Helios Technologies, Inc. (NYSE:HLIO) Q3 2022 Earnings Call Transcript November 7, 2022
Helios Technologies, Inc. misses on earnings expectations. Reported EPS is $0.9 EPS, expectations were $0.99.
Operator: Greetings and welcome to the Helios Technologies Third Quarter Fiscal Year 2022 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the call over to Tania Almond, Vice President of Investor Relations and Corporate Communication. Thank you. You may begin.
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Tania Almond: Thank you, operator and good day everyone. Welcome to the Helios Technologies third quarter 2022 financial results conference call. We issued a press release announcing our results this morning. If you do not have that release, it is available on our website at hlio.com. You will also find slides there that will accompany our conversation today. On the line with me are Josef Matosevic, our President and Chief Executive Officer, and Tricia Fulton, our executive Vice President and Chief Financial Officer. They will spend the next several minutes reviewing our third quarter results, discussing our progress with our strategy, providing our updated outlook for 2022, and then we will open the call to your questions. If you turn to Slide two, you will find our safe harbor statement.
As you may be aware, we will make some forward-looking statements during this presentation and the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from where we are today. These risks and uncertainties and other factors were provided in our 10-K filed with the Securities and Exchange Commission. You can find these documents on our website or sec.gov. I'll also point out that during today's call we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.
We have provided reconciliations of comparable GAAP with non-GAAP measures in the tables that accompany today's slides. Please reference Slides three and four now. With that, it's my pleasure to turn the call over to Josef.
Josef Matosevic: Tanya. Thank you and good day everyone. This quarter again, our team has kept the heads down to deliver to our customers, execute our plan, and drive results against the backdrop of a major hurricane, rapid and measurable change in FX rates, ongoing supply chain challenges, effects on Europe from a prolonged war and a weak and restricted economy in China. We continue to innovate with new technology, capture market share, integrate our flywheel acquisitions and diversify in applications and markets. In a nutshell, we are executing on our augmented strategy to continue to deliver on our long term growth plans with top tier margins. Our steadfast dedication to our customers, our technology innovation leadership and our ability to leverage our unique vantage point is pure play in the hydraulics and an electronic space provides us confidence that we will continue to outperform against our competition.
Protecting the business, our margins and cash flow are top priority in this environment. As I mentioned on our last earnings call, we have been making great progress executing on our manufacturing and operating strategy. We provided some excellent examples of our strategy at work at our recent sales site analyst day, for example. This includes leveraging the manufacturing expertise and operational footprint we gained With the acquisition of Balboa, we are moving the production of several prior categories to our state of the art low cost operations in Mexico. Our strategy addresses our in the region for the region approach that has enabled us to outperform and lead times to our customers and gain market share. In addition, we are seeing our operating companies working closer together across R&D manufacturing as well as system sales.
Our transformation to an integrated operating company is happening. This strategy provides the framework for a long round way of operational efficiencies that we are still in early innings of executing. As we fold in more flyable acquisitions over time and add new markets and products, there will always be something to optimize. We outlined examples of several current projects we have in process. I encourage you to review the analyst data deck and our website to learn more about the many actions we are taking to drive efficiencies, productivity and optimize our cost structure. This quarter, we further demonstrated our focus flywheel acquisition strategy, closing and Damon products. They are an excellent complement to our hydraulics platform.
Damon imprints established long-term relationship with a diversified customer base serving multiple end markets. Additionally, they have a differentiated value proposition with a strong engineering team that serves a breadth of applications across both custom and standard manifold design packages. With the Helios business system, we expect to leverage from a very successful small business to closer to a $100 million business over the next few years. We are so pleased to add them to the Helios corporate family. We continue to prove our innovation leadership capitalizing on our expertise in the hydraulics and electronics, we created a breakthrough, one of a kind solution that we expect to drive change throughout the markets we serve. Our recently announced solution creates electrical power by capturing wasted energy from a hydraulic fluid, which can be used to support the growing number of electrical applications required on any type of equipment.
