Greetings, and welcome to the Helios Technologies First Quarter 2020 Financial Results. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ms. Karen Howard, Investor Relations for Helios Technologies. Thank you. You may begin.

Thank you, operator, and good morning everyone. Welcome to the Helios Technologies First Quarter 2020 Financial Results Conference Call. On the line with me is Tricia Fulton, our Interim President and Chief Executive Officer. Tricia was appointed to this interim role as announced on April 9, upon separation from the company of our former President and CEO. Tricia also continues to serve as our Chief Financial Officer. She will review 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.hlio.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. Tricia will summarize our financial performance and strategic progress during the first quarter of 2020 as well as her perspective on our outlook. After that, she will go through the details of our financial results for the first quarter before we open up the line for questions and answers. And with that, it's now my pleasure to introduce Tricia.

Thank you, Karen. Good morning everyone. I will start on slide 3. We were pleased with our first quarter results demonstrating strong top-line revenue and operating performance. We realized consolidated sales of almost $130 million. Our backlog continued to support our sales and order levels, which were relatively stable throughout the quarter. Most of the quarter was business as usual for us until the COVID-19 pandemic conditions began to affect our operations in mid-March. The shutdown of our factory in Italy due to government mandate had about a $5 million unfavorable impact on first quarter sales. Our strong operational execution in Q1 was offset by a noncash goodwill impairment charge for our faster reporting unit. This goodwill adjustment of $39.1 million was driven by the uncertainty of the longer-term impacts of COVID-19 and reduced EPS by $0.99 per share resulting in a GAAP EPS loss for the quarter. However, from an operational performance standpoint, we realized a solid adjusted EBITDA margin and non-GAAP cash EPS relative to our sales levels. Please turn to slide 4, and I'll summarize our strategic business highlights for the first quarter of 2020. Despite lower sales, we reported gross margin expansion compared with the prior year evidencing our ability to manage cost and continue productivity improvements. Recall that at the beginning of last year we completed the facility consolidation project for our cartridge valve technology or CVT business. As we progressed during 2019, we experienced productivity improvements from that initiative and further continuation was evidenced in our first quarter 2020 results as well. We have completed the infrastructure of the CVT engineering center of excellence and it is mostly operational. The final pieces of equipment should arrive and be installed by late summer. This facility will provide us with the R&D and testing capability needed for our new product development to feed our organic growth objectives for CVT as part of Vision 2025. Importantly, increasing cash flow and reducing debt have historically been focused goals for us and we have made very good progress over the past couple of years. Additionally, in the first quarter of 2020, we have reduced our net debt by over $11 million, expanding our already strong liquidity position and maintaining our 2.1 times net debt to adjusted EBITDA ratio. New product development has been and continues to be an important component of our Vision 2025 strategic plan. We intended to introduce our new ACE software tool and MCx hydraulic controllers at the CONEXPO trade show in Las Vegas in early March. Due to safety concerns for the health and well-being of our employees, we were unable to attend this event. We believe this product is critical to our electrohydraulic strategy and therefore did not want to delay its launch. Our team has been conducting significant virtual new product introductions and training for our channel partners and customers. ACE enabled system experts with little to no software coding experience can create full-featured machine control applications efficiently. Paired with our new MCx hydraulic controllers, ACE brings together the entire control system and intelligently integrates displays, power distribution modules, valves, actuators, joysticks, and engine data for robust and exceptional control. The game-changing speed and accuracy of ACE combined with the robust and highly configurable hardware of MCx controllers is unlocking a host of possibilities for our customers. The versatility of the products lends themselves to a variety of applications and end markets. Let's turn to slide 5 for our perspective on outlook in light of the COVID-19 pandemic before we