Greetings, and welcome to the Helios Technologies Second Quarter Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tania Almond, Vice President, Investor Relations, Corporate Communications and Risk Management. Thank you. You may begin.

Thank you, operator, and good day, everyone. Welcome to the Helios Technologies second quarter 2022 financial results conference call. We issued a press release announcing our results yesterday afternoon. If you do not have that release, it is available on our website at hlio.com. You will also find slides there that will accompany our conversation today. On the line with me are Josef Matosevic, our President and Chief Executive Officer; and Tricia Fulton, our Chief Financial Officer. They will spend the next several minutes reviewing our second quarter results, discussing our progress with our accelerated growth goals, affirming our outlook for 2022, 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 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 turn to Slide 3. With that, it's now my pleasure to turn the call over to Josef.

Tanya, thank you, and good day, everyone. Our team performed extremely well yet again and delivered strong results for the ninth consecutive quarter in this challenging macro environment. We are staying laser-focused on executing against the business system and our strategy to create accelerated growth with top-tier margins. We delivered solid increases across most of our markets and regions. In fact, our diversification strategy is proving its value. We saw strength in our industrial, recreational and mobile markets that more than offset the market shift we've seen in other areas this quarter. We are outpacing the competition on many fronts. We believe our competitive advantages lie in our engineering expertise, application know-how, pure-play focus, as well as our manufacturing and operating strategy that we are executing. We have a new product rollout for customers in our Electronics segment that validate our innovative solutions. Our Hydraulic segment continues to introduce new solutions that are even changing the way our customers engineer their own products. Beyond driving the top line, we are constantly strengthening our business model to our manufacturing and operating strategy. This helps drive greater operating leverage. We are taking a global look at our footprint and are maximizing our capabilities to better serve our customers with the greatest value proposition. This strategy is enabling top tier margins and solid earnings despite the strength of the U.S. dollar and the impact that it has on foreign currency. Our operational strength and the determination of our people are delivering solid power in the face of hyperinflation and supply chain constraints. I am always so impressed with how our teams work together to produce remarkable results day after day. I want to thank each Helios colleagues around the world for your strong consistent performance and dedication to continue to build a great…

Thank you, Josef, and hello, everyone. On Slide 5 through 9, I will review our second quarter 2022 consolidated results. As Josef mentioned, we are delivering impressive financial performance against headwinds of foreign currency, supply shortages and rapid inflation. In the quarter, sales grew 8%, which on a constant currency basis was 12% as foreign currency exchange rates impacted sales by $7.5 million. Supply chain constraints delayed about $15 million in sales. This continued despite an expanded supply base, strategic investments in inventory, production schedule adjustments and extensive work on product redesigns. We have a solid demand in industrial, mobile, agricultural and recreational end markets. While the health and wellness industry, specifically Balboa product shipping out of Asia serving Europe slowed in the latter half of the quarter. Geographically, the Americas have remained quite strong with more modest growth in Europe. Continued restrictions related to COVID have weakened the APAC region, specifically in China. Gross profit increased in the quarter on higher volume against a $2.2 million currency headwind. Gross margin contracted as supply chain and logistics challenges prevent optimal operations. We have additional strategic pricing actions planned. As supply chain conditions improve, this will help with output, absorption and efficiencies. Additionally, we expect to capture more benefits over time from our manufacturing and operating strategy. We also believe as we continue to advance the strategy that Josef highlighted, we can find greater efficiencies even in these less than ideal operating conditions. We are highly disciplined with our SEA expenses to strengthen operating leverage. SEA as a percent of sales improved 100 basis points to 13.5% of total sales. Adjusted EBITDA of $59 million was in line with the trailing quarter and up 3% over last year's second quarter. Importantly, despite the impacts I just outlined, we are holding margins…

Thank you much, Tricia. As I said on our last call, it is very important to us to continue to do what we said we would do. We are doing that through maintaining our regional guidance range for the year. While we assume the lower end of the range, we will and have been working diligently to find creative ways to offset the headwinds and create better momentum from the tailwinds. We also remain on track to achieve some milestones that we have accelerated by 2 years of reaching at least $1 billion in revenue by 2023. You can probably tell from the type of work we are doing with our manufacturing and operating strategy. We have a long runway of opportunities ahead of us. The diversification that we have been working on across the business, including the size and scope of each of our business segments, deeper and broad end market penetration and geographic mix is all coming to fruition. Since the beginning of the pandemic, we have remained laser focused on staying close to our customers and understanding their needs, while innovating new products at an accelerated rate. In fact, we recently announced a new efficient energy saving ecoline program a couple of weeks ago from our Hydraulics business. The program has several solutions to customize the system that can significantly boost and improve efficiency, reduce fuel consumption and provide cost savings. We have more announcements coming this fall that we believe could be game changing for multiple industries. Our intense focus on innovation will allow us to leapfrog our competition further extending our leading market position. This is an exciting time in our corporate history. We remain very optimistic about our future and our ability to build a broad class [ph] large cap company over time. With that, let's open up the lines for Q&A, please.

