BAIRD 2026 GLOBAL INDUSTRIAL CONFERENCE - HELIOS TECHNOLOGIES INC

All right. Well, good afternoon, officially, everyone. My name is Mig Dobre. I'm the Baird analyst covering machinery and diversified industrials. To conclude my coverage, we have Helios Technologies, who I'm introducing to all of you here today. Joining us with some comments on the company and some Q&A, we're going to have Sean Baggin, CEO, and also Jeremy Evans, Chief Financial Officer. I'm going to turn it to you, Sean, for some intro, and then we'll do some Q&A. Super. Yeah. Thanks, Meg. And thanks for all of you joining and those on the webcast as well. Appreciate your interest in Helios. With me, Jeremy Evans, our CFO. Also, just want to also point out Tanya Allman, our head of investor relations. Very experienced. She reminded me at our third quarter earnings release. It was our hundred and twenty fifth earnings cycle. She's been through her career, but she leads investor relations and our corporate communication. And then our board member since 2020, Laura Dempsey-Brown, has joined us as well. She also serves as the chair of the board. So welcome. Thanks for joining us. For those that aren't as familiar with Helios, I'd like to just start back and highlight we're based in Sarasota, Florida, an industrial technology diversified company that was founded in 1970 as Sun Hydraulics. And up until 2016, that's what the business was. And so today we're 56 years old. And 2016 came around and there was a 10-year strategy to become a billion-dollar company by 2025. And at that time, from 2011 to 2016, sales had kind of stagnated. But it was a very profitable company, roughly $200 million of sales for six years in a row, $100 million of cash on the balance sheet, no debt. And the strategy was set forth to diversify through M&A. And so from a period of 2016 to 2023, the company embarked on 12 acquisitions that has clearly diversified the company into two operating segments, both electronics and hydraulics. And during that period of time, about $1.3 billion was deployed on those acquisitions. And so I joined the company about three and a half years ago as the CFO. uh my first year was a CFO and then my next six months was as the interim CEO CFO and so for the past two years have been the permanent CEO and one of the first things I did uh when I became CEO was acknowledged and and that that we had acquired and changed the makeup of this company so really step back to look at the portfolio look atthe strategy of the company and also just the makeup of the businesses and then from there laid out what we deemed as our 1.0, 2.0 3.0 strategy that we unveiled at our investor day earlier this year in March called the core strategy since that time we've returned to growth we had 12 quarters in a row three years in a roll of declining sales it was clear to me in that CFO capacity as I started my CEO tenure that we had a sales problem so we started with the strategy then we restructured the company and then we changed the people and and now we are very focused by business sun hydraulics faster innovation and bilboa and as i mentioned sun was the founding business and now today that's less than half of our business so speaks to the diversification that you can see on this slide of the of of the end markets and the channels that we serve and the two segments this year will be roughly $900 million in sales. We, as I mentioned, divested the business. So our jumping off point is even $100 million less than that in 2025. We've had five quarters in a row of double-digit sales increases and earnings growth. And you can see from the pie charts, very diversified in terms of not relying on any one customer, not relying in any one market. And we continue to lean into that diversification and build our go-to-market strategies around that. So maybe, Meg, with that, you can jump into some of the questions. No, that's great. And I appreciate having that slide up because we're going to talk about some of the end markets as well. But maybe it's helpful to start with kind of a backwards look at the year itself, 2026. It's been a better year, a much better year. And, and I think it would be helpful to sort of understand what you perceive as the biggest drivers of that. I I know, for instance, you sell through distributors in your hydraulics business. How much of this inflection in demand is really kind of driven by end users as opposed to maybe behavior changes at the distributor level? And maybe a similar comment for electronics. Yeah, and it is very different drivers between the two businesses. So last year in June was our inflection point where we started to grow again. And so the third quarter was the first quarter of those five that I mentioned of double digit growth. And what we pointed back to is that strategic work we did with a very targeted approach of how we were going to change our go to market engine. We brought in a lot of new sales leaders. As I mentioned, we changed the structure of the company and how we go to mark it in the different regions. And beyond that, got a very target approach to those growth and adjacent markets. We aspire to be a market leader in the markets we serve, and we operate in very niche markets. Today, our addressable markets are roughly $12 billion. At $900 million, we're less than 10% share leader, but we're not playing the market share game. We're going to markets where we feel we're entitled to win and have differentiated technology and customer solutions. So within hydraulics, we have two big businesses, Sun Hydraulics and Faster, And then in the electronics segment, we have two large businesses, Innovation Controls and Balboa. Our growth has been broad-based. All four businesses we expect to grow double digits this year. And we go back to that strategic planning, targeted focus, and changes and go-to-market. When you look at the two segments, hydraulics is definitely driven by the ag market, construction market, but also