Greetings. Welcome to Helios Technologies Second Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the conference over to your host Tania Almond, Vice President of Investor Relations and Corporate Communications. You may begin.

Thank you, operator, and good morning, everyone. Welcome to the Helios Technologies second quarter 2021 financial results conference call. We issued a press release yesterday afternoon. 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 Chief Financial Officer. They will spend the next several minutes reviewing our second quarter results, discussing our progress with our accelerating growth goals, reviewing our recent NIM acquisition, updating our outlook for the rest of 2021 and then we will open the call to your questions. If 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 also during 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 will be provided in our 10-Q 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 prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP with non-GAAP measures in the tables that accompany today’s slides. And with that, it’s now my pleasure to turn the call over to Josef.

Tania, thank you and good morning, everyone. Please turn to Slide three and I'll summarize our highlights for Q2. Our team delivered another excellent quarter with strong sales and earnings surpassing our expectations at every level. I want to thank the entire Helios' family for of their hard work and tireless dedication to our customers. We have excellent operating momentum as we execute our augmented strategy and are on the right path to achieve our accelerated goal of $1 billion in revenue while delivering top tier adjusted EBITDA margins by the end of 2023 that is two years earlier in our previous plans. We have very strong double digit organic growth driven by serving our customers well and diversifying our market. In fact, we believe we are gaining market share as we provide industry-best lead times. We have been winning over the hearts and minds of our customers, we are focused on remaining flexible to meet their needs in this very volatile macro environment. In addition, we are new products to the market at an accelerated pace to help make them more competitive as well. In total, we had 87% growth in the quarter with 37% organic growth. In addition to driving the top line, we are gaining traction with our manufacturing strategy as well. This help drive solid operating and EBITDA margin expansion. In fact, we posted the best margin results we have had in three years. The implementing targeted pricing strategies to help offset the continuing supply chain headwinds that the industry is facing, including higher freight costs, raw material price increases and shortages of components. We're focused and cash generation with approximately $35 million of cash from operations in the quarter and 137% trailing 12 months free cash flow conversion and through to our growth strategy, we…

Thank you, Josef. And good morning, everyone. On Slide six and seven, I will review our second quarter consolidated results. Let me start by saying that we heard your request for greater transparency on acquired revenue and are pleased to give you what you need to better understand our strong performance. You will find in our press release a table that shows organic revenue by quarter and the contributions of acquisitions. As Josef noted, we outperformed and delivered outstanding growth in the second quarter, supported by our focus on delivery lead times, our expanding sales channels, strong end markets, managing our operations efficiently and our most recent transformative acquisition of Balboa, which exceeded our expectations again. Net sales grew 9% sequentially and 87% over the prior year period, as we executed our growth plans and continue to take market share. Second quarter gross profit of $82.2 million increased $6.8 million or 9% compared with the trailing quarter and $37.5 million or 84% for the prior year period from higher volumes. Gross margin of 36.8% was flat sequentially and year over year was impacted by improved fixed cost leverage on higher volume the difference from Balboa's margin profile as well as supply chain challenges and increased material and freight costs. We're implementing multiple pricing strategies while also carefully managing the business to overcome the higher input costs. Manufacturing is performing well given the juggling act required to get products out the door. Our manufacturing operations are extremely flexible and agile in balancing available materials and staffing to ship products to our customers. Adjusted EBITDA margin grew to 25.7% up 310 basis points from the same period a year ago and up 60 basis points compared with the trailing quarter, reflecting our disciplined cost management efforts, productivity improvements and the contributions of…

Thank you, Tricia. Again we're driving excellent performance and I am extremely proud of our team. We are stepping up to the many challenges we are facing while driving amazing execution of 3G plan. We are uniting efforts across the organization to deliver outsized growth and are confident in our ability to meet our long-term accelerated financial goal. With that, lets open up the line for Q&A please.

[Operator instructions] And our first question is from Mig Dobre with Robert W. Baird and Company. Please proceed with your question.

Good morning, everyone. Thanks for taking the question. I figured maybe I would start with your updated guidance, your topline guidance. So, your initial guidance had about a $10 million range. The range has actually widened to $30 million in your updated guidance. And for me, it's a little bit counterintuitive. We're only dealing with six months left in the year. So I'm kind of curious -- I'm kind of curious as to what's embedded in here in terms of the high end versus the low end? And I'm also curious when I'm thinking of the midpoint the $70 million increase at the midpoint maybe what contributed that if you can bucketed by the various segments or business line?

