Ladies and gentlemen, greetings, and welcome to the Helios Technologies Fourth Quarter 2022 Earnings Conference Call. It is now my pleasure to introduce you to Tania Almond, Vice President of Investor Relations and Corporate Communications.

Thank you, operator, and good day, everyone. Welcome to the Helios Technologies Fourth Quarter and Full Year 2022 Financial Results Conference Call. We issued a press release announcing our results yesterday afternoon. If you do not have that release, it is available on our website at hlio.com. You will also find slides there that will accompany our conversation today. On the line with me are Josef Matosevic, our President and Chief Executive Officer; and Tricia Fulton, our Executive Vice President and Chief Financial Officer. They will spend the next several minutes reviewing our fourth quarter results, discussing our progress with our augmented strategy, providing 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 will be provided in our upcoming 10-K 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. Please reference Slide 3 now. With that, it's my pleasure to turn the call over to Josef.

Tania, thank you, and good day, everyone. Last quarter, I stated our top priority is protecting the business, our margins, and cash flow. Even in this challenging environment, the Helios team delivered again. I would like to briefly recap our strategy. As an organization, we are tirelessly dedicated to our customers and critically focused on innovation leadership. We utilize our operational excellence business system to guide our strategies and tactics. This enables us to capitalize on our unique position as a pure-play hydraulics and electronics provider. We made great strides this year on our transformation from a holding company to an integrated operating company with a long runway ahead of us. I am very grateful for how hard our global teams worked this year, navigating nonstop challenges. It is a true testament to the amazing people we have in the Helios family and the core values we share. This has been an important year for Helios as we integrated and closed on flywheel acquisitions, advanced our technologies, and announced plans for new centers of excellence to best service our customers through leveraging a world-class manufacturing and operating approach. Our team executed our augmented strategy and protected our business. We thought and acted globally while diversifying our markets and revenue base. Most importantly, we continue to build and develop the talent that makes up our global workforce. We delivered top-tier margins with solid earnings for the full year of 2022 while navigating supply chain challenges, foreign exchange impacts, and the ongoing softness in our health and wellness business in the fourth quarter. We continue to build on our financial strength with our Q4 free cash flow up 20% versus the prior year. Our balance sheet remains very flexible so we can be opportunistic on additional flywheel acquisitions. In 2023, we expect to build upon the progress we have made this year. We will stay focused on what we can control and keep innovating, maintaining our top operational standards and executing our manufacturing and operating strategy. To that end, we announced we are creating two operational centers of excellence in North America for Hydraulics. We also just announced the opening of our automated warehouse in Italy at Faster. With this move, we expect to drive greater operational efficiencies, quality control, and technological enhancements that create advanced hydraulic solutions for our customers. We recently closed another great Flywheel acquisition, Schultes precision manufacturing that brings additional customers and capabilities. Combined with our organic growth initiatives, we expect to reach our $1 billion revenue milestone with top-tier margins on a run-rate basis ending 2023, not including any additional acquisitions this year. Through our organic and acquired innovations, we are creating a pure-play hydraulics and electronics business that will be incredibly tough for our competition to follow.