review our financial performance in more detail. These are certainly unprecedented times. As a result of government mandates, our China operations were shut down for about six weeks beginning in February through mid-March. Production at our Italian facility was shut down for about four weeks in March and April, although customer shipping activities continued. After three additional weeks where our ability to manufacture at full capacity in that facility was limited to only certain government-approved activities, I'm pleased to report that as of yesterday, we are now able to engage in full production at our faster facility in Italy. All of our other significant operations were deemed essential and are running near full capacity. In all facilities, we implemented substantial procedures to limit the spread of COVID-19 and keep our employees safe and healthy while responding to the needs of our customers. Several of our customers' facilities were shut down under government mandates, especially in Europe. For the most part, our supply chain hasn't been significantly impacted. When we provided you with our business update at the end of March, we withdrew our 2020 guidance. At that time most of our businesses had not yet been significantly impacted by COVID-19. However, the economic impact of the pandemic has negatively affected our sales and orders for April. We expect second quarter headwinds, but anticipate that the largest impact was in the month of April due to shutdowns of many of our global OEM customers. A portion of our backlog has been postponed from April to later in the second quarter and a smaller number of orders have been canceled. In other cases, we do not have updated order schedules from OEMs due to their extended shutdowns. Given this heightened uncertainty, we don't have sufficient visibility to comment on the remainder of the year. Accordingly, we have completed multiple planning scenarios for 2020 at varying demand levels. We have already instituted certain cost-containment steps in an effort to mitigate the effects of the downturn. These include the following: a 20% temporary salary reduction for all corporate officers; permanent layoffs and temporary salary reductions at Enovation Controls; reduction in the use of contingent labor; a hiring freeze; deferral of some capital expenditures; and our Board has agreed to temporarily reduce their compensation by 20%. We have identified additional actions that we could take if needed to further protect the health and liquidity of our business. These include actions such as postponing additional non-essential capital expenditures; eliminating our temporary workforce; reducing or eliminating overtime; applying additional salary reductions; reducing working hours to lower payroll expense; executing furlough programs and/or additional layoffs; and further reducing discretionary spending. The extent of such actions will be determined by the magnitude and duration of the economic downturn. Our management team will continue to monitor and assess the impact of economic changes on our businesses and take the necessary actions. I will now turn to slide 6 to review the financial results for the first quarter in a bit more detail. Sales were down $15.3 million or 10% compared with last year's quarter excluding a $2.1 million unfavorable currency impact. Approximately $5 million of the decline was attributable to the COVID-19 pandemic. On a regional basis, during the first quarter of 2020 our sales to APAC were about the same as last year's first quarter despite a pause in China for COVID-19. Sales to the Americas and EMEA markets declined by 13% and 19% respectively. As a percent of the consolidated total sales to the Americas, EMEA, and APAC regions were 45%, 28%, and 27% respectively in the first quarter. As I mentioned a few moments ago, our GAAP EPS looks distorted for the quarter reporting a loss of $0.54. It includes a $0.99 per share non-cash charge for goodwill impairment relating to our faster business unit, resulting from the uncertainty of our end markets in this COVID-19 environment. Despite lower revenue in the quarter, operational profitability remained relatively comparable with the prior year, with consolidated adjusted EBITDA margin at 23.5% versus 23.7% last year. In dollars, our adjusted EBITDA was down only 12% on the 12% reduction in consolidated sales. Non-GAAP cash earnings per share were $0.56 compared to $0.63 in last year's first quarter, an 11% decline. Again, solid performance on a 12% reduction in sales. The adjustment to arrive at non-GAAP cash earnings consists primarily of the goodwill impairment charge in this year's quarter and amortization of intangible assets in both years as well as some other non-recurring items and the tax impact of these adjustments. These are shown in the reconciliation tables in the