Greetings, and welcome to the Helios Technologies First Quarter 2020 Financial Results. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ms. Karen Howard, Investor Relations for Helios Technologies. Thank you. You may begin.

Thank you, operator, and good morning everyone. Welcome to the Helios Technologies First Quarter 2020 Financial Results Conference Call. On the line with me is Tricia Fulton, our Interim President and Chief Executive Officer. Tricia was appointed to this interim role as announced on April 9, upon separation from the company of our former President and CEO. Tricia also continues to serve as our Chief Financial Officer. She will review the results that were published in the press release distributed after yesterday's market close. If you do not have that release it's available on our website at www.hlio.com. You'll also find slides there that will accompany our discussions today. If you look through the slide deck on slide 2 you'll find our Safe Harbor statement. As you may be aware, we will make some forward-looking statements, during this presentation and also during the Q&A. 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 are provided in the earnings release as well as in other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at www.sec.gov. I also want to 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 to non-GAAP measures in the tables that accompany today's earnings release, as well as in the slides. Tricia will summarize our financial performance and strategic progress during the first quarter of 2020 as well as her perspective on our outlook. After that, she will go through the details of our financial results for the first quarter before we open up the line for questions and answers. And with that, it's now my pleasure to introduce Tricia.

Thank you, Karen. Good morning everyone. I will start on slide 3. We were pleased with our first quarter results demonstrating strong top line revenue and operating performance. We realized consolidated sales of almost $130 million. Our backlog continued to support our sales and order levels are relatively stable throughout the quarter. Most of the quarter was business as usual for us until the COVID-19 pandemic conditions began to affect our operations in mid-March. The shutdown of our factory in Italy, due to government mandate had about a $5 million unfavorable impact on first quarter sales. Our strong operational execution in Q1 was offset by a noncash goodwill impairment charge for our faster reporting unit. This goodwill adjustment of $39.1 million was driven by the uncertainty of the longer-term impacts of COVID-19 and reduced EPS by $0.99 per share resulting in a GAAP EPS loss for the quarter. However, from an operational performance standpoint we realized a solid adjusted EBITDA margin and non-GAAP cash EPS relative to our sales levels. Please turn to slide 4, and I'll summarize our strategic business highlights for the first quarter of 2020. Despite lower sales, we reported gross margin expansion compared with the prior year evidencing our ability to manage cost, and continue productivity improvements. Recall that, at the beginning of last year we completed the facility consolidation project for our cartridge valve technology or CVT business. As we progressed during 2019, we experienced productivity improvements from that initiative and further continuation was evidenced in our first quarter 2020 results as well. We have completed the infrastructure of the CVT engineering center of excellence and it is mostly operational. The final pieces of equipment should arrive and be installed by late summer. This facility will provide us with the R&D and testing capability needed…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Good morning. Thanks for taking my questions.

Hey Brian.

Hey. Trish can you just rewind just 30 seconds and say -- talk about that scenario where you said we have ample I think you said ample liquidity or ample cash for the next 12 months. What was that scenario?

Yes. Yes. I mean we expect cash flow to be positive for the year. How that plays out throughout the year in the quarters is still I think a little open. But each quarter we still expect to be cash flow positive in all of our scenarios.

Okay. So, you weren't highlighting some scenario like a really worst-case scenario in which you would run out of cash in 12 months that wasn't--

No. No. That's just to show that for the next 12 months that we have ample liquidity. That's also in the Q and was a requirement to be included in the Q.

Yes. Okay. I just wanted to clarify that. And then I know the backlog was -- has been very supportive of the revenue here throughout the year and you said some of it was pushed into the back half of the second quarter. I guess can you kind of update us on what that level of backlog is now relative to where it was beginning of the quarter and the beginning of the year? And how much should that support revenue throughout the back half of 2020?

Yes. So, our overall backlog is still very consistent at the end of April with what we were seeing at the beginning of the year. So, overall, the backlog hasn't changed significantly. We do still have significant past due backlog in the CVT business that we've said before and still believe will carry us through most of Q2 from a shipment perspective. But we have seen a little bit of the backlog shift out of Q2 and into Q3 and Q4 from some of the OEM shutdowns that have happened mostly in April.