Hi Mig. Thanks for the question. So in the guidance, we did expand the range quite a bit, which we agree with you as a little counterintuitive at this point, but given what we're seeing in the market, we thought that we needed to give ourselves a little bit of room. Certainly on the high end, it shows the strong demand that we have in all of our end markets and all of our businesses. And we're very pleased with where we are on order intake and the demand levels and where the market seems to be going. But because of the supply chain challenges that we're seeing across the businesses, but probably a little bit more on the electronic side, we felt that we needed to give ourselves a little bit of room in any events that we are able to get the person that we need to turn around the shipment in the third and fourth quarter. And I think it is important to remember that the demand is there. It really just is a supply chain constraint problem that we're dealing with. Our pricing teams are doing an excellent job of getting products in the door, but it is also a lot on the parts of what we need to make in any given day. And we're happy with where we are, but we don't see those clearing up before the end of the year. There's been some report that we need to see some of them still in the '22. I think we have a pretty good handle on it, but there's still logistics issues and a few supply chain issues that are holding us back from being able to say that our top line is going to be at the high end of that range, for sure.

Yeah. That that's helpful. And that makes a lot of sense. Are there any areas of your business where you're seeing more of a constraint, I'm thinking, electronics in particular, I'm wondering and can you also help us out with any of the buckets as to the $70 million of revenue increase? Was that mostly electronics or was that hydraulics as well? That'd be helpful thanks.

It really was across the board, hydraulics and electronics. The split between the two segments for the first half is at the higher end of the range, what we anticipate that will be for the second half as well. Where we're seeing supply chain constraints is across all the businesses, but specifically in electronics, so I think we've had probably more challenges than on the electronic or on the hydraulic side. Some of its components from the things getting tied up in ports we had shipments get lost in transit that were then found, but we aren't able to get those products in time to make the product according to the schedule that the customer wants from a delivery perspective. So while we're seeing all of those things happen on the electronic side, I don't think we're any different than anyone else in that regard. And we're really pushing the supply chain teams to come up with creative ways to get us the products that we need. We're going out to the broker market when we need to. On the hydraulic side, I think the constraint someone that's material costs and steel's going up. So that has some effect. The constraints though, are really that our suppliers are very busy because all markets right now, whether it's ours or in other industries are very strong. So the suppliers are very busy as well.

I see. Okay. And last question from me is on Balboa where, just the revenue traction that this business has had this year has been considerably higher than I think what we be expected or modeled. And I'm pretty curious here in terms of what's driving the growth and how sustainable do you see this? And is there any seasonality here to be aware of back half of the year relative to the first half, thank you?

Good morning, Mig. Look, during our Investor meeting a few weeks ago, we pretty much laid out exactly what the path would look like for each of our businesses, but in particular to avoid certainly the large piece comes from pent up demand, but then you also heard of things if you want to diversify into other markets and with the acquisition of BJN coming to our family here, work collaboratively with innovation to develop the next generation products and really have a good, better, best strategy and to other markets to get browsing, to see slowly but surely some traction. So to summarize your question, clearly backlog and pent up demand combined with some diversification in UN marches and new customers.

And on the seasonality question Josef.

Look, as far as we can see right now, we have everything baked into our guidance for the remainder of the year. We continue to see a very strong pattern, as we honestly get filled educated, with that business, we'll communicate accordingly, but we don't see analogy quite honestly at all right now.

And our next question is from Nathan Jones with Stifel. Please proceed with your question.

Good morning. Its [indiscernible] following on for Nathan. As we noted a couple of times that you're picking up market share, but providing best in class lead times, could you describe how you're able to maintain that advantage and how do look on the [indiscernible]?

Look, great question actually on the hydraulic side, for a year ago, we took an effort here to clearly understand our investments strategy in manufacturing and what were the bottlenecks. If the operation for supply chain or material flow and really heavily invested, not only in improving the processes, but also bringing some additional talent and renewed in some areas that we can separate ourselves from the competition. So the investment part following by fill in [ph] and education and lining up the supply base with our core competencies and really having a strategy that collaborative working through this process got us to a point where we hear folks actually at our suppliers stationed on a weekly basis. We invested in this area. We knew we need to get that into this area and we're holding extremely strong lead times. And B, what else does in a position to clearly understand where our customers are going and what would it require for us to maintain our market share and gain market share? But the notion of the strategy is the investment in manufacturing operations drove that result.

Okay. And then switching over to product cost. I know some contracts on the price especially in electronics, how Helios is able to negotiate any pick up in pricing from share inflation and price increases plans are now sort of second half, thanks.