on the sun hydraulics side, the mobile equipment. We belong to the NFPA, National Fluid Power Association. And it gives us real good market indicators for those mobile markets. And that has started to grow again, where the past couple of years it had been down, but it's low single digits. As I mentioned, we'll grow that business double digits. So we're more than double the market growth there. And it's really that distributor engagement that you referenced, Meg, in terms of how we're engaging with our distributors, in term of using data and analytics and targeted accounts and applying our application engineers and our sales team to help close more sales and looking at territories and ensuring we're aligned with the right partners globally. On the faster side, it's much more direct to OEM. We're very proud of our customer base, long-term customer base. John Deere, Agco, C&H, Caterpillar, Kubota, Bobcat. And really, some of those markets have definitely been challenged. Construction, obviously, has been growing nicely, but the ag is in a multi-year down cycle. I know we got a positive reading finally on the large equipment after many years, but we've had some success in the small tractor, compact tractor, but also that faster team diversifying away from purely ag into construction. And now we're real excited about entering the data center thermal management market. I'll let you talk electronics. Yeah, within electronics, we've got health and wellness is a key in market. That's where Balboa services. And if you go back before COVID, That was a fairly steady load amidst single-digit growth business during COVID, extreme COVID demand. When we acquired the company, if you look back 12 months pre-acquisition, they were roughly $130 million in sales. During COVID, they peaked at $250 million. They were the most profitable business unit that we had. After COVID, the demand cut off. And so just as fast as it ramped, it cut off, we're now back to that kind of low to mid-single-digits growth. We've actually done better than that this year. One of the things that we believe we're benefiting from is we're seeing a shift in production from the Americas into Asia and specifically China, where our OEM customers are moving operations over there. And so we've seen roughly a 10 percent shift. The business isn't staying in the APAC markets, being exported back either to Europe or U.S., but we have a really strong operation there. We acquired a company named Joyanwei, been investing in them, and so we're seen really strong growth there. In the recreation space, that's another big piece of electronics, part of innovation controls. We've had success with several OEMs. We've Had a large OEM where we've been growing business with them. That really kicked in in the second half of last year, so we're starting to lap that comp. I think in that side, it's about 70% of electronics is consumer-facing, so got to monitor interest rates. I would say just the general market, not a lot of tailwinds there, but we believe that, you know, we have new business wins. We're doing a product refresh, which we think gives us a better opportunity as we move forward to secure more base of business. And we're also looking to diversify. How do we take our electronic platforms that are primarily displays, electronic control modules, wiring harnesses? How do мы take that and grow that into adjacent markets, new customers? I also want to touch on, we did a very, very small acquisition of, acquired the assets of a company called RadioSound. That got us into audio solutions, and why is that important? One of our strategies is to own the end-user experience or own the cab when it comes to electronics. And so through our displays, through our control modules, now we can connect to a sound system. With that acquisition, we've got a contract relationship with Indian Motorcycles, But we believe we can take that technology, apply it into our marine customers, our other recreational customers, and even in some applications, mobile and agriculture as well. All right. That's a very helpful overview. Thank you both. I think I want to maybe double click on some of the comments that you provided. And since we're on the electronics slide, maybe start here. so you you talked about the large customer win in recreational and we're kind of lapping that what's the right way to sort of think about this going forward is it is it uh now that we should be thinking about this this vertical growing more in line with with customer production was there any stocking element to it as we look at the prior 12 months that that might have helped drive out growth. Yeah on that recreational side absolutely it's similar dynamic to what Jeremy shared with Balboa during the COVID period there was a significant uptick in the recreational marine when everybody wanted to be outside recreate and then equally a downward trend that now is had troughed and growing again we saw that significant uptake in the fourth quarter last year from that one customer and now exactly right we're they're continuing to guide growth and we're going to continue to grow with them but we have to earn business every two to three years as they redesign models whether that's our marine customers or our rec customers or even our our health and wellness and so our focus back to the go-to-market strategy is where where do we want to play where can we win who are the largest competitors that we don't own that have that business relationship with where can we take our adjacent products how can we become stickier with our portfolio hence the radio sound solution because every one of these customers has audio built into their products particularly on the hydraulic side as well those customers within the cab typically do so we're pretty excited about having these new growth verticals so I remember and this This is maybe the 1.0 strategy rather than the current one, but there was a lot of discussion about the cross-pollination