Greetings. And welcome to Helios Technologies First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a 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 Tania Almond, Investor Relations and Corporate Communications for Helios Technologies. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the Helios Technologies first quarter 2021 financial results conference call. We issued a press release 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 first quarter results, updating you on the execution of our augmented strategies, discussing our recently announced acquisitions, updating our outlook for the rest of 2021 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 also during 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 will be provided in our 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 tables that accompany today’s slides. With that, it’s now my pleasure to turn the call over to Josef.

Tania, thank you and good morning everyone. Please turn to Slide three and I will summarize our highlights for Q1. We have started 2021 on a very strong note with our first quarter exceeding our internal expectations. In fact, we had several records in the quarter as well. We had record sales in our electronic segment supported by the outsized growth of Balboa, which we acquired in November of 2020, as well as innovation controls, which had its highest quarter since Q3 of 2018. Hydraulics also performed well as markets are recovering. In fact, our quick release couplings business set a new sales record in the quarter as the end market is quite strong in construction equipment is also driving demand for our products. Additionally, our CVT business has returned to its best-in-class lead times. This combined with our top-tier technologies are driving market share gains as we continue to make great progress with the new customers we have targeted across both business segments to test out our diversified market strategy. We recently started working with another customer and our cross-functional teams are meeting along with engineering reviews and collaboration; both hydraulics and electronics have started receiving orders from a number of these customers for new diversified applications. We are very pleased with how responsive the market has been in just a few quarters worth of work validating our strategy. Combined, this all delivered 58% top line growth in the quarter. Thanks to the entire Helios family for all of the incredible hard work and dedication to produce such great results. Our operating and EBITDA margin improved nicely despite the supply chain headwinds that the world is facing including higher freight costs, raw material price increases and shortages of electronic components. Gross profit reflects the changing mix in our product portfolio. But the significant operating leverage and higher volume expenses generated approximately $15 million of cash from operations in the quarter with 170% trailing 12-month cash conversion. With this cash, we will continue to deliver on our balance sheet. And to top things off, we continue to execute well with our flywheel acquisition strategy with the definitive agreement we announced yesterday to acquire Shenzhen Joyonway Electronics & Technology Company. They are a fast-growing developer of control panels, software, systems and accessories for the health and wellness industry. This transaction positions us to cost-effectively expand our electronic controls platform with more capabilities, strengthening our supply chain through broader geographic reach and increasing our manufacturing capacity to meet growing global demand with the opportunity to improve our margins over time. The facility is located in the Silicon Valley of China and puts us at the heart of electronics and controls technology advancement in Asia. We could not be more pleased and look forward to welcoming the Joyonway colleagues to the Helios family. Given our strong start to the year, we are raising our full-year outlook, which we will review in more detail later in our remarks. On Slide four and five, I will touch on some financial highlights for the quarter, then Tricia will go into more detail during your prepared remarks. First quarter net sales grew to nearly $205 million in Balboa, which has been part of Helios for about five months and well exceeded our expectations. We were able to expand capacity and enhance productivity to capture the increased market demand. Our adjusted EBITDA margin grew to 25.1% compared with last year, an increase of 160 basis points. Non-GAAP cash EPS of $0.99 was 77% annual growth reflecting the better than expected performance of both segments. All in all, the first quarter demonstrated a very solid performance by the entire company and was a direct result of the plans we put in place in the second half of last year with excellent execution by the Helios team against those plans. I will now turn the call over to Tricia to review the financial results and outlook in a little bit more detail. Tricia?