We do have pricing for the back half in all of the businesses to some degree. And like you said, those end up being a negotiation especially on the fixed price contracts, but we've been with many of our customers for so long that we have been able to go to them and get pricing even on the fixed price contracts related specifically to the material cost increases that we're seeing some of those go through as the price increase in some go through the materials surcharge. Some are temporary, some are permanent but certainly we have been able to have those tough discussions and get the pricing or surcharges through so that we can try to cover some of these increased material costs in the back half of the year and I think that's important to maintaining our strong margins.

And our next question is from John [indiscernible]. Please proceed with your question.

Tricia, in your commentary, you talked a little bit about the new platforms, driving in revenues and the electronics segment. And, we talked about that for the last six months, nine months. How do you see that unfolding over the next nine months? Are we just sort of seen the tip of the iceberg in terms of the new platform contributions?

Yes. At this point we are just seeing the beginning of those rollouts. In the first year of any rollout, we clearly haven't reached the maturity level on that product. We rolled them out slowly to make sure that we're meeting the commitments to our customers. And over time, those become very significant. Especially on the electronics side, we've seen that with some specifically because they have a model year rollouts related to their recreational vehicles. And we have had a couple that have started rolling out this year, but we have more to come in the back half of the year and we're making sure that we have the parts in place to be able to make those products. That's been a key focus of the supply chain team. And I think that we're ready and ready to go on those. And we'll see them roll out. But for the year, you know, the, the total percent of revenue that they're adding is not high, it's low single digit, but certainly as those mature, it will become a bigger contributor to revenue.

How many different platforms do you see over the next couple of quarters?

Over the next couple quarters, we have significant -- what we would consider significant roll-outs probably three to four for the rest of this year. We do have others that are smaller and they're important as well and important to get them right. But from a revenue perspective, they have a little less intense.

Okay. Josef on the improved lead times, I would take that the improved lead times allows you to take share from others that you're able to deliver the product as the lead times improve for your competitors, do you think you'd be able to retain that business, that new market share?

We know, hydraulic side, most of our products is shift of distribution. So we know our customers extremely well. And we believe currently with anywhere between six to seven week lead time, we clearly have the upper hand and we feel comfortable we will maintain those lead times and in some cases improved lead times. On the OEM side, we also have very strong lead times if it's on the path of business or our electronics business, and its differentiation John. Once you get into that process, you're into the next three to five years, it's very difficult to get out. So we really invested wisely as a company into knowing that we could have a differentiation there and how to protect our margin. So does that answers your question is. We're comfortable that we will maintain those lead times, but also we have other areas that we're working on that will separate us from the competition.

[Operator instructions] Our next question is from Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Hey. Good morning. This is [indiscernible] on for Jeff. Starting off, you had pretty healthy incremental of about 40% in the quarter despite all the headwinds out there, some modest step down in the second half. Could you just go through the puts and takes in this outlook and how all the headwinds out there and seasonality of the business and guidance?

Yeah, I think it's difficult to say that there's seasonality this year to be quite honest. With all of the demand in the markets that we're seeing across the end markedly, I'm not sure that it's a normal seasonality. And certainly you have good incremental, especially with what we saw on the supply chain side. In the back half of the year, there are a couple of things that we have less workdays in the back half of the year. We're seeing some supply team challenges that we believe are probably going to keep us from being able to perform at the level that we did at Q2. But the positive part of that again, is really the demand that we're seeing in the end markets and the growth that we expect to continue in those end markets. But it really is driven primarily by supply chain, when you look at what the expectations are from a margin perspective and then revenue perspective in the back half of the year,

And then you talked about it a little bit, but could you quantify the amount of price you're expecting in Q2 and what you're expecting for price cost for the rest of the year?

The price we did put through a few selective price increases on specific products in the first half of the year that really helped cover some of our costs that we were seeing on the cost increase side, but it's low single digit million for the year to date pricing impact. So it's not a significant contributor to the first half of the year. It will likely be a larger contributor in the back half because we have a few price increases that are not rolling through until August, September, October timeframe. So there will be some impact there, but it really, those price increases really are put through more to help us offset the material cost increases and supply chain constraint issues that we're having.

Thank you. And we have received the question-and-answer session. Ill now turn the call over to Josef Matosevic for closing remarks.

Thank you, operator. Thank you much for joining us today. We appreciate all of your interest in Helios and really look forward to updating all of you on our third quarter in November. We remain super confident in our ability to continue to grow and deliver value for all of our stakeholders. Have a great day and stay healthy.

This concludes today's conference, and you may disconnect your line at this time.