This changes the paradigm and we are serving the mega trend of electrification of hydraulics by creating power where it's needed. This is just one of many technology innovations that we have recently announced. We held a science fair tool led by our engineers during our endless data to highlight the large number of new innovative, energy efficient products we are bringing to the marketplace over the coming month as we execute on our innovation roadmap. All we do remains centered and now intends to protect our business, think and act globally, diversify our markets and revenue sources and attract and retain talent, which is the backbone of our success. Thank you once again to all the Helios colleagues this quarter for the tireless work and dedication to our company.
Let me now turn the call over to Trisha to review the financial results and discuss our updated outlook in more detail before I come back for some closing remarks. Tricia?
Tricia Fulton: Thank you, Joseph, and hello everyone. On Slide five through nine, I will review our third quarter 2022 consolidated results. As Joseph noted, we are executing to drive growth through innovation and acquisitions, protect earnings in tough market conditions and support our future through the talent of our team. First, I want to address the most recent events in Sarasota with regard to Hurricane Ian. With our Sun Hydraulics operations in Sarasota, close to where many of the predictive models were forecasting of potential direct hit, we proactively shut down our operations for the safety of our team. As the majority of our cartridge valve manufacturing is located here, ultimately over 14 ships were impacted. Thankfully, I'm happy to report that our colleagues are all safe and our facilities unscathed from the event with an estimated $5.3 million impact of revenue unable to ship due to the hurricane and when we exclude the $8.2 million impact of foreign currency exchange rates.
Revenue in the quarter was basically unchanged over last year. It's important to note that the sales impact from the hurricane is not lost business. It just shifts the timing given the number of labor hours that were impacted geographically, the Americas were solid while EMEA and APAC, specifically China clearly reflected the economic conditions in those regions. In terms of end markets, our recreational market growth was significant with strong double digit increases, primarily driven by our new product winds that were several years in the making. We also had nice growth in the industrial market driven by machinery and energy and the mobile markets grew as well. The diversification we now have in our end markets is much better than in the past, but the tough year over year comparison to the amazing performance our health and wellness market had last year is still having a drag on results.
I will discuss this more in a moment. Current conditions prevented optimal operations in the quarter. Gross profit and margins declined on lower volume. The impact the hurricane had on operations, FX rates and continued challenges with supply chain and logistics. We are realizing benefits from our manufacturing and operating strategy that partially offset the other items we are focused on cost containment and e expenses were down 3% over the prior year. Adjusted EBITDA was $48 million and adjusted EBITDA margin was 23.2%. When normalizing for the hurricane adjusted EBITDA margin would've been 23.6%. We continue to demonstrate we can provide top tier margins even through a very challenging operating environment. Our effective tax rate in second quarter was 23.6% sequentially as expected and above the high end of our original guidance range, but down compared with the year ago level, primarily reflecting the impact of varying tax jurisdictions diluted gap cash EPS of $0.90 included a $0.03 impact for FX and an estimated $0.05 impact for the hurricane.
On Slide 10, you'll find highlights of our hydraulic segment results. Sales grew 8% on a constant currency basis and normalizing for the estimated hurricane impacts. The effects to sales related to foreign currency exchange rates was $7.9 million in the quarter. In addition to the $5.3 million shipment delays from the hurricane, we estimate there were $6.6 million of sales delays in this segment due to supply chain shortages. This amount is up from $6 million last quarter. Hydraulic segment gross profit was impacted by unfavorable FX of $1.9 million and an estimated $2.3 million from hurricane impacts. Cost discipline resulted in a 7% reduction in FDA expenses over the prior year. Please turn to Slide 11 for review of our electronic segment results.
Our electronic segment is more concentrated in the US so foreign currency has less of an impact on revenue. We saw strong double digit growth in recreational industrial machinery as well as the construction markets. Our new product rollouts could not fully offset the decline we are seeing in the health and wellness market. Therefore, our net sales declined 15% over the prior year quarter. We are not expecting improved conditions from the health and wellness market over the next year given the global economic environment. Delays in electronic segment shipments because of supply shortages was an estimated $8.2 million, which improved from 9.1 million last quarter. We expect to continue to see this come down. Electronic segment, gross profit of 22.8 million and gross margin of 30% is a direct reflection of the slowdown in the health and wellness market.