back of the slide deck and release. Please turn to slide 7 for a review of our Hydraulics segment first quarter operating results. Consistent with prior periods, I want to point out that acquisition-related costs, including amortization and the goodwill impairment charge are not included in our operating segment numbers. They are accumulated in our corporate and other segment reported in the tables in the back of our earnings release and slides. Sales for the Hydraulics segment declined 9%, excluding currency, which had a $2 million unfavorable impact. The COVID-19 pandemic reduced sales by approximately $5 million in the quarter. From a geographic perspective, excluding the effects of currency, we saw 3% year-over-year growth for the quarter in the APAC region, which was offset by a 10% decline in the Americas and an 18% decline in the EMEA market. The primary drivers for the decline in the Americas and EMEA regions were softer end-market demand and the impact of regulatory mandates associated with COVID-19. Due to the lower sales volume, gross profit declined 7% for the quarter, but gross margin grew by 160 basis points. The gross margin expanded as improved productivity and cost management efforts more than offset unfavorable foreign currency and the government-mandated closure of the facility in Italy due to COVID-19. Hydraulics segment operating income decreased $2.3 million due to lower revenue in the quarter. However, cost management efforts drove a $600,000 reduction in FDA expenses, which together with the gross margin expansion resulted in a 30 basis point increase in operating margin to 20.7% in the quarter. Please turn to slide 8 for a review of our Electronics segment first quarter operating results. Revenue was down 16% compared with the first quarter of last year. The decrease was due to continued softer demand in the recreational and oil and gas end markets as well as the impact of the customer contracts that we renegotiated last year. Foreign currency and COVID-19 pandemic had a minimal impact on electronic sales this quarter. First quarter gross margin improved 180 basis points to 47.5% reflecting continued cost management efforts and a non-recurring benefit from the release of contractual obligations, due to the lower revenue operating margin in the first quarter of 2020 was 18.7% of sales compared with 21.4% in the first quarter of 2019. Please turn to slide 9 for a review of our cash flow and capitalization. In the first quarter of 2020, we generated over $15 million of net cash from operating activities and over $12 million of free cash flow, up from $11 million of free cash flow in the first quarter of 2019. Our CapEx for the quarter was $2.9 million, down from $8.8 million in the same period of 2019 due to a conscious reduction in light of reduced end-market demand in the COVID-19 pandemic, due to the current economic conditions and uncertainty of future cash flows, capital expenditure projects are being evaluated and several have been reprioritized and deferred. We are currently only proceeding with high priority and critical projects. Regarding capitalization in the first quarter, we reduced our gross debt by $6 million and our net debt by over $11 million. At the end of the first quarter, our net debt to adjusted EBITDA remained at 2.1 times consistent with year-end 2019. We continue to have ample liquidity. At the end of the quarter, we had over $195 million available on our revolving credit facility. We also have a $200 million accordion which is subject to certain pro forma compliance requirements. Our scenario analyses consider the impact on cash flows, and we believe that we have sufficient liquidity to cover our operating cash needs for at least the next 12 months. These analyses also indicate that we maintain compliance with the covenants under our credit facility and remain cash flow positive for the year under all scenarios. Please turn to slide 10 for our conclusion before we open the lines for Q&A. While we are faced with significant near-term uncertainty which may require adjustments to the timing of some of our investments, we remain committed to our Vision 2025 strategy. Our goal is to achieve global technology leadership in the industrial goods sector by exceeding $1 billion in sales while maintaining superior profitability and financial strength. We have confidence in the abilities of our operating unit Presidents to lead their businesses through this economic downturn and drive long-term organic growth. We are fortunate to have well-respected brands, a dedicated global employee base, and ample liquidity. Leveraging this solid foundation, we believe that we will emerge as an even stronger Helios organization. Now, let's open the lines for Q&A.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Good morning. Thanks for taking my questions.