Thank you, Josef and good morning, everyone. On Slide six and seven, I will review our first quarter consolidated results. As Josef mentioned, we delivered significant growth in the first quarter supported by our focus on delivery lead times, our expanding sales channels, strong end markets, and of course, the addition of Balboa which exceeded our expectations. Net sales grew 35% sequentially and 58% over the prior year period, as we executed our growth plans. First quarter gross profit of $75.4 million increased $22.7 million or 43% compared with the trailing quarter and $23.5 million or 45% over the prior year period from higher volumes. While consolidated organic volume was up over the fourth quarter, gross profit was also affected by the mix of products sold, Balboa’s gross margin profile and the impact on operations from increasing freight costs. We are working to offset the impact of these items with cost containment, adding shifts to reduce overtime and working on our global supply chain efficiency program. Gross Margin was 36.8% and was impacted by the difference from Balboa’s margin profile, supply chain constraints, and increased freight costs. Adjusted EBITDA margin grew to 25.1% or 160 basis points compared with the same period a year ago and was up 190 basis points compared with the trailing quarter reflecting our cost management efforts, productivity improvements and the contributions of Balboa. Non-GAAP cash EPS improved $0.39 to $0.99 for the first quarter compared with the trailing quarter and was up $0.43 compared with the prior year period, reflecting better than expected performance of the Balboa acquisition. I should point out that our effective tax rate for the first quarter was 23.2% compared with 22.3% in the prior year period before impairment, primarily due to increased earnings in higher tax jurisdictions. Please turn to Slide eight for a review of our Hydraulic segment first quarter operating results. As Josef mentioned, in Italy, our QRC business had its highest sales quarter and we are growing that business through a combination of leveraging customer relationships, deeper geographic reach, and strong demand in the construction and agricultural end markets. The cartridge valve technology business is also seeing marked improvement as the distributor channels are depleting inventories and beginning to restock their shelves. Combined, these efforts delivered solid hydraulic sales of $119 million, up 15% over the prior year period. Foreign currency exchange rates provided a positive $5.7 million impact on sales. By region, the segment had growth in both EMEA and APAC reflecting end market demand. QRC had strong growth in APAC driven by China. Sales in the Americas were down due to softer end market demand but with strength in certain markets such as agriculture. Q1 Hydraulics gross profit benefited from higher volume while margin was constrained with rapidly increasing freight costs and efforts to provide deliveries on time to customers. Operating margin of 23.6% compared with 20.7% last year reflects operating leverage on higher volume. In fact, CVT has significantly improved their operational performance over the last seven months getting back to their top-tier lead times in executing well on cost containment. I should note that we are intentionally being very selective with price increases in our Hydraulics business. Instead, we are positioning to gain market share while uncovering additional productivity efficiencies to drive margin. Please turn to Slide nine for review of our electronics segment first quarter operating results. As we said earlier, Balboa exceeded our expectations and was a significant contributor to our electronics segment sales for the first quarter. We could not be more excited by the potential this acquisition continues to bring. Electronic sales were $85.7 million compared to $25.7 million in the prior period, an increase of 234%. Growth drivers include the first full quarter of Balboa revenue, new product introductions, and strong demand in the recreational and health and wellness end markets. Notably, our organic business was up very healthy double-digits driven by record demand in the recreational markets. Electronic segment gross profit of $30 million in Q1 increased with the acquisition and higher volume. Electronics gross margin was 35%. This reflects the impact of mix primarily related to the different margin profile of the Balboa acquisition. Operating income for the electronic segment of $18.3 million doubled the trailing quarter and was almost four times greater than the prior year period. Operating margin improved to 21.4%, up 270 basis points for the same reason. The 2021 first quarter margin reflects the strong operating leverage inherent in this segment. Please turn to Slide 10 for a review of our cash flow. Cash from operations was $15.1 million in the first quarter. We are carefully balancing our working capital requirements with our efforts to provide timely deliveries to our customers amidst record demand. For the quarter, CapEx of $5 million represented about 2% of sales. While our plan for $30 million to $35 million in CapEx for 2021 is unchanged, as a result of higher sales, it will likely be closer to approximately 4% of sales for the full year based on our updated outlook. Free cash flow was $10.1 million at the end of the first quarter, equating to a trailing 12-month free cash flow conversion rate of 170%, as Josef mentioned. We believe we have significant financial flexibility to further pursue our flywheel acquisition strategy. Regarding our capital structure on Slide 11, we continue to rapidly de-lever our balance sheet with a pro forma net debt-to-adjusted EBITDA leverage ratio of 2.65 times. This is an improvement from the 3 times at the end of 2020. Total debt was $452 million at quarter end, reflecting total repayment of $10 million during the quarter. At quarter end, we had $150 million available on our revolving lines of credit, with total liquidity of $176 million. As most of you are aware, our financial strategy is to increase leverage for disciplined acquisitions and then generate the cash to quickly pay back down. Our capital priorities are debt reduction, organic growth through new products and technologies, acquisitive growth, and finally distributions to shareholders. We have been a consistent dividend payer over the last 24 years. We recently paid our 98th sequential quarterly cash dividend on April 20 of this year. Now, let's turn to Slide 12 and I will discuss our outlook for the rest of 2021. While the second half of 2021 is not yet fully visible, we are definitely encouraged with the strength we are seeing in our end markets and the success we are having in diversifying our markets and gaining new customers. Our guidance for 2021 assumes constant currencies in quarter end rates as well as the assumption that our markets will continue to recover from the global pandemic. We are raising our revenue outlook for 2021 to the range of $740 million to $750 million, which implies a growth rate of approximately 42% at the midpoint of the range. The adjusted EBITDA margin outlook remains unchanged at 23% to 24% as we continue to leverage our manufacturing efficiencies to offset the higher raw material costs and freight expenses in the macro environment. This implies we are raising our expectations for adjusted EBITDA dollars to the range of $170 million to $180 million or a 44% annual growth rate at the midpoint of the range. Additionally, we continue to invest through non-CapEx related items into our manufacturing strategy to reap the rewards of margin improvement over the long term. Interest expense outlook at current borrowing levels and rates remains unchanged at $16 million to $18 million. The effective tax rate for 2021 is expected to be in the range of 24% to 26%. Depreciation is expected to be about $22 million to $24 million and amortization will be approximately $30 million to $31 million. We are raising our non-GAAP cash EPS outlook to between $3.30 to $3.50 per share or a 52% increase over the prior year at the midpoint of the range. The increase in our guidance for 2021 is driven by the strong end market demand we had in the first quarter and expect to continue throughout 2021. We are able to leverage our fixed cost base and maintain our strong margins, even given the headwinds on material costs and logistics and our decision to manage pricing to our competitive advantage. With that, I will turn the call back to Josef for some final comments.