Thank you, Josef, and hello, everyone. On Slides 6 through 10, I will review our fourth quarter 2022 consolidated results. As Josef noted, our team executed well on our augmented strategy and protected our business. We believe we had success navigating the fourth quarter and this past year despite the difficult macro environment. Throughout 2022, we experienced significant uncertainty, rapid inflation, rapidly rising interest rates, challenges in the constrained supply chain, restrictions in China, and lower consumer demand, mostly in our health and wellness market. End market sales this past quarter saw very strong double-digit percentage growth in recreational markets, including off-road vehicles and marine. Industrial markets grew in machinery, power generation, oil and gas, and mining. Mobile markets, including construction, material handling, specialty vehicles, and forestry equipment also strengthened. Our health and wellness markets remained contracted. Geographically, our 2022 sales in the Americas and EMEA regions increased comparably to 2021, both benefiting from pricing and acquisition-related sales, while sales to the APAC region declined from demand and foreign exchange impacts. Revenues declined in all regions in the fourth quarter compared to last year, reflecting lower demand primarily in the health and wellness market. Overall, we had an unfavorable foreign exchange impact on revenue of $7.1 million in the quarter and $28 million for the full year. We estimate that supply chain constraints delayed $12.3 million in sales this quarter. As you would expect, the softness in sales and related economic conditions in the quarter impacted our gross profit and margin. Profitability declined on lower volumes, FX rates, and continued challenges with supply chain and logistics, but benefited from prior pricing initiatives and realized benefits from our manufacturing and operating strategy. Selling, general and administrative expenses were constant versus the prior year, reflecting cost management initiatives while we integrate acquisitions, implement our manufacturing and operating strategy, and adapt to the macro environment. Adjusted EBITDA in the quarter was $39.2 million, and adjusted EBITDA margin was 20%. For the full year, adjusted EBITDA margin was 23.2%. We continue to demonstrate we can provide top-tier margins even through a very challenging environment. Our effective tax rate in the fourth quarter was -2.3% and +19.2% for the year. The full-year rate is down 1.1% versus the prior year's effective tax rate of 20.3%, primarily driven by a decrease in foreign tax income taxed at different rates and state and local tax benefits. Additionally, as a result of recent acquisitions, our full-year U.S. state effective tax rate decreased. Diluted non-GAAP cash EPS of $0.78 in the quarter includes a $0.02 impact from foreign exchange. Slides 9 and 10 provide visual trends demonstrating overall growth in our hydraulics revenue for the past several quarters. Most of the foreign exchange impact affects the Hydraulics segment. Supply chain constraints delayed an estimated $7.1 million in sales for Hydraulics this quarter, almost half of which was due to a coil shortage. The decline in electronics over the past few quarters was heavily impacted by the softness we experienced in the health and wellness market. This is one of the areas that we have taken a conservative approach to within our 2023 guidance. We believe the health and wellness market will bottom out and start to recover in 2023. The exact timing of when that recovery will begin is not yet certain. Though many market participants believe it could start in the spring. We will wait to build in that recovery in a stronger way once we start to see signs of it materializing. Supply chain constraints also delayed an estimated $5.2 million in sales for electronics this quarter. According to the Federal Reserve's Industrial Production Index, production of semiconductors and other electronic components in the U.S. declined during the fourth quarter of 2022. This is the lowest level since the second quarter of 2021, as output peaked in the fourth quarter of 2021. We believe that as the general economic uncertainty lifts over time and we see end market demand return to more normalized levels, our gross margin, operating margin, and net income will improve correspondingly. We are proud of the team for protecting the business well and managing costs this past year. On Slide 11, you will find highlights for our fourth quarter Hydraulics segment results. Sales grew 12% on a constant currency basis, and the unfavorable impact to sales related to foreign exchange was $6.8 million. Acquisitions added $8.2 million and organic revenue grew a healthy 6% on a constant currency basis. Hydraulics segment gross profit was impacted by unfavorable foreign exchange of $1.7 million, along with inflation. Cost discipline resulted in a decline in SGA expenses in dollars and as a percentage of revenue over the prior year, despite the growth in the top line. Please turn to Slide 12 for a review of our Electronics segment results. Our Electronics segment is more concentrated in the U.S., so foreign currency has less of an impact on revenue. FX had a minor impact on revenue of $300,000. Our Electronics segment gross profit of $14.6 million and gross margin of 26.2% is a direct reflection of the slowdown in the health and wellness market. SGA expenses were managed as we adjusted the business to the current market environment, though they did increase by $1.8 million, driven by a competitive labor market, wages, IT, and marketing expenses. Please turn to Slide 13 for a review of our cash flow. We had strong cash flow generation. In Q4, we generated $35.7 million in cash from operations, up 15% over the prior year period. Our cash and equivalents were up 53% over the year-ago level. CapEx came in at 5% of sales for the quarter and 4% for the full year, in line with our expectations. We recently paid our 104th sequential quarterly cash dividend, returning cash to shareholders. Free cash flow was $25.7 million in the quarter with a conversion rate of 147%, up sequentially from 105%. We generated $78 million in free cash during 2022. Our manufacturing and operating strategy is driving productivity, margin enhancement, and efficiencies. It also leverages the region for regional operations to help protect earnings and cash flow. You can see on Slide 14 that we have a strong balance sheet and significant financial flexibility to execute our strategy for growth. Total liquidity at the end of the quarter was $183 million. Our net debt to adjusted EBITDA leverage ratio was 1.9x. While we have been executing on our Flywheel acquisition strategy, we have been able to stay at or below our target leverage ratio for the last several quarters. Turning to our 2023 outlook. Please go to Slide 15. We originally expected the long-term target at our last Investor Day in June 2021 to reach $1 billion in revenue by year-end 2023, a couple of years earlier than originally anticipated. Of course, at that time, many major world events had not yet unfolded. Since then, the pandemic has stretched on for years, China has remained largely locked down, and the Russia-Ukraine war has persisted for over a year now. Global supply chains have been more complex than any time in recent world history. Over the last year, we have had rapid inflation and are dealing with a global recessionary environment. When we look at our performance since 2020 through such a chaotic time in the world, we are very proud of the growth we have been able to achieve. Even with the contraction in our health and wellness market that we have seen since the boom cycle through 2021, combined with our other businesses and recent Flywheel acquisitions, we believe we can grow revenues to $910 million to $940 million this year. That would imply 3% to 6% annual growth over 2022 and over 20% growth compounded over the last 3 years since 2020. We would expect to exit 2023 on a run-rate basis of approximately $1 billion in annualized revenue. These targets do not include any additional flywheel acquisitions we might complete during the balance of the year, which would be incremental upside. We anticipate Q1 ‘23 revenues to grow sequentially over Q4 ‘22 by mid-single digits and ramp through the year, exiting the fourth quarter north of $250 million on the top line. We expect the revenue split of the first half to second half to roughly approximate 45% to 55%, respectively. We have been able to protect the business through this challenging time by holding our adjusted EBITDA margins at top-tier levels. For 2023, we think we will end the year in the range of 23.5% to 24%, which would be up 55 basis points over the trailing 3-year period as well as over 2022 actuals. We believe exiting 2023, we will approach approximately 25% adjusted EBITDA margins on a run-rate basis. Importantly, we still see a path to deliver our original target at our last Investor Day to achieve a 3-year CAGR of approximately 22% growth in non-GAAP cash EPS at the midpoint of our expected range for 2023 of $3.95 to $4.10 per share.

