Helios Technologies, Inc. (HLIO) Earnings Call Transcript

Greetings and welcome to Helios Technologies' third quarter fiscal year 2026 financial results call. All lines are in a listen only. Later we will conduct a question and answer session. If you should require operator assistance at any time, press star zero. Today's call is being recorded. I would now like to turn the call over to Tanya Allman, Vice President of Investor Relations,.

in corporate communications. Please go ahead, ma'am. Thank you, operator, and good day, everyone. Welcome to the Helios Technologies third quarter 2026 financial results conference call. We issued a press release announcing our results yesterday afternoon. We are happy to welcome you to the Helios Technologies do not have that release, it is available on our website at hlio.com. You will also find slides there that accompany today's discussion as well as our prepared remarks. Joining me today are Sean Bagan, President and Chief Executive Officer, and Jeremy Evans, Executive Vice President, Chief Financial Officer. Sean will begin with highlights from the third quarter. Jeremy will then review our financial results in more detail and provide our outlook for the rest of the year. Sean will return with some closing comments, and then we will open the call for questions. Before we get started, please turn to slide two, where you will find our Safe Harbor Statement. As you may be aware, we will make some forward-looking statements during this presentation and the 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 those presented today. These risks and uncertainties and other factors can be found in our annual report on Form 10-K for 2025. along with our upcoming 10Q 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 presented 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 3 through 5 as I now turn the call over to Sean.

Thanks, Tanya, and welcome, everyone. We're pleased you could join us today. During last quarter's conference call, we described Helios' transition from business stabilization to profitable broad-based growth. This quarter adds another important element to that story, consistency. Our third quarter results exceeded our outlook as we delivered higher sales, earnings, and cashflow compared to the prior year. In sports, only a handful of professional teams have ever achieved a true 5-peat. The New York Yankees won five consecutive World Series titles, the Montreal Canadiens captured five straight Stanley Cups, and Real Madrid claimed five consecutive European Cup championships. Those accomplishments were never about the streak itself, they were the result of strong disciplined execution, and organizations built to sustain success over time. That same aspiration is at the heart of the core strategy. While we are still in the relatively early stages of our journey, our five consecutive quarters of double-digit pro forma sales and adjusted earnings per share growth provide encouraging evidence that our Helios business system is building the right foundation. remain focused not on extending a streak, but on creating a stronger company through disciplined execution, strategic investment, and operational excellence that can deliver sustainable, profitable growth and long-term shareholder value creation for years to come. We achieved record third quarter sales of 230 million with both of our segments contributing to our outperformance. That breadth matters. It reflects contributions from established customer relationships, recent business wins, and the investments we've made in our commercial capabilities. also reflects our sustained commitment to delivering product innovations to meet customer demands. In the most recent quarter, Sun Korea developed new common cavity valves. Innovation expanded on-road with Apple CarPlay and Android Auto and partnered with C-MAP to enhance marine capabilities to the platform, while Balboa contributed to a luxury spa from Hanscraft designed by studio F.A. Porsche. These are examples of innovations today. that will fuel our growth in the future. Within hydraulics, we saw growth from business wins and share gains. We also continue to benefit from demand across construction, industrial, and smaller agricultural equipment, although large ag remains challenged. Electronics strengthened recreation, led to record third quarter sales for Enovation Controls, and we saw year-over-year growth in the marine end market for the first time in seven quarters. The health and wellness end market was also up double digits in the third quarter. We did see some customers place orders ahead of price increases announced in the quarter that resulted in some pull-forward. sales being accelerated into the third quarter in both segments. Considering the solid quarter, our September acquisition, and continued order strength, we are raising our full-year 2026 sales outlook and expect fiscal year 2026 sales to be the highest in Helios' history. However, the operating environment remains challenging with ongoing cost pressures, tightening supply chains, uncertainty around interest rates, and a volatile geopolitical and trade backdrop. We cannot control those factors, but we can control how we execute, and that's where our focus remains. We continue to take actions to offset these dynamic macro factors. The timing of these actions combined with when we will fully capture synergies on the Radio Sound acquisition have been factored into our updated outlook ranges. When we introduced the core strategy, we laid out a clear roadmap for Helios' next phase of profitable growth, one built on stronger customer relationships, differentiated innovation, operational growth, excellence and disciplined capital allocation. The plan draws on the deep legacies of the Helios portfolio companies exemplified by Schultes Precision's recent 80th corporate anniversary. We set long-term financial targets anchored on organic compounded annual growth of 5% plus with an average of 100 plus basis points of margin expansion each year. We also identified new adjacent markets we are investing in and our planned approach to acquisitions. Our third quarter and year-to-date results show we are delivering on our commitments. Beyond the numbers, we have made tangible progress in three areas tied to the core strategy. Operational excellence through footprint optimization, disciplined capital allocation through targeted acquisitions, and investments in new markets. First, we continued advancing our global manufacturing initiatives and completed FASTER's North American consolidation in Toledo, Ohio. With the physical consolidation completed, the focus is on improving productivity, delivery performance, and execution as the operation supports growing customer demand. And across electronics, we are progressing production transfers within our global footprint, including moving manufacturing lines from Tulsa to our Tijuana facility to better align capabilities, costs, and regional customer requirements. These actions, along with others, are intended to strengthen the business beyond any individual quarter. They support a more productive operating model, greater regional flexibility, and new opportunities to be closer to the customers we serve in each region. Second, we completed our first acquisition since 2023 with a small targeted transaction. acquired select radio sound assets and established a new multi-year relationship with Indian Motorcycle. The transaction adds audio and communications capabilities that complement our existing electronic solutions and can support additional customers in adjacent markets. While financially modest, it is strategically aligned with our approach to acquire technology and capabilities that can be built as a platform and leverage across the portfolio. We see a strong return on invested capital opportunity as we integrate the business and capture cost synergies. This acquisition reflects the discipline return focused approach we will take as we evaluate additional targets. Third, following quarter end, FASTER secured its first data center thermal management order, achieving an important milestone we expected to reach this fiscal year. Over the last 18 months, the team has moved through market research, R&D, product development, prototyping, testing, and qualification to get to an initial customer order. It is a great example of how we applied our operational excellence developed through FASTER's 75-year corporate history to diversify into a large, unpenetrated market. The significance today is not the order's near-term financial contribution, but rather the commercial achievement and potential implications for future growth. Together, these three areas are building a stronger foundation for long-term value creation. With that, I'll turn the call over to Jeremy to review the third quarter financial results and our updated 2026 outlook.