Tricia, thank you. Again, we had a very strong start to 2021 and are encouraged with the results we are having in the early stages of our mission to diversify our products and end markets. We are making excellent progress on our augmented strategy. We are structuring our organization to deliver long-term growth with top-tier margins, and we are confident in the management team's ability to execute. We are creating an organization that provides greater benefits to our customers, and is rooted in our shared core value system to deliver on our mission. We are very excited about where we are going as a company and hope you will join us in that excitement. We are hosting an Institutional Investor and Professional Analyst Day here in Sarasota on June 15, and hope that you will be able to join us. If you can’t travel to our location, the event will be broadcast through our website as well. Our plan is to help you see how we will deliver outsized growth, that we are disciplined acquirers with a well-constructed plan, and that our margin journey provides expansion potential. With that, let's open up the lines for Q&A.

At this time, we will be conducting a question and answer session. Please wait while we poll for questions. The first question is from Nathan Jones from Stifel. Please go ahead.

Good morning, everyone.

Good morning, Nathan.

Good morning, Nathan.

I wanted to start on some of the pricing commentary that you were making, Tricia, and that you guys are looking to offset some of this inflation that you're citing with productivity rather than pricing. That's been a fairly unusual position for most of the companies I cover at least this quarter who are looking to pass through inflation at least dollar-for-dollar, and some of them with margin on it. I think the comment was specifically on the Hydraulics products. So maybe you can talk a little bit about that strategy. What benefits do you think it’s going to get in terms of share? And then is that the same kind of outlook on Electronics?