between electronics and hydraulics, and I'm curious as to not only whatever progress you were able to make over time on that, but the validity of that thesis that there's still some way to, you know, either cross-sell or develop joint product? Yeah, from a cross-selling, we look at it, we want to be the preferred supplier for those companies that are buying both electronics and hydraulics from us. And we have examples of that in mobile and construction primarily. But where we are seeing the benefit is as the trend towards electrohydraulics has played out, our electronics segment is providing a lot of engineering resources to support that hydraulics movement. And we recently announced what we call the QMEH valve. It's a valve that's got a sensor in it that will monitor the flow of fluid through the cartridge valve. That sensor technology was actually developed in support with our team from electronics. And so when we think about electrification and we think about product design, even though we have two reporting segments, those engineering teams are absolutely connected, helping work on joint product development. And then from the commercial side, the customer facing our electronics teams, our hydraulics teams, they understand the product portfolios at the leadership level. Compensation is tied to overall Helios results. It's not at the segment results when you look at the the segment presidents and leaders. And so but it's more of rather than a big solution and going in and try to sell to a customer. In many cases, they may already be vertically integrated. So it doesn't make sense. But making sure that we can speak to the full Helios product offering and that we could be that preferred supplier to those customers that need it on health and wellness. And I know we're on a slide, but that one. Yeah. So, it sounds I understand the whole COVID demand bump and and the subsequent downturn but in terms of where you are right now from a revenue standpoint are you back to pre-COVID levels is it somewhere around that 130 or do we still have a deviation relative to that? Yeah and it obviously it's embedded within the electronic segment we don't break out the specifics but yeah it's above pre-acquisition level so it's fully recovered where we get excited is some of the new products and technologies During the period of seven years when there was a lot of M&A going on at Helios, a bit of the R&D and the focus within the plants on efficiency and the lean principles were under-invested in. That's where we have targeted a lot our CapEx dollars lately, but also on R&E, you've continued to see that ramp up, including during the downturn of those 12 quarters at the tail end of it when I joined. That was the number one area. the lesson I had learned over 23 years my prior company like lean into these so that when it recovers we're positioned well and I think we're benefiting from that if you look at the amount of products we've launched over the last 18 months it's really targeted at new incremental revenue streams not cannibalizing the existing we feel really good about all the products and market positions that we have all these businesses that we bought are really strong businesses they just don't happen to be at the return profile of the legacy Sun business, but they all generate cash, they're all profitable. And so it's really been a focus on tying that product strategy to the go-to-market and how we engage with our customers, how we show up and talk to them. Um, and so when you, when you look at Balboa specifically, what we have planned to launch right now forward over the next year is more than the company had launched in the prior dec- decade even before Helios owned BalboA. And we're getting into new areas like water care and water treat that are all back to the comment of incremental revenue streams that get us excited about future growth potential there. I mean, it sounds like you've really done a lot to improve the Balboa business, you know, from the moment that you've acquired it. The cycles are what the cycles are, but maybe this is a better asset than it was before. One of the questions that I think you heard me ask you in the past is probably a good business, but why are you the best owner of this business? How does it fit with the portfolio strategically? Right. So before I was with the company and during that COVID time, I saw the historical performance and what it's capable of. Granted, it was not sustainable where it got to. But at that point, when it approached a quarter of a billion dollar business, it was by far the highest margin business within the overall Helios portfolio. And part of that is because the low-cost manufacturing center of excellence down in Tijuana, Mexico. To get to the answer, are we the best owners of it? What we've done with that restructure of the company is we've really made that an end market within our electronics segment. We have a president of electronics, Billy Aldridge, that looks at health and wellness just like he looks at marine, construction, ag. And as the market leader in that space, the number one player, and our ability to see what the profit potential is and the overlap between that and some of the displays for innovation and technology we can share and the scale we can get and leverage that plant, it's a key part of our strategy going forward. And we had a bit of a fork in the road last year that said, if we're not going to have a path of improvement, whether that's profitability, sales growth, go to market, then perhaps we're not. And this is at the time when we were evaluating the portfolio after I became the CEO. But we are committed to it. And we actually deployed our GDP, our goal deployment process, to improve that. So across the entire business, black dots, owning different work streams that we report out on monthly and driving that accountability culture to reverse the trend. And like I said, it'll be up double digits this year with strong