Thank you, Sean, and good day, everyone. Please refer to slides six through eight as I review our third quarter results. Sales were 230 million, a third quarter record, and an increase of 4% from the prior year period. Adjusting for the CFP divestiture, radio sound acquisition, and foreign exchange impacts, sales increased 13%. As a reminder, last year's third quarter sales was an inflection point for us with year over year growth of 13% as well. So this is the second consecutive year with double digit growth in the third quarter. Our results exceeded the high end of the outlook we provided in August by 8 million, with both reporting segments contributing to the outperformance. Radio Sound contributed approximately 400,000, while Foreign Currency Translation added close to 1 million of sales in the quarter, neither of which were included in our prior outlook. Additionally, we estimate customers pulled forward approximately 4 to 5 million of orders from the fourth quarter into the third quarter as a result of announced price increases. Gross profit increased 4% to 76 million, and gross margin expanded 10 basis points to 33.2%. Higher volume in the benefits of our operating and portfolio actions helped offset continued inflation in material and component costs, freight, and utilities. Operating income was 28 million, compared with 1 million in the prior year quarter, which included a goodwill impairment charge of 26 million. Adjusted operating income grew 4% to 38 million, and adjusted operating margin was 16.6%, consistent with the prior year. Adjusted EBITDA increased 3% to 47 million, with adjusted EBITDA margin of 20.3% compared with 20.5% last year. Although adjusted EBITDA was up 1.4 million, adjusted EBITDA margin was pressured due to our increased investments in R&D, fast moving inflationary costs, higher incentive compensation expense driven by our year to date performance, and a continued high run rate for employee benefit costs. We continue to manage spending carefully while protecting the engineering, commercial, and operational functions that support future growth. Diluted earnings per share increased 71% to 53 cents. Prior year third quarter was impacted by a goodwill impairment, which was partially offset by the gain realized on the CFP divestiture. Adjusted diluted earnings per share increased 11% to $0.80, $0.03 above the high end of our outlook. Turning to the segments, please refer to slide nine. Hydraulic sales were 143 million, up 1% as reported and 15% on a pro forma basis. Sales increased in the Americas and EMEA, while the reported APAC comparison was affected by the divestiture. Growth reflected continued commercial execution and share gains, as well as distributor partners restocking ahead of our announced price increases. Order activity softened following those increases, but appears to have normalized. It's important to distinguish replenishment of channel inventory from the underlying rate of end market consumption. We are monitoring distributor inventory and regional order patterns closely. Hydraulics' gross profit was 46 million, essentially unchanged from last year, while gross margin declined 20 basis points to 32.3%. Gross margins were impacted by higher freight and utility costs, as well as additional expenses associated with the Faster North America consolidation. Segment operating income increased 2% to 25 million, and operating margin improved 10 basis points to 17.3%, as leverage on operating expenses as a result of higher sales more than offset the gross margin decline. Electronics sales increased 10% to 87 million and reflected a record third quarter in Enovation Controls. Growth in the Americas and APAC more than offset lower sales in EMEA. Performance reflects ongoing customer program activity and new business wins, even as conditions across certain core markets remain challenged. We continue to target opportunities where our controls, displays, and integrated technologies can deliver greater value to customers. Electronics gross profit increased 11% to 30 million, and gross margin expanded 40 basis points to 34.7%. Gross margin benefited from leverage on overhead expenses as a result of higher sales, which more than offset higher input costs. Segment operating income was 12 million with an operating margin of 14.3%. The prior year third quarter operating margin was impacted by a goodwill impairment. Excluding the goodwill impairment operating income income was flat with the prior year reflecting incremental investments in research and development electronic component availability and pricing remain areas of attention particularly for memory chips and circuit boards we are working with suppliers and selectively positioning inventory to support customer requirements. We also continue executing production transfers and other initiatives intended to improve our cost structure and manufacturing flexibility, while routinely evaluating pricing-related actions to help offset inflationary pressures. The radio sound acquisition integration is underway. Our near-term priorities are supporting the Indian motorcycle relationship, integrating the operations, and identifying additional applications for the acquired capabilities across our customer base. We expect it will take about one quarter to capture the cost