Okay. Is there any way you can say like how much backlog there is in that business relative to revenue expectations for or you're not giving any guidance. So, I don't -- sorry I'm just curious is that sustained revenue potentially around these levels, or is it only a fraction of kind of the revenue that you've been running at that run rate?

Yes. The run rates on the backlog have remained pretty consistent and we've been happy with that. It's just a little bit of a shift in when those need to be delivered. But the backlog has held up pretty well through this. It's really just the movement between the months. We've had some cancellations as we noted in the prepared remarks but they've been pretty minimal at this point. As you know we get changing information every day from customers from OEMs and from the distribution network. So, we're having to adapt almost daily to changes that we're seeing coming through. But overall, it's holding up pretty well from a backlog perspective.

Okay. And then just one last one on the Electronics side is there any change in your in the programs and platform opportunities that you have going into 2021 any conversations around those being delayed or pushed out or is 2021 still expected to be a good growth year for Electronics?

Yes. 2021 programs are still holding up. We haven't really seen any changes at all in those programs. We have seen some of the 2020 rollout extend by one month at this point which is pretty much reflective of what the OEMs were shut down. But no changes to 2021 at this point. So, we're happy to hear that.

Okay. Thanks very much.

Thank you.

Thank you. Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Hey, good morning.

Hey Jeff.

So just -- I guess, if you can obviously no guidance but if you could give us a sense of what you're seeing from a sales standpoint in April or in order trends just to kind of give us a sense of I think most companies are seeing April is maybe the worst and I know some of your peers have been talking about orders or sales and the decline magnitude of 30% 35%. I'm just trying to understand what you're seeing because it seems like it's holding up better?

Yes. So, as we haven't done in the past we also are not going to give numbers specifically on orders and backlog related to April at this point since we're not giving guidance. We aren't going to talk a lot about the specifics of sales. But sales and orders did both drop significantly in April, I would say deep into the double-digits in both Hydraulics and Electronics segments with electronics dropping more than what we saw in Hydraulics. Many of the OEM customers were shut down in the Electronics segment. So, orders had to be pushed out to later in the quarter or the year. And in some cases, as I stated before, there were smaller amounts of cancellations. In April hydraulics is still supported by backlog, especially in CVT. Shipments were maybe a little bit lower than we expected, due to employees being out from COVID-related absences and also the implementation of COVID safety procedures that we put in place in April. Faster also does have some backlog past due that was created as part of their shutdown and they'll be able to ship some of that. But April was tough for them as well in that regard, but we're able to push it into the back half of Q2.

Okay. So it's fair to say that, like, the trend in electronics is going to be certainly worse than in 2Q than 1Q, as well as hydraulics. Maybe just on the decrementals, I mean, they were pretty impressive, certainly, in hydraulics. As you see maybe a sharper drop into 2Q how do you think the decrementals hold up?

Yes. Just real quick, going back to your first question. I would say, overall, if you're looking at some of our peer reports, our hydraulics did not drop as much as their overall hydraulics did in April based on some of the information that we've read that came out last week. So I just wanted to point that out before we move on. With regard to decrementals, in our scenario planning, which consists primarily of scenarios that are down, both 15% and 25% on annual sales drops. And those aren't indicative necessarily of what we're seeing, but we wanted to model those out. The decrementals are probably a little bit higher than what some of the peers have come out with. We're looking in the range of 40% to 45% at the adjusted income line. We will pull out all of the costs that we can to protect the decrementals. But, certainly, we also want to make sure that we are prepared to return when the economy rebounds.

Okay. That’s helpful. Thanks

Thank you. Our next question comes from the line of Mig Dobre with Baird. Please proceed with your question.

Thank you. Good morning, Tricia.

Hi, Mig.

Hi. So you outlined considerable amount of measures on slide five. And I'm wondering, as you look at everything that you have listed there, what is the net impact on a company from a dollar standpoint?