Thank you. [Operator Instructions] Our first question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Hey. Good morning, everyone.

Jeff, good morning.

Good morning, Jeff.

So just on kind of the guidance change towards the lower end. I'm just trying to better - you cited a number of things. I think the electronics being a little slower, FX, maybe just uncertainty. Just order of magnitude, how do you think about the headwinds?

Yes. We're looking at the supply chain. We're seeing some headwinds on the steel and the electronic components. I don't think that's new, but we are continuing to see it and coupled with that, we also see increases in European energy costs, which are pretty dramatic at this point. And then FX has been having more impact than anticipated with the strength of the U.S. dollar against the euro. But I would have to say that I still think the supply chain constraints is the number one driver.

Okay. And then just on health and wellness, if you could just explain what's going on there. We've seen some evidence of destocking in kind of pool and spa. And I'm just wondering if it's - I think you mentioned Asia shipping into Europe, if it's Europe weakness, if it's more broad than that, if it's demand weakness versus destocking? Just a little more color there.

Yes, Jeff. On the health and wellness in particular in our Balboa segment, the biggest impact on Balboa is clearly China followed by Europe, and North America is holding steady. So that's kind of how I would answer your question, largely tied into China and Europe. China being the largest impact, Jeff.

Okay. And then like the – go ahead, Tricia…

Yeah, I mean, in both of those areas there's some of the inventory issues that we're seeing of unbalanced inventory that needs to be worked through over hopefully a short period of time. And then there's also a demand impact on that as well. So it's coming from both sides in both APAC and in Europe.

And then the weaker China, is that's demand related or that's noise around China lockdown?

Combination of the both, but mostly demand related, Jeff.

Okay. Thanks so much. I'll get back in queue.

Thank you.

Thank you. Our next question comes from the line of Chris Howe with Barrington Research. Please proceed with your question.

Good morning, everyone. Thanks for taking my questions.

Sure.

Morning. As we think about some of the comments that you made on the last call, can you provide an update on the footprint? You mentioned it briefly in your prepared remarks, kind of where capacity utilization is today in support of the demand trends that you see across both segments?

Yeah, certainly, Chris. So very active journey here as we really starting to think 2023 and beyond and taking a more global look at our current capacity. And going forward, what should it look like is we're in a position now where we think unfolding additional flywheel acquisitions to further create this differentiation. We have been talking about and then we added an arm of a new team in terms of system sales, the recurring growth. So we're picking up some pretty nice team in terms of orders and backlog, coupled by the investments we have done over the last 2 years on new products. So all those three areas are coming together now. So to answer your question, we are now in the process of looking at the acquired companies. Where are in terms of carrying capacity. Our goal is to free up an additional 20% to 22% of global capacity. We will reach that goal with our plan by the end of the year. That's a methodical step, we need to take. So good progress. The oven is getting baked and we will certainly communicate the final outcome here on our Q3 call where we will also provide additional color on new product development and other areas of the business.

All right. Just to follow up on Jeff's question about the different challenges that you're seeing that are factored into falling into, let's say, the lower end of the guidance range. As we kind of think about that in more detail, can you talk about what areas of the business or what regions of the business you are perhaps seeing a little bit better transparency, as we compare this question with your prior comments about the visibility into the second half, what areas are you seeing some improved visibility?

Yeah. So on the improved visibility, clearly, the U.S. construction gives us higher level of comfort, as we look at second half, pretty much across our entire portfolio. Ag markets remained relatively strong. You know, that holds true for the global markets. Really, Chris, in our case, it's a 1, 2, 3 punch. It is China, FX and supply chain. That is pretty much it. We anticipated supply chain to last into the second half, and that's the reason why we have taken steps proactively to protect the margin, and the team has done a great job on protecting FX you know, once that work - works itself out of the system, they should get us given into a better - better stage and then once China opens up whenever that is, we are really good to go. We really don't have any fundamental shift to the strategy or any execution issues. We have - we could have sold north of $15 million [ph] additional dollars if we wouldn't have the supply chain challenges, so to say. Balboa was hardly impacted mostly because of China, if you look at a year-over-year comparison, I just wanted to make sure that our investors understand that we really have a 1, 2, 3 punch going on between China, FX and supply chain. That's pretty much it.

Okay. That's helpful. And I'll ask one more and then I'll hop back in the queue, I promise. As we look at the guidance towards the lower end of the range, we kind of think about the composition of that guidance. It's being driven by full segments in rhythm towards this guidance? Or do you anticipate one segment doing a little better, for example, a little bit less of an FX headwind in the Electronics segment, although you do see continuous deferral of sales, but maybe you can comment on how the segments shake out towards that guidance?

I think it's pretty balanced, Tricia, right…

Okay…

Its very challenged, Chris. Its just a little bit more visibility. And clearly, we want to maintain to be good stewards of the business and not send any wrong messages. But this is as far as we can see right now, and we wanted to take a proactive approach just communicating effectively here that 1, 2, 3 punch I've been talking about. If things improve, then obviously, we will be in a better position, if things further deteriorate, you guys know the story.