Yes, on the Hydraulics side, we have made manufacturing improvements. We have had a lot of discussions probably over the last 18 months or so about the CVT business in particular, bringing together the operations in the Sarasota plants. I think they've done a very good job of increasing the capacity of those plants and being able to get more product out the door in a more efficient way. So we believe that that's going to benefit us going forward. In addition to that, we have a new expansion project going on in Italy to ramp up the capacity that we have in the main factory for our QRC business. That project has started and will continue probably over the next 18 months or so. We have already started getting machines into that business. So we're seeing increased capacity already from those new machines being in place, but we're also going to be expanding the actual footprint of the factory. We're also looking on the CVT side at the Cangzhou plant that we have in China and bringing in more capacity there as well. So we think we're in a really good position to be able to leverage what we have in place and the new things that are coming on to be able to get more products out the door as we continue to see demand ramp in both QRC and CVT throughout the Hydraulics segment. So, I think that we have some opportunity here to take market share as we move forward without having to take severe pricing action even though we are seeing some cost increases on the material side.

And then any comment on pricing on the Electronics side? I assume that inflation is even worse there than it is in the Hydraulics business. Are you keeping pace with pricing there or are you looking for productivity on that side as well?

It's a little bit of both there. We already had a small price increase on the Balboa side for the plastic business. We saw a pretty steep ramp in the resin costs for our plastic products, primarily through Balboa, but also some innovation as well. We were able to put through a price increase quickly on the Balboa side to cover some of those costs. We are seeing pricing ramp up on the component side for the Electronics. But we're also doing, I think, with our supply chains a really good job of getting ahead of that and placing orders even out into the end of 2022 to make sure that, one, we have supply, but also that we're getting decent pricing on that as well in this very difficult pricing environment. So it's a little bit of both. And on the Mexico factory on the Electronic side, we've made some really great strides over the last few months of being able to get more capacity out of that factory on a daily basis. Also, we see very strong demand in the health and wellness end market. That seems to be continuing as we go into 2021. So we want to make sure that we have the capacity to be able to meet that demand. And I think we've done an excellent job of ramping that up pretty quickly.

And just one on the distributor inventories, I think you said you believed that distributor inventories declined in the first quarter. So sell-out more than sell-in. What is included in guidance so what kind of expectation do you have to restocking at the distributor level for the rest of the year?

We don't have a specific percentage of restocking but we're anticipating based on the feedback that we've gotten from distributors, both in the reports that we get from them quarterly as well as discussions with them, that they're starting to ramp back up, specifically on the larger OEMs that they're servicing with parts. We're starting to see that flow through the order patterns, specifically at CVT because that's where the majority of the distributor business is.

Great. Thanks for taking my questions. I'll pass it on.

Thank you.

The next question is from Mig Dobre from Baird. Please go ahead.

Yes, thank you and good morning, everyone.

Good morning, Mig.

I'm wondering if we can get a little more specific on the Electronics business. Balboa did well, can you give us a sense for what the revenue contribution for Balboa was in a quarter? And how did that go relative to what you were expecting three months ago?

Well, Mig, look, I think Tricia mentioned in her prepared remarks that in terms of the organic growth component, all of our businesses actually had healthy double-digit growth. So Balboa clearly contributed significantly, but so did everyone else. So we are really well balanced in terms of organic growth and growth through acquisition.

Okay. So you're not willing to provide specifics in terms of the revenue contribution. I'm trying to calculate the organic growth for the business in a quarter.

Yes, we are not going to give specifics on the Balboa business. I think Josef framed it pretty well by saying that the organic business grew healthy double digits. We also commented that animation itself had its highest quarter since Q3 of 2018. We're reporting on segments and we'd like to keep it at the segment level.

If I look at your revenue outlook for the year that change in outlook, you raised your revenue guidance by $55 million in the midpoint and I'm curious as to what the buckets or the moving pieces to this guidance adjustment is. How much of this is maybe your Hydraulics business doing a little bit differently than what you planned initially versus maybe Balboa being better than you expected versus the core electronics business?