Thank you very much, Tricia. All the pieces of the puzzle are fitting together nicely as we build Helios into an integrated pure-play hydraulics and electronics company with over $1 billion in revenue. As Tricia described, much has changed in the world over the last couple of years. When I look at Slide 16 and think about our augmented strategy and how it has helped us perform against our Vision 2025 expectations, I am so proud of our global teams for executing so well. We have accomplished much through a period that has taken many businesses way off track. We have been able to acquire a high-quality portfolio of flywheel acquisitions, advance our technologies through tireless innovation of industry-leading products and solutions, and make significant progress implementing our manufacturing and operating strategy as we diversify revenues and markets while protecting our business and margins, all of which has accelerated our growth. So as we enter 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. With that, let's open up the lines for Q&A, please.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Mig Dobre from RW Baird.

It's Joe Grabowski on for Mig this morning. Thanks for all the color on the guidance. Very helpful. I was just wondering if maybe I could get a little bit more color and see if you had anything to say on sales expectations by segment for the year.

Yes, Joe, this is Tricia. Thanks for joining today. I think that we are looking at 2023 from an organic growth perspective, probably if we exclude Balboa right this minute from that discussion, as a growth year from an organic perspective for the Hydraulics segment and the parts of the Electronics segment outside of Balboa. That is one of the areas that we said we've built a lot of conservatism into the forecast for, but we're looking at mid-single-digit growth on the organic side, which we believe is at least 2x what the market is growing in the areas where we are. So I think that we're pleased with where we are and where our businesses are able to grow relative to the market and continue that growth to outpace the market.

And maybe just drilling into the health and wellness then. I know last quarter, it was kind of stabilizing at $150 million to $160 million at that time, probably 4-plus months ago or close to 4 months ago. So what are kind of the assumptions? Is there a range you can give similar to that for the assumptions for Balboa in 2023?

I think, Joe, where we are in the cycle now, we feel that the business is stabilized and we see a path and some visibility into a recovery with improved order patterns. Is it perfect? No. But the order pattern is clearly going in the right direction. In terms of geographic locations and the recovery, we see that starting in North America and have gone really, including me personally spending a lot of time with the customers and really understanding the inventory levels and when will it back up in what areas. So we feel that we will start to see a recovery in North America, and that’s supported by the improved order pattern, followed by recovery in Europe and then the Rest of the World. In terms of your question specifically, I think we need a few more data points to answer this with a higher level of structure and discipline, but we clearly have stabilized the orders, and they are improving. The recovery will start in North America, followed by Europe and the Rest of the World. We have joined the two or three-largest health and wellness shows very recently, one in France, one in North America, and there seems to be a very good sentiment that we are clearly going to get out of this and the recovery will start in 2023.