synergies. Acquisition represents a high-reward opportunity that expands our audio solutions offering and establishes a relationship with the new OEM. Turning to slide 10, we generated cash from operations of 40 million, up 59% from the prior year period, and a record for a third quarter. Free cash flow in the quarter was 32 million and capital expenditures were 8 million as we continued investing in the business. Those investments support manufacturing capabilities, productivity, and future growth. Our cash conversion cycle improved to 116 days compared with 128 days in the prior year period. This reflects our continued focus on driving timely customer collections, extending terms with our partners, and managing inventory held within Helios. We maintained our day's inventory on hand, although our inventory balance has increased year-over-year and sequentially, as we've increased stock to support higher sales, while selectively taking an inventory position on Electron. tronic and thermal management components to support customer requirements and manage supply availability. On slide 11, you can see our balance sheet continues to provide flexibility. We ended the quarter with total debt of 328 million and cash of 73 million, resulting in net debt of 255 million. Net debt declined by 109 million from the prior year period, and net debt to trailing 12-month adjusted EBITDA was 1.4 times, compared with 2.4 times a year ago. Our capital allocation priorities remain in this order. First, organic investment, followed by returns to shareholders, strategic acquisitions, and then debt repayment. Our capital deployment in the quarter reflected this as we increased CapEx and R&D investments over the year-ago period, repurchased our highest amount of common stock a quarter, extended our cash dividends to 119 consecutive quarters, and deployed 1.7 million on the acquisition of certain assets of RadioSound. Slide 12 summarizes the financial priorities we established at the beginning of the year. We made consistent progress across all four priorities this year. executing our growth plan, improving gross margins, maintaining earnings momentum, and optimizing capital allocation. We are focused on ending the year strong, delivering a new sales record, and converting the sales growth into earnings and cash. Turning to slides 13 and 14, we now expect 2026 sales of 895 to 902 million, or 13% pro forma growth at the midpoint over the prior year period. The low end of the range eclipses our previous record of 885 million, so we are on pace for the highest annual sales in Helios' history. The top end of the range has increased as a result of anticipated sales from the completed acquisition. For the full year, we expect hydraulic sales of 564 to 568 million, 15% pro forma growth at the midpoint, and electronic sales of 331 to 334 million, 12% growth at the midpoint. We expect consolidated adjusted EBITDA margin of 20.2 to 20.4% and adjusted diluted earnings per share of $3.08 to $3.15. We are tightening both the margin and earnings ranges from our prior outlook to reflect the current cost environment along with the impact of the radio sound acquisition. The new adjusted diluted earnings per share midpoint reflects a 22% annual growth rate, approaching twice that of our expected midpoint top line growth of 13%. For the fourth quarter, we expect consolidated sales of 205 to 212 million. This includes hydraulic sales of 135 to 139 million and electronic sales of 70 to 73 million, reflecting current order visibility, component availability, and the benefit from the acquisition. We expect fourth quarter adjusted EBITDA margin of 18.5 to 19.5% and adjusted diluted earnings per share of 60 cents to 67 cents. As a reminder, the fourth quarter of 2025 included an interest expense benefit of 5.4 million related to an interest rate swap that was originally due for maturity that quarter and was terminated as a result of our debt refinancing in 2024, which favorably impacted earnings per share by approximately 12 cents. This impacts the year-over-year comparison in the fourth quarter. There are several considerations behind this outlook. First, we expect the fourth quarter growth rate to moderate from the third quarter pace as we are lapping tougher compares combined with the fact there was a full extra week in the shipping calendar in the fourth quarter last year. Last year in the fourth quarter, we reported 17% sales growth and 29% pro forma growth without CFP. This is part of those tougher compares mentioned. Second, we remain in an inflationary cost environment, and although we have taken targeted pricing actions, we believe the benefit will start to show more in 2027. Third, we will incur integration costs in the fourth quarter related to the acquisition, which were not originally anticipated in our prior outlook, while expected synergies will start to be reflected in early 2027. Our outlook therefore balances the strength of our year-to-date performance and commercial pipeline with a measured view of the orders for the balance of the year, while layering in timing of initiatives to offset cost inflation, as well as the recent acquisition. With that, I will turn the call back to Sean for his closing comments. Thanks, Jeremy. Our 2026 key focus area is shown on slide 15.