I think it's quite balanced. When considering our various businesses, QRC in Italy offers more clarity, and we believe QRC will maintain a strong year with healthy double-digit growth quarter-over-quarter. During our monthly distribution calls, we gather feedback on inventory levels, and it seems that replenishment will begin soon. However, we are unsure of the pace at which it will happen, but we anticipate it. This is why our strategy is focused on taking pricing actions in certain commodities, while shifting towards gaining market share with a manufacturing strategy that supports margin improvement. In the Electronics sector, we have better visibility regarding Balboa. On the recreational front, our new product launches are underway, and they are being introduced to specific customers without any cancellations. Overall, I feel confident that this guidance is realistic, fair, and achievable.

I'm glad you feel that way. Then I guess, maybe my final question. I'm certainly trying to think through the cadence of the year here, right. I mean, if I look at your frame of the top line seems to imply that Q1 has the highest revenue quarter of the year; subsequent quarters are going to have lower revenue, which to some degree is, at least to me, counterintuitive. I would imagine that the business sort of builds sequentially in terms of end market demand. And there's also sort of kind of like the seasonality aspect of maybe Q2 and Q3 being better than Q1. But again, that's kind of how it used to be back when we were just talking about the CVT business, and you've added some new components. So I'm kind of curious here is it Balboa that has strong seasonality early in the year, and it's reflected in Q1 results? And what we should be expecting that to kind of wane as the year progresses or is there some other cadence that you feel comfortable sharing with us? Thank you.

For Q1, yes, I mean the Balboa business came out stronger than we had anticipated. We had the demand there, we had the backlog. What we were lacking a little was the throughput. But with some of the improvements that we've made in the Mexico facility, through the global ops team, I think we've done a good job of being able to get more product out the door than we thought we were going to be able to or that they were before the acquisition or even into Q4. So that came out a little stronger than we had anticipated. CVT was also a little stronger than what we thought. But you might recall from the last couple of quarters, we've been talking about agriculture being strong, recreational being strong, health and wellness being strong. So they've been strong for several quarters. There's not full visibility, as we said, into the back half of the year. We can see, the first half of it seems like it's still staying pretty strong, but just a little less visibility that we have going into the third and fourth quarter. So, there's no normal seasonality right now, especially if we look at the historical CVT business. I think we have to sort of throw seasonality out right now given some of the dynamics that are in the end markets. We’re very happy with the really strong Q1 that we had. We do have very strong demand continuing in many of these end markets. If I look at our internal end market chart, there's a lot of green on it. That feels good, but there's also always that little bit of uncertainty about where the back half of the year is going.

Okay. I'll get back in the queue.

The next question is from Josh Pokrzywinski from Morgan Stanley. Please go ahead.

Hey, good morning, everyone.

Good morning, Josh.

Just a follow-up on some of the pricing commentary and questions. I agree with the earlier observation that it seems atypical among industrial companies right now. We've heard more about gaining market share through better lead times and more consistent delivery rather than focusing on price. I'm curious if you could share your insights on what you're observing with your customers regarding any disruptions in lead times. If certain industries are not focusing on lead times, is that perhaps creating a differentiation compared to your competitors?

Look when we originally built out that strategy, part of our augmented strategy is to have a manufacturing roadmap that supports the very strong plan in the supply chain, operations, manufacturing and materials area, and build-out a margin journey over the next two or three years, that will contribute to improve the overall margin. So this strategy is complete. And it's been rolled out as we speak and led by a very strong team. So this is piece number one. Piece number two, when we look across our spectrum and some of the folks we compete with, their lead times have significantly increased where our lead times are back to where they should be in the leading categories. So there was that, a point number two. And we certainly have taken pricing action on some commodities. But pulling altogether and looking at this from a holistic strategic standpoint, I really feel that this is our time to take some market share and take advantage of the lead times we have. We have very strong products being launched in terms of new products, existing products and the customers have reacted. So that's why we are saying, yes, Balboa was very strong in terms of Q1. But let's not forget that organic business across the spectrum of our businesses has been always very healthy in the double-digits. So it's really a balanced approach. And we are benefiting from good lead times, we are benefiting from really strong orders. We feel good about where we are going. And that’s why we are very methodical about what pricing actions we are taking, because we believe we can get to the other side of the stretched supply chain much stronger and much better with a significant organic growth component.

