Welcome to the Helios Technologies First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. This morning, the company was having intermittent technical difficulties during the pretesting on their phone lines. They have posted their prepared remarks on their website in case any issues arise with the sound quality of the call. It is now my pleasure to introduce Tania Almond, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, operator, and good day, everyone. Welcome to the Helios Technologies first quarter 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 Executive Vice President and Chief Financial Officer. They will spend the next several minutes reviewing our first quarter results, discussing our progress with our augmented strategy, reiterating our outlook for 2023, 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 have been provided in our latest 10-K filing as well as our upcoming 10-Q to be 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 table that accompany today's slides. Please reference Slide 3 and 4 now. With that, it's my pleasure to turn the call over to Josef.

Tania, thank you, and thanks to everyone on the line joining us. The vision we have laid out is really starting to come together. The Helios team continues to execute on our Augmented Strategy. Thank you to all the Helios colleagues for your tireless work and critical contribution in executing our shared vision. We started 2023 with strong top-line results. Our team delivered very good sequential revenue growth of 9%, including double digits from electronics coming off the fourth quarter. We are encouraged by the continued improvement we have seen in our health and wellness business over the last few months. We are protecting the business by achieving a sequential increase on our gross margin, while navigating the macro environment, supply chain, and FX impact. We are proactively investing through operating expenses over the first half of this year. This will accelerate the integration of our augmented strategy to align our long-term cost structure as we continue this journey and prepare for the next wave of global growth. We view these investments as more of a step function in how it will play out through our financials. There are several investment areas. First, following the acquisition and integration of several companies, we announced the opening of 2 new Centers of Excellence to be completed in Q3. This is part of the construction we are highlighting on Slide 4 currently taking place at Daman adding 50,000 square feet. We just turned the lights on and took down the temporary wall between the addition and existing building. We are also starting construction right next to our existing Balboa facility in Mexico to add 68,000 square feet. Second, we continue to do the work we previously outlined relating to our manufacturing and operating roadmap projects. We have several initiatives we will execute throughout…

Thank you, Josef and hello, everyone. On Slide 6 through 10, I will review our first quarter 2023 consolidated results. We saw strong sequential improvements coming off the fourth quarter, we had sequential growth on revenue, gross margin, and adjusted EBITDA while investing in our future. This gives us increasing confidence in how we see the rest of the year unfolding relative to our original expectations. Industrial and mobile markets realized double-digit percentage growth in the quarter over the year-ago period. Within these markets, there was growth in machinery, construction, material handling, specialty vehicles, power generation, oil and gas, forestry, and renewable energy. Agriculture demonstrated single digit annual growth while our health and wellness markets remained contracted compared to the year-ago period, but grew 36% sequentially. Our strong revenue growth over Q4 '22 of 9% was driven by the Electronics segment which was up 17%, with the Hydraulics segment up 5%. Year-over-year, Hydraulics was up 8% or 10% in constant currency and Electronics up 11%, excluding health and wellness over Q1 '22. Geographically, we saw growth across all regions sequentially, led by EMEA with 15% growth, the Americas at 8%; and APAC at 4%. Over the year-ago period, revenues declined in all regions, reflecting lower demand primarily in the health and wellness market. Overall, we had an unfavorable FX impact on revenue of $3.5 million in the quarter compared with the first quarter of '22. Most of the FX impacts affect the Hydraulics segment. Sequentially, gross profit grew 12% and gross margin increased 110 basis points over the fourth quarter, driven by higher volumes. As we would expect, on a year-over-year basis, the lower volumes impacted our gross profit. Gross margin compared with last year was impacted by reduced leverage on our fixed cost base on lower sales and the…

Thank you so much, Tricia. We are off to a solid start in 2023. We continue to build on the strong foundation we established over the last few years by executing the augmented strategy we laid out. We remain focused on being an industry leader in innovation and providing our customers the attention and dedication they have come to expect. We continue to acquire a high-quality portfolio flywheel acquisitions that advance our technologies with industry-leading products and solutions. We are making significant progress implementing our manufacturing and operating strategy as we diversify revenues and markets while protecting our business and margins, all which has accelerated our growth. So as we progress into 2023, our vision and goals remain unchanged. We believe we can protect the business, cash flow and earnings, and that the Helios business system will continue to provide the structure and discipline to execute our long-term plans. Through our organic and acquired innovations, we have created a pure-play hydraulics and electronics business that will continue to drive shareholder value well into the future. 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.