My last question is related to the previous ones. If I interpret the 45-55 sales split literally, it suggests that sales in the second half of the year will be over 20% higher than in the first half. Could you explain the expected increase in sales from the first half to the second half?

Yes. I can start from a strategy standpoint and then Tricia can add a little more color on the numbers. Going into this, Joe, just by the virtue of what we experienced in the latter half of 2022, particularly Q4 was probably the toughest quarter for us in terms of supply chain. We have really taken a very conservative approach and de-risked the portfolio to a point that we are comfortable where we are on delivering the first half at 45%, as Tricia mentioned. And then we have additional visibility in our Sun business, our QRC business, our innovation business, coupled with the heavy investments we have made over the last 3 years in new products, and the product rollouts are now confirmed with our customers. We have enough inventory data in place now that we can comfortably say there's no destocking that we can see in our business. So we just wanted to be very conservative and continue to deliver based on the current information we have based on the backlogs and the order pattern, and we see improved pathways in the second half with all the elements I just mentioned. And then, obviously, we have a little bit of potential upside if the broader market turns a little bit or if the health and wellness market turns just a little bit more, that clearly would be an upside. But we feel we protected the downside scenario, and we have put ourselves in a position that with our capital allocation and our flexible balance sheet and our investments in new products that if the health and wellness continues to improve as we currently observe, and if we had a couple more acquisitions, there should be a pretty good second half.

Yes. Just to add on to that a little bit, just to hit most of the number items. We're looking also at an improved supply chain as we roll through the year. I mean we still have a lot of supply chain issues, as we noted in the prepared remarks that we think are going to flush out throughout the year. We have good visibility on the order book for the OEM businesses, specifically at Faster and innovation, and can see how the orders are rolling out through the year. We have information from customer discussions that indicate opportunities later in the year and can help us continue to take market share. On the manufacturing and operating strategy, most of those moves for the centers of excellence will be completed by the September time frame, so we believe that we're going to be able to ramp things up relative to that as well.

Our next question comes from the line of Nathan Jones from Stifel.

I'm going to go back to try and get some help bridging from the fourth quarter '22 number to the $250 million exiting Q4 '23. So if you said $12.7 million of delayed revenue in the fourth quarter and you have a $7.5 million from the Schultes acquisition. So if I kind of prorate Q4 '22, that would give you about $216 million. You talked about mid-single-digit growth outside of Balboa, which probably leaves you needing about a $25 million improvement out of Balboa from the fourth quarter of '22 to the fourth quarter of '23. Is that what you guys are building in to get to the exit rate of $250 million?

That seems very reasonable, but that's why we built in such a big range at the top end to be able to accommodate some of that. But yes, I think that your numbers are in the ballpark if you look at the $30 million range that we have.

Tricia, you mentioned that you have insight into the OEM orders for the latter half of the year. How firm are those orders at that point, and how easily can they be canceled?

We have seen historically that they're pretty fixed. They can make changes to them within certain time frames. But because we're always in constant communication, especially with the large OEMs, we have a pretty good confidence level in at least a pretty tight range of where those orders will stay within the year.

I wanted to ask a question about Balboa in the fourth quarter of 2022. The revenue came in at the lower end of the guidance range, and it seems that Balboa contributed significantly to that. Is there a situation with inventory destocking in the channel or lower sell-through? Could you provide more insight into what influenced the fourth quarter 2022 results compared to the midpoint of your expectations?

Yes. I think there was at least in Balboa, a little bit of destocking because we know there's inventory in the channel. One of the things that we've gotten out of discussions with customers is that the dealers and distributors are starting to wear through that inventory more quickly now than the manufacturers seem to be. So we expect that orders are going to start to come back in Balboa from that channel first as we flow through the year. But I think that we're pretty happy with some of the verbiage that we're getting that this is going to start to roll out during the spring.

And the other data point is how you remember with our good, better, best strategy, our engineering excellence has worked with innovation folks and more to develop new products, which we have announced. And at the shows, we have received not just good feedback, but also a certain level of commitments, switching over to that product line. So all combined, I mentioned earlier, there is a confidence level that not just current products but also traditional Balboa products, but also new products in diversified markets are leveraging a product offering. And that's the other reason why the back half is so important compared to the first and second half. And so we feel pretty good about it.

