead, sir.

Good morning, everyone.

God morning, Nathan.

Good morning.

Wolfgang, I'd like to talk a little bit about the revenue synergies. I know, you know, in the past to 2025 and those upper single-digit kind of revenue CAGRs, there's a big assumed contribution there from revenue synergies, so can you give us an update on the kinds of projects that you're working on, if any of those revenue synergies have materialized to date and what your outlook is for those over the next few years?

Yes, Nathan, as I pointed out, I'm particularly pleased where we are with regard of the revenue synergies here. After the acquisition of Enovation Controls in December of 2016, you might recall that we laid out that goal of generating $5 million EBITDA by the end of 2020. And I would basically segregate these 4 years into 3 categories.I mean the first phase was probably the first one and a half years where we kind of got used to each other, had some joint product development activities, developed one controller here for the Hydraulics business that was quite a success and then in phase 2, that's the phase we are in right now, where we are really digging up a lot of opportunity by basically featuring jointly in front of customers and talking about engineering projects.And I'm particularly pleased about this phase 2 because I see the number of opportunities is increasing by the month and then phase 3 would be from now forward until the end of 2020 when we want to realize then some of those synergies. So regarding the original target, I think we are in a very solid position. I think it's reasonably fair to say already today that we will hit that number and even have a very good chance of exceeding the original target.

Okay. Then on this - in the Electronics segment, the change in the contractual terms or relating from contractual obligations with a specific customer there that you made. Clearly you would have expected to take some pain upfront and realize the benefits a little bit later on as you have the opportunity to sell those products to a broader part of the market. But obviously we're seeing some pain from that now. When do you believe that we should start seeing the benefit of that decision in terms of sell-through to other customers?

I would say probably that is starting to be seen by the end of next year for the first time, but then definitely in 2021 and 2022. I pointed out already during the Q1 earnings call that we have specific OEM projects. I was talking about four specific OEM projects at that point in time that we expect to have SOPs and come to fruition then in the given timeframe.So that would be mainly 2021 and 2022. You are right, we are seeing the expected I would say hardship on the frontend here of this process, but so far, it's been going according to plan. And we are excited about the additional opportunities that we are getting in. So I'm pretty optimistic this was the right thing to do and take a short term hit for the mid and long term benefit.

Have you had the opportunity or do you think there is the opportunity to regain that customer's business even if those products are nonexclusive or do you believe that that customer is basically gone here on these products forever?

It's very difficult to say at this point in time. I mean we are not banking on that. I mean, the full focus is on basically making these products and services available to a broader base of customers around the world. Because we also want to pay a lot of attention to basically spread these products globally and not just in one designated geography as it has been the case in the past. We have given very little consideration to your specific question whether that customer might come back. If they do come back, I mean, under certain circumstances, under certain contractual circumstances, of course we'd be happy to serve that customer too.

Okay, thank you for taking my questions.

Sure Nathan.

[Operator Instructions] There are no further questions at this time. I'd like to turn the call back over to management for closing comments. Please go ahead.

Thank you for your interest in Helios Technologies and for your participation this morning. Also thank you to all the hardworking Helios employees who are driving these results. We look forward to updating all of you on your third quarter 2019 results in November. Thank you very much and have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.