Hey Brian.

Hey Trish, can you please go back 30 seconds and discuss the situation where you mentioned that we have enough liquidity or cash for the next 12 months? What was that situation?

Yes. Yes. I mean we expect cash flow to be positive for the year. How that plays out throughout the year in the quarters is still I think a little open. But each quarter we still expect to be cash flow positive in all of our scenarios.

Okay. So, you weren't highlighting a worst-case scenario in which you would run out of cash in 12 months.

No. No. That's just to show that for the next 12 months that we have ample liquidity. That's also in the Q and was a requirement to be included in the Q.

I just wanted to clarify that. The backlog has been very supportive of the revenue throughout the year, and you mentioned some of it was pushed into the latter half of the second quarter. Can you update us on the current level of backlog compared to the beginning of the quarter and the start of the year? Additionally, how much should that backlog support revenue during the second half of 2020?

Yes. So, our overall backlog is still very consistent at the end of April with what we were seeing at the beginning of the year. So, overall, the backlog hasn't changed significantly. We do still have significant past due backlog in the CVT business that we've said before and still believe will carry us through most of Q2 from a shipment perspective. But we have seen a little bit of the backlog shift out of Q2 and into Q3 and Q4 from some of the OEM shutdowns that have happened mostly in April.

Is there any way you can share the backlog in that business compared to revenue expectations, or are you not providing any guidance? I'm just curious if the sustained revenue will potentially remain at these levels, or if it is only a small portion of the revenue you have been generating at that run rate.

Yes. The run rates on the backlog have remained pretty consistent and we've been happy with that. It's just a little bit of a shift in when those need to be delivered. But the backlog has held up pretty well through this. It's really just the movement between the months. We've had some cancellations as we noted in the prepared remarks, but they've been pretty minimal at this point. As you know, we get changing information every day from customers, from OEMs, and from the distribution network. So, we're having to adapt almost daily to changes that we're seeing coming through. But overall, it's holding up pretty well from a backlog perspective.

Okay. And then just one last one on the Electronics side is there any change in your programs and platform opportunities that you have going into 2021 any conversations around those being delayed or pushed out or is 2021 still expected to be a good growth year for Electronics?

Yes. 2021 programs are still holding up. We haven't really seen any changes at all in those programs. We have seen some of the 2020 rollout extend by one month at this point which is pretty much reflective of what the OEMs were shut down. But no changes to 2021 at this point. So, we're happy to hear that.

Okay. Thanks very much.

Thank you.

Thank you. Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Hey, good morning.

Hey Jeff.

Could you provide some insight into what you're observing regarding sales or order trends in April? It seems that many companies are experiencing declines, with some reports indicating drops of 30% to 35%. I'm interested in understanding how your situation compares, as it appears to be holding up better.

Yes. So, as we haven't done in the past we also are not going to give numbers specifically on orders and backlog related to April at this point since we're not giving guidance. We aren't going to talk a lot about the specifics of sales. But sales and orders did both drop significantly in April, I would say deep into the double-digits in both Hydraulics and Electronics segments with electronics dropping more than what we saw in Hydraulics. Many of the OEM customers were shut down in the Electronics segment. So, orders had to be pushed out to later in the quarter or the year. And in some cases, as I stated before, there were smaller amounts of cancellations. In April, hydraulics is still supported by backlog, especially in CVT. Shipments were maybe a little bit lower than we expected due to employees being out from COVID-related absences and also the implementation of COVID safety procedures that we put in place in April. Faster also does have some backlog past due that was created as part of their shutdown and they'll be able to ship some of that. But April was tough for them as well in that regard, but we're able to push it into the back half of Q2.

Okay. So it's fair to say that the trend in electronics is going to be certainly worse than in 2Q than 1Q, as well as hydraulics. Maybe just on the decrementals, I mean, they were pretty impressive, certainly, in hydraulics. As you see maybe a sharper drop into 2Q, how do you think the decrementals hold up?

Yes. Just real quick, going back to your first question. I would say, overall, if you're looking at some of our peer reports, our hydraulics did not drop as much as their overall hydraulics did in April based on some of the information that we've read that came out last week. So I just wanted to point that out before we move on. With regard to decrementals, in our scenario planning, which consists primarily of scenarios that are down, both 15% and 25% on annual sales drops. And those aren't indicative necessarily of what we're seeing, but we wanted to model those out. The decrementals are probably a little bit higher than what some of the peers have come out with. We're looking in the range of 40% to 45% at the adjusted income line. We will pull out all of the costs that we can to protect the decrementals. But certainly, we also want to make sure that we are prepared to return when the economy rebounds.