Our next question comes from the line of Jon Braatz from Kansas City Capital.

Tricia, a couple of questions, again, surrounding your revenue guidance. What are your thoughts on the contribution from acquisitions? And how are you thinking about foreign currency impacts this year? Last year, it was a $28 million drag, something like that. What are you sort of assuming here for this year?

So from acquisition revenue, we're rolling out at pretty small, low single to mid-single digits over what we've already announced. Both of those are somewhere around $30 million for Schultes for Damon. Schultes is only 11 months of the year because we closed at the end of January, but we will have a full year of Damon in there. From an FX perspective, we made some assumptions based on where the current FX rates are. We don't try to forecast FX. So we're using current rates going forward in our guidance. I don't anticipate that if we see a steadying euro-to-USD number, I don't think we're going to see as much impact from FX as we saw last year.

And then as you talk about mid-single-digit growth for the business ex-Balboa, how would that break down between price and volume? How do you see that?

We implemented most of the pricing last year because we are seeing such large increases in component prices. So it's pretty much all driven by volume increases.

Our next question comes from Jeff Hammond from KeyBanc.

So the year kind of looks back end loaded. I think one thing I wanted to hit on was Hydraulics, just historically is typically stronger in the first half and seasonally weaker in the second half. And I want to see kind of how the hydraulic side plays out, particularly as we look at peer companies, it seems like most are kind of saying front half, better growth in the second half and people are building in kind of some deceleration. So maybe just speak to the seasonality of the Hydraulics business.

Yes, Jeff. The main reasons for structuring things this way include the launch of two new centers of excellence, which is carefully planned in terms of processes, inventory levels, and order patterns. This is significant work, but we intend to do it correctly, and the process has already started. Another factor is our lead times. Looking at our current backlog in the Hydraulics segment, there is no indication of a decline; we have numerous initiatives to improve customer closeness, launch products, leverage Damon and Schultes, and enhance operations in North America using existing factory assets. Overall, we are taking a very methodical approach to execute effectively. That's it.

Okay. And then can you just clarify the lead time dynamic? Because I know you've been talking about having better lead times, and that's helping drive your share. But I don't know if like some of the backlog is more back-end dated or just clarify that comment.

Sure.

Yes, I think that our lead times are significantly better than most of our competitors, who are experiencing much longer lead times—up to four or five times ours. They still have backlog that is likely being addressed more in the first half compared to us. We have initiatives in place and, based on information from our distributor channels, we anticipate a ramp-up in orders in the second half.

And that's tied to some of these new programs and new products?

Yes, new programs and new products. As mentioned in the release, our performance in China was quite low for Q4, particularly in Asia. With China being shut down for an extended period, we believe there will likely be some improvement in the second half of the year from the Asia-Pacific region.

Regarding electronics, do we expect the performance from the fourth quarter to the first quarter to be similar across both segments, at around mid-single digits, or do you anticipate a more significant increase? I'm concerned about the profitability decline from the third quarter to the fourth quarter, which was quite noticeable. I'm curious whether the profitability for electronics in the first quarter will resemble that of the fourth quarter or the third quarter more closely.

We don't anticipate that it's going to look like 4Q because we do expect to have a little bit more revenue on the top line in Q1, which helps leverage the cost that we have there.

So is all the sequential growth 4Q to 1Q in electronics?

No.

No.

I wanted to mention the recent trend of destocking. In the fourth quarter, we observed significant destocking. I was on a call with a company in the pool industry, and they mentioned ongoing destocking, with their distributors reducing inventory levels to the lower end of what they typically hold. This indicates that they are preparing for more destocking. Are you also planning for continued destocking, or have you found that your products are appropriately matched with the channel?

Yes, Jeff, we did see some of that in the health and wellness segment only. We hit that very hard. A matter of fact, I was just there two weeks ago and had this global council meeting with the folks, and we repeated our question on numerous occasions. So the feedback we have gotten is that we saw that in the second half of the year at Balboa, but that has worked out of the system. So that incremental improvement we are currently seeing and have started to see in December and January, the trend has nothing to do with the destocking. Yes, I understand.

Yes.

Ladies and gentlemen, since there are no further questions, I would like to turn the conference over to Tania Almond for closing comments.

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

Thank you. The conference of Helios Technologies has now concluded. Thank you for your participation. You may now disconnect your lines.