Helios Technologies, Inc. (HLIO) Earnings Call Transcript & Summary

Good afternoon, and thanks for joining us for the final day of Morgan Stanley's Laguna Conference. I'm Joshua Pokrzywinski, the firm's U.S. electrical equipment and multi-industry analyst. Here with me this afternoon is the management team from Helios Technologies, including new CEO; Josef Matosevic; CFO, Tricia Fulton; and brand new to the IR team, VP of Investor Relations, Tania Almond. Team, thanks for joining us. Welcome to all. Before we dive in here, I do need to quickly read the disclaimer. So for those on the line, this will be my 57th time or something like that, reading it. So everyone bear with. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to our Morgan Stanley sales representative. Team, thank you for making the time to join us. Obviously, easier on the flight from Sarasota, and having to go all the way out to Laguna. But you guys get to still enjoy the sun. Unfortunately, we don't this year. But thanks for joining all the same.

Thank you.

Thanks for having us.

Thanks for having us, Josh.

Thanks Josh. If you wouldn't mind just maybe spending a few minutes telling us what you're seeing out there. And obviously, newer to the role yourself. So any kind of bigger strategic imperatives as well as observations that you have that you want to make us aware of upfront, that would be great.

Yes, certainly. Thanks for having me, Josh, here. And good day to everyone. So maybe I'll start by saying how truly I'm blessed and excited to have joined this wonderful great company here. The first 100 days have been, considering the COVID challenges, still very exciting on my end. And as you can imagine, I'm learning on the fly here, have had the chance to dig in very deep into Sun Hydraulics and our Innovation segment. And as we started the journey here with the team, I wanted to have a good, deep, thorough understanding of our 2025 strategy and the plans associated with that and considering our economic conditions, how solid are they. And I'm here to tell you that the strategy is good, is confirmed. And that followed a very deep dive on meeting the people, meeting the management team and same holds true. I am really fortunate to have gotten to know a lot of great people here, very strong management team, a nice combination between folks who have been here for a long time, some new team members who bring some very unique skills to the table. So strategy is good. Management team is sound. Unfortunately, I could not go and see our third segment, which is in Italy, our Faster Group. We did most of that over the phone and over Teams, but same thing holds true there. So in summary, the strategy is confirmed. Our vision is clearly to get to $1 billion in revenue with a greater than 24% EBITDA margins. What I think I'm seeing here and what's starting to feel right to all of us here at Helios is even the strategy is confirmed, Josh, but there's certain value streams that need to be added to the strategy for 2 particular reasons: One, we got to make sure we hit that strategy. And secondly, I think considering the strong company we are with a strong balance sheet we are, this is our great opportunity to separate ourselves from the competition and add additional plans by augmenting our vision here to get to our strategy quicker and faster. So we are in the process right now to bake a value stream approach that will be added to the strategy by -- maybe just a couple of quick examples by: number one, clearly, looking at our current market position; and how do we leverage Helios and Helios brands globally, quicker and faster; and how we pull those 3 different segments into a leveraged approach here. And the other one would be to just look at our opportunistic approach on M&A and complete our product offering, where we have gaps in the products and start to diversify our approach in other industrial markets. One example would be, if you look at innovation control, who is largely focused in the recreational market with digital control solutions, selling directly to the OEMs. When I dug in into the product line, it is really well designed, well developed, strong R&D backbone, very strong engineers. But those applications with some minor engineering activities can be applied in other diversified markets in the industrial market sector. So I'm excited to see the journey continuing and once that cake is fully baked, we will communicate this to the investor community accordingly what exactly that means. And then finally, focusing on the operating -- on the operations piece of the company, and see how we can leverage our supply chain, leverage our manufacturing footprint, potentially at a low-cost country approach and that type of stuff. So look, super excited. And with that, I think it's time to maybe -- if you ask some questions.

Perfect. So appreciate that intro. Obviously, you took over right in the middle of COVID. So no small feat, both on sticking to the long-term strategy, which is -- it's good to hear you reiterate. I want to come back to some of those elements. But certainly, the near-term has been challenging for folks as well. Anything that is kind of occupying your attention in the near term that either showed up in supply chains or particular acute reactions out of customers that is kind of putting off maybe that longer-term strategic attention? Or have your markets settled down a little bit here?

That's a great question, Josh. So here is the unique position we are in. As everyone, I'm sure, on this call is aware of that, we are highly profitable company with a very strong and flexible balance sheet. So we really don't have significant fundamental issues here. We are in a daily contact with our distributors. If you look at our 3 product lines or 3 business units, Sun Hydraulics sells through distribution and when you talk to those folks, it's a mixed bag, right? Some of the distributors have low inventories and doing extremely well. Some have a little bit high inventory, it takes them a little longer to burn off. But at the end of the day, it's balancing out. We anticipated Q3 to be a trough for us. The picture is shaping up potentially a little bit better than we thought. On the innovation side, our funnel of new products that we developed over the last 12, 18 months, we were somewhat worried that some of them may be canceled out or delayed for a couple, 3 years. None of them were canceled. We only had a handful pushed into 2021, but pretty much all of them have been confirmed, and in many cases, through a co-funding mechanism. On the Faster side, headquartered in Italy, Faster is having a great year. Europe has recovered extremely fast and strong and doing really well. Asia is ramping up for us, in particular, China on a very rapid basis but doing well there as well. So I don't have this major fundamental issues of cyclicality that will require significant cuts in the organization. We have held down to all of our engineering and R&D people. Of course, we made some minor adjustments where needed, be good stewards of our shareholders here. But we're going to stay focused to our strategy. We're going to continue to develop and design the very close to the markets and to our customers, continue to work the additional value stream and communicate those accordingly and continue to deliver and deliver.

