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. A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. I'd now like to turn the call over to Tania Almond, Vice President of Investor Relations and Corporate Communication. Thank you. You may begin.

Thank you, operator and good day everyone. Welcome to the Helios Technologies third quarter 2022 financial results conference call. We issued a press release announcing our results this morning. If you do not have that release, it is available on our website at hlio.com. You will also find slides there that will accompany our conversation today. On the line with me are Josef Matosevic, our President and Chief Executive Officer, and Tricia Fulton, our 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 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 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 Josef.

Tanya. Thank you and good day everyone. This quarter again, our team has kept the 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 weak and restricted economy in China. We continue to innovate with new technology, capture market share, integrate our flywheel acquisitions and diversify in applications and markets. In a 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 is pure play in the hydraulics and an electronic space provides us confidence that we will continue to outperform against our competition. Protecting the business, our margins and cash flow are top priority in this environment. As I mentioned on our last earnings call, we have been making great progress executing on our manufacturing and operating strategy. We provided some excellent examples of our strategy at work at our recent sales site analyst day, for example. This includes leveraging the manufacturing expertise and operational footprint we gained With the acquisition of Balboa, we are moving the production of several prior 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 and 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 round…

Thank you, Joseph, and hello everyone. On Slide five through nine, I will review our third quarter 2022 consolidated results. As Joseph noted, we are executing to drive growth through innovation and acquisitions, protect 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 Ian. With our Sun Hydraulics operations in Sarasota, close to where many of the predictive models were forecasting of potential direct hit, we proactively shut down our operations for the safety of our team. As the majority of our cartridge valve manufacturing is located here, ultimately over 14 ships 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 important to note that the sales impact from the hurricane is not lost business. It just shifts the timing given the number of labor hours that were impacted geographically, the Americas were solid while EMEA and APAC, specifically China clearly reflected the economic conditions in those regions. In terms of end markets, our recreational market growth was significant with strong double digit increases, primarily driven by our new product winds that were several years in the making. We also had nice growth in the industrial market driven by machinery and energy and the mobile markets grew as well. The diversification we now have in our end markets is much better than in the past, but the tough year over year comparison to the amazing performance our health and…

Thank you much, Tricia. Clearly, we are all in this challenging global times together. This is when companies will remain 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 Helios 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 sticky 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 by 2023 with top tier margins. With that, let's open up the lines for Q&A please.

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Our first questions come from the line of Jeffrey Hammond with Key Bank Capital Markets. Please proceed with your questions.

Hey, good morning everyone. This is David on for Jeff. 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 stock in North America similar to other residential on markets? Are there more moving parts and I guess on this just how do you expect this to progress in your term?

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 thought in Europe or in APAC. There's probably some destocking going on in the Americas, but the majority of that destocking needs to happen in EMEA as we go forward. We're still getting some good news for 2023 from our North American customers. It really seems to be focused more on, on Europe, but with the economy, the way it is, interest rates the way they are I I think it'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, 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 and 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 and supply headwinds?

Yeah, we had an analyst day here at just a few weeks ago, and I think the folks got a very good sense for what products are we introducing to the market in 2023 and beyond. And there was well invested in well planned over the last two years. We knew we would be in a correction stage, especially in the health and wellness but working with our customers very closely and ran our customer perception study a couple years back and continued to follow up. We knew pretty much we had to hunt and over the last couple years, heavily invested in products that are not just going to be complimentary to what we are doing, but it will clearly help us diversify into other application markets and most importantly get us the system sales capability that we are really active and making it very sticky. So a few specific examples in the health and wellness area with having our Helios sense of engineering excellence, working together with innovation teams we are bringing products in out to the market over the next few quarters that will clearly diversify above and beyond the 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. Yes, this is a pullback. We do believe that we are nearing in many areas about in the health and wellness and we should start seeing flight recovery. Asia obviously is a still a wild card as we have, substantial growth opportunity there as well. But the new products over the next couple years in the electronics segment in the health and wellness end, on the innovation side, we we're more than upset what you currently see.

Thank you. Our next questions come from the line of Mig Dobre with Baird. Please proceed with your questions.

Thank you. Good morning everyone. Trish, I appreciate the context on Balboa $200 million of revenue or close to it in 2021. If we're looking at Q3 and your Q4 guidance, what sort of revenue level or revenue run rate for Balboa is implied in our Q4 guide?

Yeah, on the electronic side certainly Balboa is affecting the Q4 numbers. We're still seeing a lot of strength of innovation and we talked about the new product rollouts that they've had. Recreational markets are still going very well for us both in marine and vehicles. So the impact that you're seeing on Q4 is pretty much all being driven by the Balboa demand cycle,

Right? But just look, I'm not clear as to what the revenue run rate is here. Is this business now reverted back to a kind of $100 million base that you had when you initially acquired it? Is the sort of revenue run rate here or is it different?

We don't really like to give out specific business unit targets. We're looking at the electronics and hydraulic segments as segments, especially as we're rolling acquisitions into them. But certainly as the run rate is significantly lower than what we saw in 2021

Because I think this is the thing that we're all grappling with here and, David was asking about this earlier on too, as we're trying to sort of right size our estimates for 2023, we're really trying to understand the magnitude of the headwind that is coming from this health and well wellness market. What's kind of baked into the pie for the second half of this year and what might still be on a come in the early part of '23. So I don't know if you can help at all with that dynamic,

I think a fair way of answering your question here actually is when we acquired Bob Boy in particular, we were just north of a hundred million. You know, Ted revenue obviously jumped up as almost double sized and now it pulled back more into the $150 million, $160 million type of range. And we think that in some cases we are seeing the bottom and seeing some slight recoveries in particular in North America still waiting for data points from Asia. And we will be in Europe actually next week, all week long and getting a good feel for where the markets are trending in Europe. Will you see before falling back to the levels that we have acquired the company we don't see that we are right now somewhere in between those two numbers, when we acquired them versus when we peaked. I think that's the most factual way we can answer your question at this point.