Got it. I guess you're just sort of related to that? Is this more with new customers, existing customers? Is this some sort of platform, when you're targeting where it ends up being sticky, just sort of what gives you the confidence that you're not renting share in the short-term versus something that may be a bit more sustainable?

Yes, on the Hydraulic side, clearly, it’s worth existing customers, and in many cases, new customers as well as they really don't have anywhere to go to get the product as quickly as they want to. And then our diversified market strategy obviously contributes to get very healthy as well. On the Electronic side, it's pretty much bulk of it. It's all with existing customers.

Got it. And then just last question, as it pertains to visibility, I know you guys don't really talk about backlog so much. But that was a bit of a driver last year, I think in the third quarter, and you said Q2 was better than folks thought because we achieved some backlog in the meantime and then a little leaner coming in the second half. What's the status sort of rebuilding that now? And how do you calibrate that and the kind of moderation in revenue trends here as the year goes on? Thanks.

Look our visibility is clearly tied into our guidance. So we have put out this guidance very carefully, very methodically, and we believe we can hit it. I really don't want to get into specifics about backlogs at this point, but we have enough visibility within the business that we feel we will hit our guidance with expected margin portfolio. And we will continue to grow this business organically and through acquisition as we already announced one this quarter.

Okay. Thanks for the color.

Thank you.

The next question is from Jeff Hammond from KeyBanc Capital Markets. Please go ahead.

Hey, good morning, guys.

Good morning, Jeff.

Good morning, Jeff.

I just wanted to revisit the components of the guidance because it seems that, compared to my model, Electronics significantly contributed to the positive variance, especially Balboa, based on what you said about the core. So I'm trying to understand if the guidance is fairly balanced, as you mentioned, or if the majority of the guidance increase is primarily on the Electronic/Balboa side.

Yes, so it's the first one, Jeff. We have a very healthy balance here between organic and inorganic growth.

Okay. And then just on the 8% revenue guidance raise, you're leaving your EBITDA margins range unchanged. And I guess when I think of your business, I think of kind of 30% to 35%, kind of incrementals. But this kind of this 8% increase would imply you're incrementing in the low 20s. Is that, kind of this price versus share dynamic? Or is there conservatism in there? Or is there something else I'm missing?

Well, clearly, the majority or the big part is what you just said; it's the very methodical pricing that we are looking at. Some of the commodities obviously have increased; there are higher freight costs. And we are very disciplined in how we are approaching this. So, you did see an increase obviously in overall dollars based on our guidance. But yes, to answer your question, it's all related to the supply chain and we feel longer-term with the manufacturing strategy we have in place, we will get to a much better place a couple of three quarters from now taking the current approach we're taking and gaining market share and positioning our customers to be able to compete more effectively and start shifting orders our direction.

Okay, and then anything you can give us on this acquisition in terms of kind of relative size what the annual revenues are? What kind of the long-term growth rate of the business is?

Yes, first of all, we just signed the deal; we haven't closed on the deal. We expect to close sometime in the third quarter. This is not going to be a material acquisition for us from a top-line perspective. It really brings us a technology and scaling their existing products that gives us manufacturing in China, that will help us with our strategy for the region. This will also, as Josef pointed out, continue to drive those margins upward over time. So we're looking at this not from a big plug on the revenue top-line side but more as a technology expansion and footprint expansion within our Electronics segment.

Okay, and then if I could just sneak one more in, just help me understand kind of the difference between the EMEA strength in Hydraulics versus kind of the relative weakness in America's. Is that timing, is that kind of the backlog dynamic that maybe Josh referenced? Just help me understand because it seems like most of my companies are kind of talking about North America leaving us out here? Thanks.

I believe the situation is influenced by both the end market and the sales channel. In the EMEA region, a significant portion of the growth in hydraulics is driven by large OEMs. Conversely, in the Americas, the CVT business is primarily impacted by the distribution channel. There were excess inventories to manage at the year's end, and we are also comparing this to Q1 2020, which had a very high backlog in the CVT sector, where we were shipping as much as possible. This makes it a challenging comparison for Q1 in the CVT area. However, we are now observing a resurgence in demand in the Americas, which is beginning to increase. The growth in EMEA Hydraulics can be attributed mainly to the strong performance of the agriculture sector in Q1.