Okay. Thanks for taking my questions. Appreciate it.

Thank you, Chris.

Thanks, Chris.

Thank you. Our next question comes from the line of Mig Dobre with Robert W. Baird. Please proceed with your question. Q – Unidentified Analyst: Good morning, everyone. This is Joger Baskian [ph] on for Mig this morning.

Morning, Joe.

Morning, Joe. Q – Unidentified Analyst: Hey, good morning. I know you put through some pricing in the first quarter. It seemed like price cost headwinds persisted this quarter. Am I reading that right? And will you need to push through more pricing in the second half?

We did put through pricing in each of the businesses some time in Q1. And with regard to price rime costs, by the end of the quarter, we were at a price cost neutral, but certainly not for the full quarter depending on how the pricing was rolling out. And we're looking at that really mostly from materials perspective, are we able to cover the cost of the rising material cost on the supply chain piece of it, and we've covered that - recovered also a little bit of the margin on it, but certainly not at the full margin. That's why you still see the gross margins being a little bit lower than what they were last year, but we're able to leverage the SEA costs and still come in with really strong EBITDA margins to the bottom line. Q – Unidentified Analyst: Maybe asking another way. Have you started to see your costs come down? I know a lot of commodities rolled over in the quarter? Have you started to see your costs come down? Or is there a little bit of a lag on that?

A slight improvement, Joe, in the Hydraulics segment, but has it come down to the degree that we call it normal? No. Q – Unidentified Analyst: Okay. And then on the supply chain, you called out $15 million of delayed sales, which I guess were actually improved from the first quarter, and you said you expect to continue to improve. I guess, what gives you the visibility that it's going to continue to improve and what sort of - sort of – order of magnitude, if it was $15 million in the second quarter, how much can it improve in the third and fourth quarter?

Yeah. So our visibility on the Hydraulics segment, in particular, with CVT and Faster, we have a very consistent order pattern with our . distributors. So we have a slight - we have additional visibility within our distribution channel now that we're starting to get a little bit more comfort and Faster have been a direct OEM company. We traditionally don't see much change besides the last couple of quarters due to the Ukraine and Russia situation, there were some push outs, but it is starting to stabilize a little bit. We just want to wait another a couple of three months and see if that's going to stay consistent or is it just one of those one-offs. On the Electronic side, with innovation, is a very good, strong consistent story and order pattern here. It hasn't fluctuated much and above board side, it's pretty much all impacted by China and Europe. So that's where the grays zone is, so to say, Joe. Q – Unidentified Analyst: Got it. Okay. I'll pass the line. Thanks for taking my questions.

Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Good morning, everyone.

Hey, Nathan.

I wanted to go back to the price cost question there. Tricia, you said you were - you exited the quarter neutral on price cost relative to materials. So are you saying that you're not price cost neutral when you're including all sources of inflation, like freight, labor, all of those kinds of things?

My comment included freight, but not labor or the efficiencies that would view get as the labor and overhead of gross margin. We still have some disruption in the production cycle because of the supply chain issues that we have. So we're not getting the full leverage that we would out of our labor and overhead to get to the gross margin level. That's what I was commenting on.

Okay. So we've seen some increasing pressures on gross margins over the last couple of quarters. Maybe you can comment on that. I mean is that just the inflation from the second half of last year starting to roll through. And how you think that we should be looking at that gross margin progression over the next few quarters?

Yes. Gross margin is going to continue probably around the levels that we're at right now because we are still seeing where we're having to do broker buys on the electronics side and the costs are so high there. We are seeing some stabilization of that, though, which is encouraging. Steel prices are still high, but expected to start to come down, at least according to the projections that we have. So over time, we will get back to the gross margins that we had but over the next couple of quarters, we still will have some of the same challenges.

Okay. Thanks. And one on the CapEx number. I think you said you're probably going to come in at or below the low end of the 3% to 5% guidance range. I would think of a fair amount of this has to do with the manufacturing and operating strategy, seems to be going full steam ahead. So just any comment on whether you're getting this done more cheaply or whether it's taking longer from supply chain constraints. So just why is that money not getting spent this year?

Yeah. We're actually - as we're moving things around to the different facilities to optimize the operations and manufacturing, we're actually realizing that in some cases, we had more capacity than we thought we did. So we don't have to make those investments right away. So that's some of the benefits. Some of it is just the delay in the lead times on some of the machines that we're looking at. And as Josef pointed out, we're also looking at the acquisitions that we've made and seeing where we have capacity in those facilities as well. So some of the investments don't have to be made this year because we have the capacity available.

Great. Thanks for taking my questions.

Thank you.

Thank you.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the call back over to Ms. Almond for any closing remarks.

Great. Thank you, operator. And thank everyone, for joining us today. We appreciate your interest in Helios and look forward to updating all of you on our third quarter results in November. Please feel free to reach out to me directly if you have any follow-up questions. Have a great day and stay healthy. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.