Okay. That’s helpful. Thanks.

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

Thank you. Good morning, Tricia.

Hi, Mig.

Hi. So you outlined a considerable amount of measures on slide five. And I'm wondering, as you look at everything that you have listed there, what is the net impact on a company from a dollar standpoint?

Yes. So, it's a little bit difficult to tell for the full year what the impact will be, because there are so many options on there and we aren't exactly sure which ones of those will need to trigger. But certainly in Q2, we're looking at somewhere around a $4 million impact from the steps that we have taken in Q2. Those can continue throughout the rest of the year, but there are additional steps listed there that will further drop our overall cost structure, at least on a temporary basis. And most of these are temporary. There are very few that are a permanent charge for us, but we are able on a temporary basis to control the cost pretty well.

Okay. If we're looking at a continued sort of challenging environment beyond Q2 and looking at this $4 million savings figure is the right way to think about it, is that we can run rate these savings into the second half, or are we likely to see additional action on top of the $4 million as you adjust down the line?

Yes. So the $4 million doesn't necessarily run rate into Q3 and Q4 because some of those were one-time pops that aren't necessarily repeating costs. So the overall cost for the year is something less than the run rate of that $4 million. If we implement only the items that have been put in place so far, it's probably closer to maybe something like $10 million to $10.5 million. But if we implement additional steps, we certainly have additional savings that we can take, probably the largest pop out of that list comes from furlough programs that we could implement, where we could have rolling furloughs for employees if we see a decline in demand that would allow employees to collect unemployment or get supplemental income from the government in addition to the wages we would pay them for reduced hours.

I see. Okay. And then, relative to your comment versus peers that have reported and how your hydraulics business has trended, when you kind of look at the historical relationship of your business versus your larger peers, what is it that you would call out, maybe, in April that felt a little bit different that maybe helped your business perform a little bit better than peers?

Yes. I mean, through a lot of April, I mean, we still were getting pretty strong demand on the distributor side, even though the OEMs were shutdown and kind of in flux. So I think that we got maybe a little bit of a pop there. But also, I would say, our ability to continue to ship out of our past due backlog has carried us. Certainly, don't always want past due backlogs. That means you're not delivering something to a customer at the time that they want it. But we had such high demand throughout 2019 that we went into the year with past due. And I think that we now have the ability to wind that down through Q2 and get that product out to customers. But it certainly supported our sales in Q1.

Yes. I appreciate that. And I think Brian was trying to understand the dynamic earlier on the call, given that it's hard for us to appreciate how backlog really plays into your revenue and financials for the rest of the year. But, I guess, what I'm wondering here and this is my final question, when we're talking to OEM customers and even some of your peers, there is sort of a broad recognition of the fact that the challenge stem is not just from the fact that certain operations have been shut down because of COVID, that clearly has been the case. The broader challenge is that we're in a recession and production schedules have to be adjusted and demand has to be adjusted to reflect that economic reality. So as you think about how you're managing your business and you're sort of managing the cost structure, I'm wondering if you're sort of internalizing that reality as well, or if you're looking at this as being more sort of shutdown-driven with a quicker path to recovery in the back half of the year. And if that's the case, why are you maybe thinking different than some of the other folks out there? Thank you.