Okay, that's helpful. Sorry, go ahead.

Maybe just at the same time, as you saw in our day, we have developed new products in particular on the BBO side, considering the energy cost in Europe you know, under heat pump for an example, as you saw, that will help us mitigate some of the headwinds and certainly help us with the sales in Europe. But you should have a very good feel for where these products are going and what's our opportunity. So we are really not too worried, not too concern. We got plenty of feedback from our customers direct feedback a few days here in a couple weeks where the orders actually peak quite nicely. We just need the Asian market to open up and in Europe to stabilize a little bit more and we should be well in our way.

Understood. My final question again, if I look at your implied fourth quarter guidance revenue, EBITDA earnings it shouldn't we think of this as being really probably the baseline run rate for 2023. Any variances relative to Q4 that you would call out for us, Trish into next year? Thank you.

I think that the run rates going, I don't know that we want to look at it necessarily as the run rates for 2023, but possibly heading into it in, in the first quarter. I do think that with all of the new products coming out that, that we have both in electronics and hydraulics, we're going to be able to drive additional top line revenue in 2023 that will get us above that run rate as we go forward. Certainly it could hold true for 20 or for q1, but not for the full year of 2023 given new products plus the new product rollouts that we have coming out at innovation, which have been really years in coming with the relationships we have with those OEM.

Thank you. Our next questions come from the line of Nathan Jones with Stifel. Please proceed with your questions.

I guess I'll follow one from Mig. Maybe we can talk about the parts of the electronics business that aren't Balboa. You talk about strength in marine and, and recreation obviously exposed to consumer spending trends there. I think general, generally speaking in the US at least, there's a lot of complaining about inflation, but it hasn't really stopped consumer spending at all yet. So what are you guys thinking about the risk of those markets slow down as the Fed continues to, to raise interest rates and inflation's generally going to bind into consumer sentiment? What's the risk that you, you see a drop off in those businesses going into 2023?

Nathan, on the innovation side, knowing what we know now, folks are having a really strong year. And again, what Trisha said earlier, you know, our investments over the last two years in TED product line in into the diversification gives us a very strong confidence level that this journey will, will continue. The products that have been rolled out in 2023, as you know, Ted business becomes very sticky for a minimum of two to three years, and then there's a refresh and then it continues. So we really feel very confident that innovation will continue to grow with strong margins and have a very solid year as it, it stands right now.

So your view is that the market share gains from new product rollouts in '23 can offset any end market weakness that you see for innovation?

Yeah, the key comment is here, Nathan, for folks to understand is as I mentioned this during our analyst, they traditionally, you know, innovation has been, you know, a 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 a two key market. It's an expanded, broader market offering with much stickier solution leveraging the entire technology play of and innovation. And on top of that you have the hydraulics coupled in on the system sales side. It's really a good deal here. So I don't see the headwinds, but I think we are very, very comfortable saying that innovation will continue to succeed with very strong margins.

Just to add on to that a little bit, Nathan, we're already starting to see some really good and interesting opportunities with the open view displays that we have had a couple press releases about through innovation and those are brand new opportunities and ones that we couldn't have gotten 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 the, that specific new product.

And in particular, Nathan, to the two areas that you will see probably you folks will see probably sooner than later is the, you know, diversification into the energy market and general industrial, what we call it. That's where applications will go here next.

And clearly gaining market share in in market that you weren't in before is all incremental. Maybe we could just go on and talk a little bit about Damon. I know you guys were very excited when we were down there in September. Can you talk about, the revenue and financial profile of the business now, what it adds to the fourth quarter what the financial targets are for Damon over the next three to five years? I know you talked about getting it to a hundred million of business and how you get from point A to point B on that.

Yeah, certainly. So as you stated, we are really very excited about the product offering, but more importantly the people and technology and into engineering capability. You know, it's a very sound business, very profitable diversified markets that we were not in before. Sound relationships financial performance for this year is really not material as we just close this. What we expect over the next year as we continue to, to develop a very focused or execute our very focused augmented strategy in terms of having center of excellence, diversifying, and really closing in on the system sales application, we feel we can leverage Ted hydraulic segment with electrification and get to the a $100 million number as we outlined in our press release. So next year you will see, a baseline run rate anywhere between, $35 million to $45 million, $50 million type of range and then it continues from there.

And the strategy to get to that $100 million, how you're leveraging the footprint with legacy business, etcetera in order to get to that a $100 million, what drives the growth to get there?

Yeah, it's twofold. One is organic application that we are, you know, just continuing to execute our manufacturing strategy with center of excellence and in the region for the region leveraging our faster brand from Europe into North America and then coupling our system sales application where we can do a system within the Damon footprint and leveraging their engineering capabilities to do more into the diversified markets and couple in other products in the hydraulics and electronics within the Damon four walls to get into the applications and markets they're currently serving. So it's a combination between organic new products and there could be another flywheel acquisition that we, that we add for electrification to speed the process up. Great. I'll pass it on. Thanks for taking my questions. Thank you.

[Operator instructions] I would now like to turn the call back over to Tania Almond 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 throughout the day with any follow up questions. Have a great day, and stay healthy. Take care.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lives at this time. Enjoy the rest of your day.