Excellent. So a couple of things that you mentioned there. I want to dig in on a little bit further. First of all, inventory. In your position with inventory and the way you interact with your customers, maybe a little different than some other folks we speak to. But maybe just taking a step back, you mentioned that some of your distributors are a little leaner on inventory. Obviously, it's an uneven environment right now. Are those folks looking to restock? Or are they comfortable with low inventory and just kind of meeting the market more at the point-of-sale level?

Again, Josh, it's market specific. So in our case, our ag markets have done extremely well. So when you look at that customer base, that customer base is restocking on a frequent basis. And though the pattern continues in other sectors in the material handling equipment area, that market is doing extremely well for us. Specialty vehicle is kind of a mixed bag, so -- but overall, I think we have seen slight recovery pretty much in most of the markets we participate.

Got it. That's helpful. And then just in the context of this quarter being the trough, I think a backlog situation kind of drove that timing differential coming out of last quarter. How has the replenishment of backlog gone? Or if you want to frame it up in kind of a book-to-bill scenario, how is -- what is that trying to tell you in terms of kind of the pace of improvement that we could see from here?

I think I'm going to co-locate here with Tricia a little bit. We have this discussion every single day. So Tricia, you may start and I finish.

Yes, absolutely. Yes. So the past due issue is one that we've had for multiple quarters. In the third quarter, the expectation was that we would be able to work through that and for the most part, we have. So now we're working off of actual demand levels in that business for CVT. It is -- it's never a position that you want to be in to have past due. But I guess the good part of that was there was very high demand for those products. And the expectation is that we will continue that once we are able to work through what we're considering a short-term problem of COVID. We're clearly more focused on the long-term opportunities. And just sort of managing day-to-day, what we need to get through the next quarter or 2 related to COVID impacts. Back to the question on distributor inventory specifically. There are some that have higher inventory than they want and some that have lower. I think they're also trying to manage with their customers of where they are in the cycle. And we're getting some good feedback from them that there are opportunities that are now popping up and starting to come back, a little bit on a one-off basis at this point, but that's how the recovery begins. So we're very encouraged by the information that we're getting from the field related to specific opportunities that seem to indicate that the fourth quarter will be what we have expected, which will be a bit of a recovery in demand.

Excellent. That's helpful. So just switching then to some of the longer-term elements because I think that's where everyone's focus is. I think interesting to hear pretty early on the recommitment to Vision 2025. And $1 billion looks like it's far away today, but I think you guys have proven a pretty good growth trajectory and have talked about some newer things that could help get you there. I guess as you see it today and open to whoever wants to take the question, what are some of the bigger initiatives that you would want to see come through? Whether things that you've already talked about? Or Josef, you mentioned that there were some opportunities in kind of new areas that were from your prior life that could be part of that. I guess, just maybe break down how you see the path to there evolving from an organic perspective? And I know inorganic is a part of it, too. I wouldn't want to miss that.

Yes. You just mentioned the third component. But clearly, Josh, look, number one, on the organic side is, I think we're going to do a much better job going forward, communicating the true power of Helios. When you dig in into those brands and into those products, those companies operate right now as stand-alone independent companies. But we haven't really leveraged the strength of the brands with some of the key customers where it's really required. Customers who install a full close subsystem or entire system, we have those brands to support that. So pulling in all 3 segments into one system where it's appropriate will be a key focus, and we are in live dialogues with those customers right now. That could be a little bit longer cycle. The second one is clearly diversifying our brands into other industrial markets where, for an example, if you see where the commercial food service industry is going with connected kitchen and everything, switching over to digital and providing data to the users, owners operators to have effective data when to change the [indiscernible], to change the oil and a fryer or what have you -- that has to be controlled somewhere. And innovation control does exactly that. So we may be able to defeature some of our current products and selling to other end markets in the industrial sector, still protecting our margin. So to me, that's a pretty significant piece, and it goes way beyond the food service sector. It could go into the HVAC. It could go into the specialty vehicle market, into medical industry. Super excited about the diversification. And as I said earlier, we are -- we have all the ingredients now and we're doing some testing and talking to our customers. And if the cake gets out of the oven, we're going to communicate this. And thirdly, as you mentioned, is our M&A approach. We have a very opportunistic appetite in that area. We know we have some product gaps. We know that we will eventually switch over to add some flywheel bolt-on small acquisition to gain us additional capabilities, some capacity in geographical territories where it's required, where we don't have it. Some areas will give us some additional supply chain and manufacturing capabilities. But we're also looking for the next big thing, right, what's the next big transformational area, it will separate Helios from the competition. So that's kind of the 3 key things that feel right to me going forward. Tricia, do you want to add something to that?

Yes, the only thing that I would add is there is already a very strong organic growth component built into Vision 2025. So we're still expecting that organic growth to happen in the current end markets and with the current products and new products. But I think what Josef is referring to is a great addition of the value stream to be able to make that happen even faster by moving into some of the end markets that prior to now, we maybe hadn't really considered, but with his background have become something that we definitely want to explore further.