Yes. Clearly, we have a lot of information that's flowing at us at a pretty rapid pace. And it's difficult sometimes to tell exactly which scenario we should be considering at that point. We try to consider all of the scenarios to play it out for a V-shaped recovery, a U-shaped recovery and L-shaped recovery and understand what our triggers were from a cost perspective and when we would need to pull those. I would say all three of the businesses are really running at different cases right now and have to take different steps to mitigate any changes in the order books that we're seeing. I also think that there's probably some order book changes that have not been reflected in what we're seeing in our backlog yet and that may just be in the form of small delays. It may be that they're trying to figure out their end markets before they adjust their build schedules. So I think we have a couple more weeks probably ahead of us before we can see more clearly what's coming at us, especially from the OEMs that just came back to work this week in Europe primarily, but we also have had some of our recreational end market OEMs that have been off for quite a while as well. So we're still trying to get through all of those discussions and understand where we are. But honestly there's some good news out there that we're hearing that's counteracting some of what the macroeconomic negative news has been. We're getting anecdotal information back from some of our OEMs that they brought build schedules down a couple of weeks ago. And then this week they're bringing them back up. So it takes some time for us to figure out what each of those customer bases are doing and what they are projecting for the rest of the year as well. That's why we are unable to give guidance at this point.

Probably there. Thank you. Tricia, good luck.

Thank you.

Thank you. Our next question comes from the line of Jim Sheehan with SunTrust. Please proceed with your question.

Hi, Jim.

Good morning. Thank you for taking my questions. What kind of working capital release might you realize this year and in which quarter might that occur in your scenarios?

So from a working capital perspective, when we looked at our scenario planning and cash flow specifically, we were I think relatively conservative and expect that we will see working capital increases throughout Q2 and possibly into Q3 with some better results than in Q4 as we're able to wear through some of that. So overall, I think we were conservative in the way we looked at working capital overall. But even with that, we still have the cash flow necessary for the business.

Thank you. Could you explain your reasoning behind the goodwill impairment in the quarter for Faster? Was that truly necessary? Are you indicating that the business is facing long-term impairment?

The goodwill impairment was primarily influenced by our annual goodwill impairment analysis conducted in Q3. In 2019, we provided a forecast to the auditors using part of the model that analyzes discounted cash flows. When we revisited that forecast in light of COVID, we recognized the need for adjustments, particularly for 2020 and potentially for 2021 as we considered various scenarios. It became apparent that we needed to record the impairment this quarter due to the analysis showing an impairment of goodwill, especially in the short term, as the scenario planning related to COVID indicated. However, our long-term goals for Vision 2025 remain unchanged for the business as a whole. The short-term impacts of COVID did affect our analysis.

Very helpful. And on your debt covenants, could you give some more color on that? What earnings level or EBITDA level would trip a covenant? And what levers can you pull to stay cash positive if the downturn is actually longer than 12 months?

Yes. We have two covenants: interest coverage, which we are well above, and our net debt to adjusted EBITDA, which should not exceed 3.5 times. In our planning, we have confirmed that we remain compliant with these covenants, even in a more severe downturn. To preserve cash, we have reduced nonessential capital expenditures at this time. Additionally, as I mentioned to Mig, we might implement furlough programs if we see a decline in demand, allowing us to conserve cash while also supporting our employees financially, which is important to us. The net debt-to-EBITDA ratio has an approximate trigger around $80 million in EBITDA.

Very helpful. Thank you so much.

Thank you. Our next question comes from the line of Jon Braatz with Kansas City Capital. Please proceed with your question.

Good morning, Tricia. Regarding your earlier comments about the prospects for the Electronics segment in 2021 and 2020, things still seem quite positive. However, you mentioned there were some permanent layoffs in Electronics, while it seems there haven't been any in the Hydraulics segment. Could you explain the reason for the permanent layoffs in Electronics?

So as I mentioned, when we were talking about April, April was a tough month for the Electronics segment. And in looking at our different scenario planning options, there were things like the furloughs. There were things like permanent layoffs. There were salary cuts. So the Enovation management team I think did a very good job in assessing what their best options were going forward and they determined that a permanent layoff as well as temporary salary reductions that are implemented for May and June were the best way for them to go for the business going forward. So they went ahead and moved forward with that. We do still have the option of furloughs if we see business continue to decline in Electronics. But at this point, we don't believe that's probably going to be necessary with the current order book that we have.

Okay. How much of their business is exposed to oil and gas?

Yes. We observed that oil and gas influenced their business last year, and it is likely to continue affecting them given the current situation in that sector. Overall, it accounts for about 10% to 15% of their total business.