Good morning, Jeff.

Hi, Jeff. Good morning.

Yes, I was just -- is there a way to quantify kind of the onetime investments or operating expenses in 1Q? And what that looks like into 2Q? And then just maybe unpack a little bit more the cadence of margin improvement. You did 20% this quarter. I think your exit run rate is 25%. Just how do we get there? Thanks.

Yes. Good morning, Jeff. When we looked at the acquired companies, and in particular the last two, they went really smoothly and have been pretty swiftly, pretty nicely. So with everything we have going on in terms of integration, in terms of investing into capacity, those capacity investments are not done for waiting for the sales to come. They're really done methodical anticipating and having some line of sight. The orders are on their way so to say. So very similar approach to what we have done end of 2020 into 2021, proactively invest into our future and really setting up the lines in the right way in terms of material flow getting some what people in that we need and having a short-term dual manufacturing between Sun and Daman here. So the transition goes very smoothly. So all in that investment pull ahead into Q1 is just roughly around $2 million. And we anticipate once we're up and running, obviously, that step function in terms of margin to improve quarter-over-quarter.

Okay. And then just in health and wellness, can you just talk about what's driving the balance and confidence in the inflection? Is this simply destocking behind us? Or is there some new wins in there? Maybe just a little more color. Thanks.

Yes. Look, we said last time, Jeff, that we started to get a sense for the business has stabilized. We have spent a lot of time within the ground with customers, dealer distributors, you name it, shows, and we are continuing to see a positive trend in the right direction now for good 3, 4 months now. So we don't see any destocking per se to the new orders and the inventory levels are starting to come down. So we are cautious in communicating our message, but it's clearly -- the trend is clearly going in the right direction.

Okay. And then just if I could sneak in a last one. It seems like a lot of companies are talking about supply chain improvements, kind of abating their friction costs around spot buys for Electronics, expedited freight. It seems like you guys are still seeing some challenges. Maybe just give us line of sight to when you think you'll start to see some normalization on supply chain.

We have already seen some normalization across specifically Electronics. There are a few things that we are still having issues getting either on a timely basis or in the quantities that we need them. But for the most part, we are seeing improvement and we're starting to see a little bit of cost down as well. I think our teams are doing a very good job in being able to look across our supplier base globally and finding the best place to procure the parts. I think you saw that the amount of sales that was being held back by supply chain, especially on Electronics, came down this quarter. So we're encouraged by that.

Okay. Thanks so much.

Thanks, Jeff.

Thank you, Jeff.

Our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Hey, good morning, guys. Thanks for taking a couple of questions. Maybe you go back to -- good morning -- some of Josef's prepared remarks on the new regional structure for Hydraulics and kind of just talk a little bit more about how that fits into the strategy going forward.

Sure, Chris. Good morning to you. Thanks for joining us as well. Look, this is, again, a part of our well laid out journey that we are communicating in our last Investor Day. We said when we get to a point, we needed to have a sharper focus on our leverage. We have a well-established team within our Faster Group. We invested significantly, not just in capacity or manufacturing operations, but also talent. Then -- those proactive investments were done to support the upcoming regional structure. So what you're going to see here is one team cutting across the European region and Middle East to really just drive leverage come in consistent practices, systems. Customers are very much informed and aligned and supportive over that journey. So just a higher level, Chris, of discipline, speed and focus to executing against our vision.

I think this also flows in very well with what we've been talking about in the region for the region for quite a while. We've now gotten to the critical mass within each of the regions given some of the acquisitions that we made over the last few years that really give us the ability to bring that to the forefront and be able to best utilize the capacity and resources that we have in each region.

Got it. I appreciate that. And maybe just switch gears a little bit, but can you talk a little bit about the ENERGEN roll out, kind of the expectations for the balance of '23, and are there specific milestones that you're thinking about?