remain intact and have guided our direction as we prioritize serving our valued customers while launching and executing against the core strategy. As we close out our prepared remarks, I'd like to return to the sports analogy I referenced earlier. The New York Yankees, Montreal Canadiens, and Real Madrid each achieved the rare feat of winning five consecutive championships, yet their legacies were never defined by whether they won a six. They were defined by the strength of the organizations they built and their ability to compete successfully year after year. While our recent growth reflects a strong start, we remain focused on building capabilities, culture, and operating discipline that can create value through market cycles. We recognize that the pace of growth may vary from quarter to quarter, so our focus remains on disciplined execution, strategic investment, and operational excellence. With record year-to-date sales, strong order trends, and a healthy pipeline of new product releases, we are confident in our ability to close out 2026 and enter 2027 well-positioned for continued profitable growth. With the initial stages of 2027 planning completed, we are cognizant that comparisons are becoming tougher with component availability, inflationary costs, and the geopolitical landscape remaining dynamic. What gives us confidence and excitement that we can continue the momentum ignited this year is the work taking place inside Helios, the customer relationships we are strengthening, the business we are winning, the products we are developing, and the operating capabilities we are building. We are not providing specific 2027 guidance today, but the priorities remain the same. As we committed with the core strategy, we are targeting a 5% plus organic growth CAGR through 2030. Our Helios momentum model has driven our performance this year to exceed that targeted pace, demonstrating the strength of our portfolio. However, we are focused on delivering sustainable compounding growth over the long term. and would not assume that this year's double-digit proforma growth rate is indicative of our expected annual growth profile going forward. We look forward to providing additional perspective on 2027 when we report our fourth quarter results. I want to thank our colleagues across Helios for their commitment to our customers and to one another. Their work is what turns our strategy into results. To our customers, distributors, suppliers, and shareholders, thank you for your continued partnership. We remain focused on finishing the year with momentum and building a stronger Helios for the long term. With that, operator, let's open the lines for Q&A, please.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. Participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. Thank you. Our first question will be from Chris Moore with CJS Securities. Please go ahead with your question.