Okay. Thank you, Tricia.

Thank you.

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

Good morning. This is Adam Farley on for Nathan.

Hey, Adam.

A quick housekeeping question. Could you quantify the benefit, the one-time benefit in the electronics segment?

The one-time benefit you are referring to concerning the gross margin is approximately $860,000 in additional revenue for Q1. Even considering that, our gross margins were 45.5% compared to 45.7%. Despite that adjustment, we maintained strong margins. This was related to a last-time purchase concerning a customer with whom we ended contractual obligations in Q1 of last year.

Okay. That's helpful. And then turning to the supply chain, I know you mentioned you haven't seen very much disruption but are you having any difficulty sourcing components? Are you building any inventory? Just any color there would be helpful.

Yeah. We have built a little bit of inventory from a component perspective in electronics. At the end of Q1 and into Q2, we started buying some electronics components that we thought might go scarce a little bit. So we have added inventory in that business as a result of that that will wean off over a couple of quarters. But we wanted to get ahead of that. So that's really the only space that we've had to specifically buy inventory ahead based on potential scarcity.

Okay. Thanks for taking my questions.

Yeah. Thank you.

Thank you. Our final question this morning comes from the line of Joe Mondillo with Sidoti & Company. Please proceed with your question.

Hi, good morning, Tricia.

Hi, Joe.

Hope you're doing well.

I am.

My first question is about the consolidation at your Sarasota facility last year. When will we anniversary that? It seemed to be a significant factor in driving margins in the first quarter. I'm curious about when the year-over-year comparison will become more challenging since the benefits from productivity improvements may no longer be visible.

Yeah. I mean, I kind of have to preface that with under normal conditions because certainly we aren't in normal conditions. I expect that we probably would have seen tougher comps even in Q2 if COVID hadn't hit, because we started to see some improvements in Q2 last year. But we saw the majority of them in Q4 and then again in Q1. The good news is that once the business does come back and come out of COVID, which I'm sure we all will that we will still have those productivity improvements in place and be able to take full advantage of them. They also help us in a downturn making sure that we're more effective and productive even when we start to see throughput go down a bit as we work through the issues with COVID.

Okay. And then just a follow-up with a question that Jeff asked earlier regarding the decrementals. You said 40% to 45%. Is that for the year where you're referring to, or was that just the second quarter? And in the last call you talked about 30% to 40% for hydraulics and 20% for electronics. So could you just clarify the expectations for decrementals there?

The decrementals of 40% to 45% apply for the remainder of the year from Q2 to Q4. We had better decrementals in Q1, so for the entire year, it will be lower than that. The hydraulics side is closer to the 40% mark, while electronics are nearer to 45%. This is partly due to our incremental investments in the electronics business for engineering and R&D. Although we have slightly reduced those expenses in our planning, the majority remains intact. Some of these costs have already been incurred because we've hired the necessary resources. Our goal is to avoid jeopardizing the 2021 rollouts. Thus, the higher decrementals in electronics are also because we've included some of these additional costs that we initially planned for the year.

Regarding your APAC region, can you explain what is driving that business so effectively? How has it been able to perform so well, especially with only a 1% decline given that the entire region, particularly China, was significantly impacted by COVID in the first quarter? I was surprised that the decline was just 1%.

China and Australia are the main factors boosting our APAC region. We continue to see strong demand in the mining sector. In China, our growth is primarily driven by new business opportunities. We have established strong partnerships with distributors in the region who are successfully securing substantial new business. This growth is being fueled by applications such as alternative energy windmills, supported by government initiatives in China.

Okay. Thanks. That’s all I have for you. Good luck with everything. Thanks a lot.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. Fulton for any final comments.

Thank you for your interest in Helios Technologies and for your participation this morning. Also thank you to all of the hard-working Helios employees who are driving these results. We look forward to updating all of you on our second quarter results in August. Thank you very much. Have a great day and stay healthy.

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