Yes. So, it's a little bit difficult to tell for the full year what the impact will be, because there are so many options on there and we aren't exactly sure which ones of those will need to trigger. But certainly in Q2, we're looking at somewhere around a $4 million impact from the steps that we have taken in Q2. Those can continue throughout the rest of the year, but there are additional steps listed there that will further drop our overall cost structure, at least on a temporary basis. And most of these are temporary. There are very few that are a permanent charge for us, but we are able on a temporary basis to control the cost pretty well.

Okay. If we're looking at a continued sort of challenging environment beyond Q2 and looking at this $4 million savings figure is the right way to think about it, is that we can run rate these savings into the second half, or are we likely to see additional action on top of the $4 million as you adjust down the line?

Yes. So the $4 million doesn't necessarily run rate into Q3 and Q4, because some of those were one-time pops that aren't necessarily repeating costs. So the overall cost for the year is something less than the run rate of that $4 million. If we implement only the items that have been put in place so far, it's probably closer to maybe something like $10 million to $10.5 million. But if we implement additional steps, we certainly have additional savings that we can take, probably the largest pop out of that list comes from furlough programs that we could implement, where we could have rolling furloughs for employees if we see a decline in demand that would allow employees to collect unemployment or get supplemental income from the government, in addition to the wages we would pay them for reduced hours.

I see. Okay. And then, relative to your comment versus peers that have reported and how your hydraulics business has trended, when you kind of look at the historical relationship of your business versus your larger peers, what is it that you would call out, maybe, in April that felt a little bit different that maybe helped your business perform a little bit better than peers?

Yes. I mean, through a lot of April, I mean, we still were getting pretty strong demand on the distributor side, even though the OEMs were shutdown and kind of in flux. So I think that we got maybe a little bit of a pop there. But also, I would say, our ability to continue to ship out of our past due backlog has carried us. Certainly, don't always want past due backlogs. That means you're not delivering something to a customer at the time that they want it. But we had such high demand throughout 2019 that we went into the year with past due. And I think that we now have the ability to wind that down through Q2 and get that product out to customers. But it certainly supported our sales in Q1.

Yes. I appreciate that. And I think Brian was trying to understand the dynamic earlier on the call, given that it's hard for us to appreciate how backlog really plays into your revenue and financials for the rest of the year. But, I guess, what I'm wondering here and this is my final question, when we're talking to OEM customers and even some of your peers, there is sort of a broad recognition of the fact that the challenge stem is not just from the fact that certain operations have been shut down, because of COVID, that clearly has been the case. The broader challenge is that, we're in a recession and production schedules have to be adjusted and demand has to be adjusted to reflect that economic reality. So as you think about how you're managing your business and you're sort of managing the cost structure, I'm wondering if you're sort of internalizing that reality as well, or if you're looking at this as being more sort of shutdown-driven with a quicker path to recovery in the back half of the year. And if that's the case, why are you may be thinking different than some of the other folks out there? Thank you.

Yes. Clearly, we have a lot of information that's flowing at us at a pretty rapid pace. And it's difficult sometimes to tell exactly which scenario we should be considering at that point. We try to consider all of the scenarios to play it out for a V-shaped recovery, a U-shaped recovery and L-shaped recovery and understand what our triggers were from a cost perspective and when we would need to pull those. I would say all three of the businesses are really running at different cases right now and have to take different steps to mitigate any changes in the order books that we're seeing. I also think that there's probably some order book changes that have not been reflected in what we're seeing in our backlog yet and that may just be in the form of small delays. It may be that they're trying to figure out their end markets before they adjust their build schedules. So I think we have a couple more weeks probably ahead of us before we can see more clearly what's coming at us, especially from the OEMs that just came back to work this week in Europe primarily, but we also have had some of our recreational end market OEMs that have been off for quite a while as well. So we're still trying to get through all of those discussions and understand where we are. But honestly there's some good news out there that we're hearing that's counteracting some of what the macroeconomic negative news has been. We're getting anecdotal information back from some of our OEMs that they brought build schedules down a couple of weeks ago. And then this week they're bringing them back up. So it takes some time for us to figure out what each of those customer bases are doing and what they are projecting for the rest of the year as well. That's why we are unable to give guidance at this point.