FDA expenses were managed well down 9% in light of the weakness in sales. Please turn to Slide 12 for review of our cash flow. Cash flow was strong in the quarter as we generated 30 million in cash from operations. CapEx came in at 4% of sales for the quarter and 3% year to date. We continue to expect CapEx for the year to be in the range of three to 4% of sales free. Cash flow was again nearly 22 million in the quarter. We have generated over 52 million of free cash flow year to date. As we have noted before, we are intentionally investing in working capital to meet customer demand, outpace the competition, and deliver on our commitments. In the quarter. Our cash conversion rate was 105% back above 100%. You can see on slide 13 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 168 million. Our net debt to adjusted EBITDA leverage ratio was 1.9 times. We believe this puts us in a solid position to capitalize on current market conditions to make selective bolt on acquisitions. Now let's turn to Slide 14. I want to take a moment to review our longer term growth plans. We set at our investor day in June, 2021 and put some perspective around the health and wellness market. When we acquired Balboa Water Group in November, 2020, their annual revenues were north of 100 million. In 2021, they nearly doubled their revenues significantly outperforming our m and a model and accelerating our return on investment timing. On the acquisition, they capitalized on the pandemic trend of consumer investment while people were not traveling as much, the deal was perfectly timed for Helios shareholders to benefit from the market trends.
In addition to adding a new end market to our business, they brought complimentary technology as well as the state of the art low cost manufacturing facility in Tijuana, Mexico. As Joseph described, we are leveraging that facility and our manufacturing and operating strategy and expects several benefits from it over time. As you know that industry is currently going through a normal market correction coming off such a boom cycle, which is impacting our 2022 performance and comparisons. We continue to remain on our trajectory path to achieve our original destination of at least $1 billion in revenues by the end of 2023, which we have accelerated by two years. We have executed on several high quality flywheel acquisitions along the way to help us reach our goal.
We continue to have a very active pipeline of potential acquisitions and feel confident in our ability to take advantage of an unstable market environment to continue to advance toward our long term financial goals. Please turn to slide 15. We are adjusting our 2022 outlook down to accommodate for known factors. We are cautious given inflation, the decline in consumer spending. China restrictions. The war in Ukraine and FX high inflation may continue to slow the global economy and is also causing a pullback in consumer spending, which is directly impacting the health and wellness market. Weakness in the economy in China driven by continued restrictions is negatively influencing demand in that region. Significantly rising energy costs in Europe driven by the prolonged war has slowed the economy in EMEA for our and markets and driven up fixed costs of our manufacturing facilities.
The strength of the US dollar negatively impacts results generated in currencies other than s d. These issues, of course, are all driving the widely discussed global recession. As noted, we are reducing revenue and adjusted EBITDA and while expecting a slightly lower adjusted EBITDA margin, it should remain in top tier performance, higher interest expense and a higher effective tax rate will also impact the bottom line. Despite all of this, believe we can protect the business cash flow and earnings and that the Helios business system provides the structure and discipline to execute our long term plans. Against these headwinds, we remain confident in our ability to achieve our accelerated longer term growth targets. This will be accomplished through a combination of the diversification of our business, continuing to bring innovative products to market and the progress on our manufacturing and operating strategy.
We are focused on our continued evolution into system sales as we become an integrated operating company as well as our active acquisition pipeline to drive growth. We believe we are in a unique position to be opportunistic because of the strength of our balance sheet and our significant liquidity. With that, please go to Slide 16 as I turn the call back to Josef for some final comments.
Josef Matosevic: Thank you much, Tricia. Clearly, we are all in this challenging global times together. This is when companies will remain critically focused on their purpose and mission, stay incredibly close to their customers and partners, and keep investing in their people and technology will be the long term winners. I believe the Helios team is up to the challenge and the value proposition of our augmented strategy provides the framework for us to win. We are driving market share, protecting our margins, creating innovative sticky solutions, leveraging our earnings power, and delivering on our long-term goals. Where there are challenges, there are always opportunities. Because of this, I strongly believe we have line of sight to continue to drive scale and achieve our accelerated milestone of reaching at least $1 billion in revenue by 2023 with top tier margins. With that, let's open up the lines for Q&A please.
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