Hey, good morning, guys. Thanks for taking a couple.

Good morning, Chris.

Obviously, you know, still lots of uncertainty, many end markets. Marine, as you said, showed some improvement for the first time in seven quarters. Just trying to find out, are there areas that you had been seeing improvement in 26, either geographically or specific vertical end markets? that started to soften in Q3 or you expect might be by the end of 26th?.

Yes, so Chris, I would characterize that generally no. Our markets that we're serving, we didn't see necessarily a slowdown anywhere. In fact, I would say the second half for us has gotten a little better than what we would have expected entering the third quarter. And I think that's indicative of us bringing up our sales guidance. Some of the ones we're watching closely certainly are over in Asia and China. particularly on the Sun Hydraulics side, monitoring distributor inventory levels and market demand. Here in North America, the ag market, as we know, has been compressed for many years in a row. However, for us, where we're benefiting is on some of the smaller compact equipment where we're kind of agnostic to what part of the market is going up or down. We just want volume. And so certainly the large combines and larger ag equipment has been challenged. But when there's a tractor sold, just a unit sold, we're still getting this captured in the same way. revenue. So those would be a couple that I would point to, but generally the marine one was a bit of a surprise just to see that go positive for the first time in seven quarters, because certainly some of the discretionary markets and with interest rates starting a little bit of an escalation puts a Little question mark on some of them, but for us, our large customers, it continued to grow there and just not at the pace that we did the year over year from the first half.

Got it. Very helpful. So congrats on the data center order. Trying to maybe just better understand a little bit on the go-to-market strategy. As you learn the market, I mean, do you expect potentially significant orders from a few players? It's going to be or will be lots of smaller customers. How do you see that kind of playing out in 27?.

Yes, well, first, we're really pleased and as we have been indicating all year, we expected to get our first order and obviously that's materialized. It's insignificant to the volume this year, but is back to our identification of a market that we weren't participating in that had emerged. came out of our strategic planning work that we had implemented. And we had been methodically developing the product and building out our operations to be ready. I would say we're going to look to stack a lot of small wins together. Today, we have over 30 customers, potential customers with products that are out there that are evaluating us, testing it. We are also under NDA with a couple of the hyperscalers. And that's more so just to get specced in on the standard product. But we're really focused on the differentiation that we can bring to that market, bringing our expertise from the ag and construction markets where we know leakage rates are always important, but even more paramount in a data center environment, given where we play with the quick release couplings, that if water is leaking on chips and electronic components, that's not a good thing. And we believe our products are better, given all the R&D and testing we've done on both competitive products and ours, and then also further... ENHANCEMENTS TO THE EXISTING PRODUCTS OUT THERE. FOR US IT'S VERY EXCITING FROM THE PERSPECTIVE OF A VERY LARGE UNPENETRATED MARKET THAT IS PURELY GREEN SHOOT FOR US. CERTAINLY WITH THE MIDTERM ELECTION RESULTS AND SOME OF THE DATA CENTERS FOCUS ON BUILD OUT HERE IN THE UNITED STATES. States and North America, at least, there's less... less opportunity for us to penetrate as quickly likely, but it's all incremental. And we're just excited to have another market to pursue.

Very helpful. I'll pass it along. Thank you very much.

Thanks, Chris. And our next question we'll hear from Tomo Sano with J.P. Morgan.