Probably there. Thank you. Tricia, good luck.

Thank you.

Thank you. Our next question comes from the line of Jim Sheehan with SunTrust. Please proceed with your question.

Hi, Jim.

Good morning. Thank you for taking my questions. What kind of working capital release might you realize this year and in which quarter might that occur in your scenarios?

So from a working capital perspective, when we looked at our scenario planning and cash flow specifically, we were I think relatively conservative and expect that we will see working capital increases throughout Q2 and possibly into Q3 with some better results than in Q4 as we're able to wear through some of that. So overall, I think we were conservative in the way we looked at working capital overall. But even with that we still have the cash flow necessary for the business.

Thank you. And could you describe your rationale for taking the goodwill impairment in the quarter for faster? Was that really necessary? And does that -- are you effectively saying that the business is impaired longer term?

So basically, the goodwill impairment was driven primarily from -- let me step back one step. We do our goodwill impairment analysis in Q3 of each year. So we did it in Q3 of 2019 and we had provided a forecast on the -- at least the part of the model that looks at DCF to the auditors. And when we went back and updated that or started speaking with them about how that forecast looked relative to COVID, we did need to make some changes specifically to the 2020 and potentially because we did multiple scenarios for this to 2021. Yes, it was necessary to take the impairment this quarter, because it did show that under the scenario planning that we're doing relative to COVID that there was an impairment of that goodwill based on primarily the near term because the long-term goals as we stated for Vision 2025 haven't changed -- hasn't changed by business and it hasn't changed overall. But certainly, the COVID effects on a short-term basis did impact that analysis.

Very helpful. And on your debt covenants, could you give some more color on that? What earnings level or EBITDA level would trip a covenant? And what levers can you pull to stay cash positive, if the downturn is actually longer than 12 months?

Yes. So we have two covenants interest coverage which honestly we're not even close to and adjusted -- our net debt to adjusted EBITDA to not exceed 3.5x. So in our scenario planning, we have verified that we don't trip those covenants in -- even in our deeper downside scenario. From a cash preservation perspective, we've cut back on noncritical CapEx at this point. And I think some of the bigger triggers of what I was mentioning to Mig in the furlough programs, if we start to see that we have a decline in demand that we are able to preserve cash through a program like that, but also keep our employees relatively whole from their cash perspective as well because that's equally as important to us to make sure that they're there as well. We're somewhere probably around an $80 million EBITDA trigger on the net debt-to-EBITDA ratio.

Very helpful. Thank you so much.

Thank you. Our next question comes from the line of Jon Braatz with Kansas City Capital. Pleas proceed with your question.

Good morning, Tricia. Tricia, on an earlier question you talked about the 2021, 2020 prospects for the Electronics segment and things still look pretty good. Yet you mentioned there were some permanent layoffs at Electronics. And I don't think there are permanent layoffs at the Hydraulics segment. What's -- why the permanent layoffs at Electronics?

So as I mentioned, when we were talking about April, April was a tough month for the Electronics segment. And in looking at our different scenario planning options, there were things like the furloughs. There were things like permanent layoffs. There were salary cuts. So the Enovation management team I think did a very good job in assessing what their best options were going forward and they determined that a permanent layoff as well as temporary salary reductions that are implemented for May and June were the best way for them to go for the business going forward. So they went ahead and moved forward with that. We do still have the option of furloughs, if we see business continue to decline in Electronics. But at this point, we don't believe that's probably going to be necessary with the current order book that we have.

Okay. How much of their business -- there is some oil and gas exposure, but how much of their business is exposed to that area?

Yes. We actually saw oil and gas affect their business last year as well and it probably will continue to have an impact given what's going on in the oil and gas space right now. In total, it's 10% or 15% -- 15% of their overall business.

Okay. Thank you, Tricia.

Thank you.

Thank you. Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Good morning. This is Adam Farley on for Nathan.

Hey, Adam.

A quick housekeeping question. Could you quantify the benefit, the one-time benefit in the electronics segment?