Yes. We are still looking at the testing that we are doing with a few of the customers, specifically on ENERGEN. And we are getting feedback that there's some good opportunities for it, but we do still have more testing that we need to do before we can roll that out on a larger scale. I think we do anticipate that we're going to get some revenue in 2023 out of that. But it's probably not going to be material this year, but it's setting us up very well to roll that out broader probably into '24.

Got it. I appreciate it. I will leave it there. Thanks guys.

Thanks, Chris.

Thank you.

Our next question comes from the line of Mircea Dobre with Robert W. Baird. Please proceed with your question.

Thank you, and good morning, everyone. Can we put a finer point on your expectations for the Electronics segment? Maybe give us a sense here as to how you envision revenue progressing first half, second half? What's embedded in your outlook? And what you've seen in Q1 versus your initial expectations when you first issued this guidance?

Tricia will get into the numbers. She's pulling it up right now, Mircea. But in the meantime, good morning to you. Probably the biggest change was the consistent improvement trend in the health and wellness. We still anticipated some spotty order trend, but it has been really encouraging to see that it's going the right direction. And in the second part, we anticipated actually, and it's going exactly according to plan, in some cases better than plan, is the continuous strength within our innovation business that's really going in a nice direction largely driven based on our new product investments we have done over the last 2, 3 years. Orders are flowing. They're coming. There's no cancellation. Team is performing extremely well and having now the balance between U.S. manufacturing and Tijuana gives us additional uplift on the margin and the journey will continue over the next 12 to 18 months as we fully capitalize on this low-cost footprint we are investing in with the second factory now.

With regard to the first half -- second half part of your question, Mircea, we are looking at a very similar breakout to what we see on a consolidated basis of the 47-53. That is expecting little bit of a pickup as we roll through the quarters sequentially on the Balboa business, and it includes some of the rollouts that we're continuing to have on the innovation side as well for the new products that are coming out.

I'm [technical difficulty] correct me if I'm wrong, but it seems to me like the assumption here is that revenue ramped sequentially by, call it, $10 million relative to Q1 and then that you're going to get to somewhere around that $80 million run rate for the back half in Electronics. And look, I mean, there's just been so much variation in this segment that I'm just trying to make sure that your level set of expectations and we understand what you guys are thinking. And I mean, please confirm if I'm wrong, but if that's correct, it would look to me like the $80 million run rate would not really be all that far from where we were in 2021. So implicitly, the health and wellness market, how do you think is going to progress in '23? And what's the exit run rate into '24? Sorry, there's a lot with that question.

I was going to say, is there a question in there? Just kidding. I think that your $80 million number from a run rate perspective for all of Electronics by the time we are rolling out to Q4 seems very reasonable. I don't know that we want to necessarily break that down quite yet for health and wellness. We're still trying to see where the market is going and how quickly this is going to pick up. We are seeing that orders are picking up every month on an overall basis. But we probably still aren't quite to where we want to be to be able to break that out a little bit more specifically. And Mircea, when we initially put our guidance together of the $910 million to $940 million, we had made some assumptions and pretty conservative ones around what health and wellness might do in the year. So we assumed we could potentially go back to pre-acquisition levels and then kind of had a band of assumptions above and below that. And so I think we felt like we started the year from a pretty conservative place.

Okay. I guess my final question, going to Hydraulics. On the slides, you're making some comments on price cost that you haven't really been able to recover some of this cost inflation with your pricing. And given the fact that your lead times are relatively low, you don't really run with a ton of backlog, I'm sort of curious as to why you're still seeing this lag. And how do you expect to manage that going forward?

Yes. We are very close to even on the price cost part on the hydraulics piece, but there's still some things that are, from an inflationary perspective, hitting us probably a little bit more than we expected. Energy cost continues to be one of those, logistics continues to be one of those as well. We also have a lot going on in that segment right now, looking at the Centers of Excellence that we're rolling out this new regional strategy. And we do anticipate that we are going to see growth from both of those things, but those are going to happen more in the back half of the year. So that's really where we're going to start to get the leverage.