Hi, good morning everyone. Morning, Tomo. Thank you for taking my questions. Maybe just on hydraulics, is actually growing 15% pro forma, which is obviously well ahead of the underlying market. Can you help us separate how much of that growth is coming from share gains and the new business wins versus market recovery and restocking? And also on color and how that is actually sustainable into 2027?.

Thank you. Yeah, thanks Tomo for the question. I would characterize it as majority of share gains. When you look at the overall markets, We rely on looking at our two large businesses, Sun Hydraulics and Faster. Sun Hydraulics is we were part of the NFPA, National Fluid Power Association, and we're clearly seeing low single digit market impact improvements. And so that's the first time in multiple years that we've experienced that. So there's a little bit of market help, but we are by far outpacing that. In fact, all four of our businesses, including over to the electronic side of the large businesses, we expect to grow double digits over the prior year this year, which is implied in our guidance. So Clearly, the Sun Hydraulics aggressive growth that we've achieved beyond the market is tied to our go-to-market and our re-engagement with our distributors and working through some of those operational challenges that had hurt our delivery times and such. And we've gained a lot of win-backs, a lot of confidence back, and really just how we're engaging with our customers and taking a much more effective approach. our data analytics approach and targeted market focus. On the Faster side, the other large business within our hydraulics segment, as we know, the ag market is historically always been the largest for Faster, despite that continued decline for multiple years. particularly here in North America, we've seen faster grow. Faster, again, will grow double digits this year. And again, remind you before we've, recognize the data center opportunity. And really what we point to there is our recent products that we've launched have gained great market traction. The multi-faster is a product that our competitors try to copy but can't make it as good as ours and we bring and we've been targeting other markets beyond just ag with that. So we've seen our construction business continue to grow. And we've also seen our distribution business, which historically, Fastenal is OEM direct. And so if you think about the go-to-market approach and leveraging our overall portfolio with our distribution expertise on the sun business, for instance, bringing that to Faster. So clearly the faster growth is market share gains because the end markets are not helping. Jeremy, any other questions?.

Yes, I would point to the ag market where you know that still is not back to what it's been. It's still been down several years. For us, that's been an area of growth. The mobile end market, which is where we have construction, material handling equipment, specialty vehicles, that's been strong and industrial as well. And as Sean mentioned, we provide data into the National Fluid Power Association. We get information back so we can compare our sales growth to what we see there on the hydraulic side. And we definitely believe we're outgrowing the market.

Thank you. And follow up on M&A. So with the leverage now down to one point four times, should we think of Radio Sound as the template for M&A going forward? Like meaning like smaller technology tuck-ins or we should consider something something larger as the balance sheet capacity continues to improve.

Yes, Tom, this is Jeremy. I would characterize the radio sound as a strategic acquisition that added capabilities to our electronics portfolio, specifically around audio solutions. And that was a gap when we think about owning the cab experience. whether that's a cab of a recreational vehicle or a boat or even into some other mobile applications. And it was obviously very small. very much a tuck in. We expect that to add, you know, in the near term, one to two million on the top line with margins comparable to those within the electronics segment. Once we get through the integration activities that we're taking place now, I think it represents the M&A approach going forward from a, you know, it's a strategic fit. It adds capability. There's high potential for good returns. And that's what we're looking for. But as you mentioned, we've been able to pay down debt. Our debt leverage ratio is below our operating range that we communicated between 1.5 and 2.5. So we are looking and we'll look for bigger opportunities that wouldn't put a revenue threshold on what we're evaluating. evaluating, but it's more of where do we see complementary capabilities and the ability to generate a good return. Great. Thank you very much.

And next we'll hear from Mig Dobre with Baird. Please go ahead.

Good morning, thank you for the question. Congratulations on getting the first data center order. I want to talk a little more about this topic. And I guess a handful of questions to be answered. I'm curious. how are you selling this product I mean is this product that goes into a new build or is this something that you can sell into existing data centers as well. And related to this, What is the life cycle of this product look like once it's installed? something that has a specific mandated useful life. you sort of have to change these couplings every so often, in order to make sure that you're living within certain safety parameters or is this the type of product that once it's installed it's kind of there for the very long haul, the life of the building or the equipment.