Yeah. The one-time benefit I assume you're referring to the gross margin comments that we made, it's about $860,000 additional revenue in Q1. So even with that our gross margins were still at 45.5% versus 45.7%. So we were -- even without that we were able to generate very strong margins. But it was on a last time buy related to the customer that we released the contractual obligations with in Q1 last year.

Okay. That's helpful. And then turning to the supply chain, I know you mentioned you haven't seen very much disruption but are you having any difficulty sourcing components? Are you building any inventory? Just any color there would be helpful.

Yeah. We have built a little bit of inventory from a component perspective in electronics. At the end of Q1 and into Q2, we started buying some electronics components that we thought might go scarce a little bit. So we have added inventory in that business as a result of that that will wean off over a couple of quarters. But we wanted to get ahead of that. So that's really the only space that we've had to specifically buy inventory ahead based on potential scarcity.

Okay. Thanks for taking my questions.

Yeah. Thank you.

Thank you. Our final question this morning comes from the line of Joe Mondillo with Sidoti & Company. Please proceed with your question.

Hi, good morning, Tricia.

Hi, Joe.

Hope you're doing well.

I am.

So my first question related to the consolidation down in your Sarasota facility last year. I'm just wondering when does -- when do we anniversary that? I know that was -- it seemed like a pretty big driver to the margins in the first quarter. So I'm just curious of when does that year-over-year comp get maybe a little tougher because you don't see the year-over-year benefits due to the productivity improvements related to that?

Yeah. I mean, I kind of have to preface that with under normal conditions because certainly we aren't in normal conditions. I expect that we probably would have seen tougher comps even in Q2 if COVID hadn't hit, because we started to see some improvements in Q2 last year. But we saw the majority of them in Q4 and then again in Q1. The good news is that once the business does come back and come out of COVID, which I'm sure we all will that we will still have those productivity improvements in place and be able to take full advantage of them. They also help us in a downturn making sure that we're more effective and productive even when we start to see throughput go down a bit as we work through the issues with COVID.

Okay. And then just a follow-up with a question that Jeff asked earlier regarding the decrementals. You said 40% to 45%. Is that for the year where you're referring to, or was that just the second quarter? And in the last call you talked about 30% to 40% for hydraulics and 20% for electronics. So could you just clarify the expectations for decrementals there?

Yeah, the 40% to 45% decrementals is for the remainder of the year Q2 to Q4. We clearly had better decrementals in Q1. So for the year, it will be something less than that. On the -- the hydraulics side is much closer to the 40% of that with electronics being closer to the 45% of that. And some of that's driven by the fact that we -- as we mentioned on the call in February that we're making some incremental investments in the electronics business relative to engineering and R&D resources. And while in our scenario planning, we have cut those a bit, we've left the majority of those costs in. Some of them have occurred already because we've already hired the resources. But we don't want to put the 2021 rollouts at jeopardy. So, some of the reason that electronics has higher decrementals is that we have left in some of those incremental step costs that we planned for the year.

Okay. And then regarding your APAC geographic region, could you just help us understand what's driving that business so well? How is that holding up so well? I mean, down 1% just given that China was -- that whole overall region seemed to be the biggest hit in terms of COVID in the first quarter. I was surprised to see that it was just down 1%.

Yeah, definitely. So China and Australia are the primary drivers of what's pushing our APAC region. We're still seeing strong mining -- in the mining end markets, we're still seeing strong demand. In China, it's really being driven by us taking new business. Still we've been talking about that for a while, but we have some very strong distributors in the China region that are taking on a lot of new business and that's really what's driving our China growth. And it's for applications like alternative energy windmills and things like that that are being driven by government initiatives in China as well.

Okay. Thanks. That’s all I have for you. Good luck with everything. Thanks a lot.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. Fulton for any final comments.

Thank you for your interest in Helios Technologies and for your participation this morning. Also thank you to all of the hard-working Helios employees who are driving these results. We look forward to updating all of you on our second quarter results in August. Thank you very much. Have a great day and stay healthy.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.