Okay. Thanks so much.

The next question is from Mig Dobre from Baird. Please go ahead.

Yes, thank you for taking the follow-up. I guess my question is sort of on a cost structure, kind of in general. And I'm wondering, Tricia, you have a fairly short cycle business. So I'm sort of assuming that you are fully experiencing the full force and brunt of higher input costs, higher freight, the supply chain disruptions. Correct me if I'm wrong on that. I guess, I'm just wondering if there's potential here for things to actually get worse or more challenging as you look at maybe like Q2 or Q3 in terms of how these inflationary pressures flow through your P&L or not? Or are you basically caught up with the environment and that is what it is and it's kind of reflected in the results?

We are currently experiencing a more challenging cost structure on the Electronic side compared to the Hydraulic side. We anticipated some of these issues earlier in the year, as we were aware of shortages and had to secure supplies in advance. While secondary sources can increase our component costs, we had already factored in some of these expenses. Additionally, we are facing higher freight costs as we strive to deliver products to OEM customers promptly, enabling them to meet their deadlines. We are certainly feeling the impact, but on the positive side, this business allows us to leverage fixed costs effectively as revenue increases. We saw the benefits of this in Q1, and if revenue levels remain high, we expect to continue experiencing this advantage throughout the year.

Yes, that makes sense. I guess, in some ways where I'm kind of going with this, if I look at your Hydraulics business you had very nice margins in Q1; operating margin was 23.5%. And the way you're sort of talking about demand kind of building out and hopefully the distribution portion of the business is picking up here, which I presume that's margin accretive for you doing business through distributors. I'm just sort of wondering here, is there a reason for us to think that margins would be lower sequentially in your Hydraulics business in subsequent quarters relative to Q1? Because if that's the case, it's not entirely obvious to me as to why that would be?

One potential reason for lower margins in the Hydraulics business in the upcoming quarters could be a slowdown in the agricultural sector, which has been performing well for several quarters. If that slows down, we might miss out on some leverage opportunities in the faster segments, impacting margins later in the year. However, it's important to note that the distribution business and CVT can benefit significantly from increased revenues. Therefore, there is a careful balance to maintain between the two technologies within the Hydraulic segment.

Understood. And lastly, sort of a similar line of thought for Electronics. If we're recognizing that a good portion of the outgrowth relative to expectations came from Balboa. You’re going to have to remind me here, but my sense was that Balboa was coming in with operating margins that were in line to maybe below segment average in the Electronics. I don't know if that's correct or not. Once again, though, as the year progresses, is there a reason to think that margins need to be meaningfully lower than what you have experienced in Q1 in this business? And that's it for me. Thanks.

On the Balboa side, as we've pointed out a couple of times, their gross margin profile is very different from what we've seen historically and innovation. But they also don't have the engineering costs in R&D that we see at innovation. So they're able to very quickly leverage on the higher volumes that we're seeing now with the increased output that we've been able to achieve in the Mexico factory, really good leverage at the operating income level, even though their gross margin profile was different coming in. They are still able to contribute very well at the operating income level.

And going forward?

Going forward, I would expect that that would continue. I mean, we're still making a lot of productivity improvements in the Mexico plant, which is the primary manufacturing facility for Balboa. So as we continue to make those changes in how they're doing production and bringing in some new equipment into that factory as well. I think we're going to continue to see that they're going to get leverage definitely at the operating margin, but probably over time also ticking up the gross margin.

Okay. Thank you. Appreciate it.

This concludes the question and answer session, I would like to turn the call back over to Josef Matosevic for closing remarks.

Thank you. Thank you all for joining us today. We certainly appreciate your interest in Helios and look forward to updating all of you on our second quarter in August. 2021 is shaping up to be a very strong year for us, but this is just the early stages of our journey. We are confident in our ability to continue to grow and deliver value. Have a great day and stay healthy.

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