HELIOS TECHNOLOGIES, INC. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• A heartfelt thank you to suppliers, customers, partners, and the Helios team for advancements during a challenging period. Delivered a solid quarter, generating nearly $35 million in cash and reducing debt by over $19 million. Handled three hurricanes in Florida, with one manufacturing facility needing repair but all team members safe.
• Focused on quality, service, and innovation. Sun Hydraulics past due backlog at 12-month low. Hydraulics launched new products like the FPJP valve and ENERGEN, with new launches planned. Electronics released new displays and controllers. Reduced lead times and invested in product innovation.
• Adjusted full-year outlook due to weak end markets and storm impacts, with sales range adjusted to $800M-$805M, down ~4% midpoint from 2023.

Segment Performance

• Hydraulics: Sales declined 2% year-over-year. Gross profit was relatively unchanged, while gross margin expanded 50 basis points on lower overhead. Operating income grew 32% due to targeted cost controls and allocation of expected cost adjustments. Foreign exchange had a $600,000 favorable impact on segment sales.
• Electronics: Sales declined 6% year-over-year. Strength in health and wellness partially offset declines in recreational, industrial, and mobile markets. Electronics gross profit was up $1 million, and gross margin expanded 330 basis points. Operating income grew 62% from gross profit benefits and allocation of expected cost adjustments.

Guidance

• Adjusted full-year sales range to $800 million to $805 million, implying revenue down ~4% midpoint compared with 2023. Expected adjusted EBITDA margin in the range of 19.0% to 19.6% and adjusted diluted non-GAAP earnings per share in the range of $2.10 to $2.20. Plan to pay down debt in the fourth quarter while reducing net debt to adjusted EBITDA leverage ratio further by year-end.

Risks

• Impact of extended market weakness on sales for both Hydraulics and Electronics. Operational impacts from hurricanes, including 18 lost manufacturing shifts equating to approximately $10 million in revenue and ~$3 million in recovery expenses. Potential tariff changes and uncertainties in market cycles affecting future performance.

Question and Answer

Q: Can we separate out unique benefits in the quarter related to cost structure, especially regarding SG&A in Hydraulics?

A: The biggest adjustment was a stock-based compensation accrual reversal. When taking that out, run rate was still down. Actions include managing headcount, dialing back discretionary costs like travel, and minimizing consultants/sales/marketing efforts while continuing product development investment.

Q: Is there an expectation for slow and steady improvement in fluid power shipments when markets begin to recover?

A: Sun Hydraulics is flattish year-over-year and expects to outperform as markets recover, with a strong product pipeline and focus on hitting delivery lead times.

Q: What's the progress on getting back to mid-30s gross margins in Hydraulics?

A: Volume is the primary factor. At $225 million quarterly run rate, existing footprint and cost structure can support mid-30s gross margins as volume returns. The company is focused on product pipeline and delivery lead times to outperform on recovery.

Q: How does APAC perform and its importance?

A: APAC is a bright spot with Hydraulics and Electronics. Not back to pre-pandemic levels but has room to grow. In-region strategy with local manufacturing and distribution helps service customers closer, with growth in health and wellness due to Joyonway acquisition.

Q: Thoughts on tariff impacts and manufacturing strategy?

A: Tariff impact is less significant due to in-region manufacturing. Local manufacturing is expected to be rewarded, and the company has dual manufacturing capabilities to optimize footprint if tariffs change, with no immediate plans to relocate major manufacturing.