And a big part of this, Mircea, is every time to be super transparent here, we are adding significant amount of capacity in -- at Daman and moving pretty much entire manifold operation, so to say, from one state to another. And after done so many of them in the past, eventually you learn how to do them well. So this one has to go right, has to go well. And it's going extremely exactly according to plan. So there's a little bit of proactive investment here to assure once it's done, it's done right, and we can come out of the gate swinging as this business or the Daman business will go in almost triple overnight once we are complete in terms of revenue. So you see some of the costs carried into that. But once that is behind us, then the operational that's going to go away.

I appreciate that. I guess my question was really more on the pricing side. There's sort of one thing that we're hearing consistently from companies is that the pricing power has been significant, and many of them are more than fully caught up on a prior cost basis. So historically in Hydraulics, you have enjoyed good pricing power. Again I'm wondering if anything changed here given the lag.

No.

No, nothing changed. We did put through pricing in the beginning of the year on the CVT side or at least on the Sun side of CVT. Sometimes there are restrictions on when we can look at pricing on the OEM side for faster specifically.

Okay. Thank you.

Thank you.

Thank you, Mircea.

Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your questions.

Good morning. This is Adam Farley on for Nathan. I wanted to start with the Hydraulics top line. I appreciate the color you gave in the prepared remarks, but can you maybe give a little more detail on which end markets and end regions are showing the most strength? And are you seeing any weakness in any areas?

Yes. So on the Hydraulics side here, when we look at -- on the QRC side or CVT side, the areas that continue to be relatively strong are the construction side, the ag side, the general industrial piece, general mobile piece continues to be strong. Balance more is still our international businesses in China. That is still kind of a mixed bag since they just opened. U.S. construction overall remains to be good. Not great, but good. European construction is going well. So overall is pretty stable on our end that we can see right now.

Okay. Thank you for taking my question.

Thanks, Adam.

[Operator Instructions] Our next question comes from the line of Jon Braatz with Kansas City Capital. Please proceed with your question.

Good morning, everyone.

Good morning, Jon.

Hi, Jon.

Josef, I know it's small, but I had couple of questions about the i3 acquisition. You used the term turbocharge and you also talked about how the growth of the company has really accelerated since 2017. I guess I'm trying to understand how you will use this business. And maybe to an extent, if you had this business 3 years ago, what would you have been able to do with it? And I'm trying to get a sense of maybe the opportunities that -- the new opportunities that may be in front of you with this acquisition.

Yes. John, I will tell you, I really appreciate that question. This is really a special one that we've been looking for, quite honestly, from day #1, not just from a cultural and talent standpoint, but as you heard me speak for quite some time now about our -- closing our product gap and being able to start switching over to a [indiscernible] system sale. And eventually, you guys heard me talk about telematic application and having software embedded into our technology. Those guys do exactly that. This was kind of the missing piece that we can build upon throughout our entire company. But at the same time, it provides us a vehicle to really now been able to compete as a pure-play Hydraulics and Electronics, and have that foothold into the customer base we have been talking about for a couple of years now. So the turbocharge comment came in as we needed to figure out how do we not just get specked then, but how do we provide the necessary information and data that the customers needed and at some point in time have a recurring revenue stream. That is kind of the entry point for us to get us to this point. We're going to invest in that company and continue to build out that IoT application that we need. Secondly, also plug it into their markets where they are really strong with our brands. So yes, it's smaller scale on the revenue side, but it's one of the things, Jon, you plug in the right foundation and start building out the walls and the roof. You got a pretty nice house at the end of the day. So we are really excited about that.

So, Josef, is it more of an OEM relationship type of business?

Pretty much, yes.

Okay.

So primarily driven OEMs.

Okay. All right. Thank you very much.

You bet. Thank you.

Thank you, Jon.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Great. Thank you, operator, and thanks, everyone for joining us today. We appreciate your interest in Helios and we look forward to seeing you out and about at a number of different investor conferences that we will be participating in through the quarter. We look forward to updating you on our second quarter results in August. Please feel free to reach out to me with any follow-up questions, and have a great day. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.