profitability growth and something where, again, believe it can be a significant contributor to our core strategy growth over time as well. But maybe to ask the question differently, is there something on the back end, whether it's in terms of manufacturing within that Tijuana Center of Excellence or is it something in terms of sourcing that feeds the rest of the business? Because on the face of it, again, you've improved the asset. It still doesn't necessarily explain why it belongs within your portfolio. The one thing I would point to that is most exciting is if you look at the Balboa business relative to the innovation business, Balbo is much more global. You can see the pie chart there. Innovation is concentrated to the Americas. Balbo gives us a footprint from a manufacturing perspective in Asia. And we have a strong distribution business in Denmark that serves the EMEA region. So leveraging those, and we have one of those mini work streams at Balbo to make some of the innovation product in some of those plants and certainly the biggest opportunity is that Tijuana facility because we see the labor arbitrage we get from making product in Tulsa, Oklahoma versus making in Balboa. We're still very committed to our Tulsa plant. When we look at our funnel and we look at the amount of opportunities and what we've been pulling through, we can fill both the plants up and we would see more opportunities on the back in engineering, sales channels, even though it's and customers how we engage. So for instance, there's a vice president of sales for electronics that is now leading the sales cycle and innovation is really good at engaging with OEMs. That's what Balboa sells to as well. So there's, there there's a lot of backend opportunities and even on the technology and product development where we're trying to run platforms consistently across both businesses. Okay. Maybe to pivot to Hydraulux, your principal business. I think one of the things that's been quite interesting here is you've had very good growth. And, you know, as you said, the agriculture market, which is one of your primary markets, has struggled. It does feel as if, though, even this portion of the business, the ag business, has gotten better for you. So what's at the root of all of that? Is it a mixed issue in terms of various types of ag equipment? Is it a geographic issue? How should we think about that? Yeah, maybe I'll take that one. I would start by saying, holistically for us, overall demand is very strong. And when we look at our order book, we've had five consecutive quarters of double-digit order growth. So comparing the orders, we get this quarter to the same quarter in the prior year. When we look AT the backlog, when we come in out of Q3, the backlog was higher this year than it was last year. And we're seeing strength in both segments. And when I look at the hydraulics, one of the things that we're able to do is take an existing product and modify it slightly to go on a different application. And specifically, we think Sun going through distributors. We have actually a platform where our customers, our distributors can come and say, hey, we like this valve, but can you make it on a smaller form factor? Then it will go on to a smaller piece of equipment. That's an example we responded to. we launched what we call our zero series counterbalance valve, expanded our market potential for that particular valve. If I look at faster, it's couplings, but these are what we call our multi-faster. So it will connect multiple hydraulic hoses together with a lever mechanism rather than having to connect each hose one at a time. And we've been launching new styles of that multi-fastener unit. We launched a product we call Genius, which is intended for larger equipment. We've launched similar profiles for smaller equipment that we think is helping. What we're also seeing is across some of the markets, geographic markets like Asia, South America, where on some ofthe lower end equipment, they wouldn't have some of these multi connections that we're actually seeing that growth a little bit in the small ag. And then finally, based on our customers and what we can see in some of themarket data, the small Ag has been performing a bit better. It's been the large ag combines where it's been back. But if that tractor has hydraulics, we've got couplings on it. So we have content on the small equipment as well as the large equipment. So I think it's a combination of seeing a little bit of market stability in the smaller equipment as well as being able to take our existing products and go on more pieces of equipment, if you will. Yeah, so to follow up on that, because I think that's quite interesting. Is there a way to help us understand the difference in content from a dollars perspective as far as your business is concerned? Comparing a large piece of equipment, you know, so something like an 8R tractor or like a Steyr or something like that versus, you know, a smaller machine, whether it's a 40 horsepower or like an 6R John Deere or something like that. Do you guys have sort of a perspective on that that you can share? I would say, so every tractor, construction piece of equipment, for sure tractors usually has a front and a rear hydraulic system. And so if you look at the slide on the bottom right, you may have a multifaster that has capabilities for four lines instead of two lines on the bigger ones that maybe be a little bit of a higher price point, but depends on the amount of applications that, that piece of equipment is, is intended for. And that's what our differentiation, we invented the multi-faceted, that makes it real easy for an operator to be able to change out their equipment. So for us, there's typically the same. Now it would be higher dollar because there might be more couplings if there's more applications that are being used. But for the most part, unit is a unit and and We're focused on getting more content within each unit Right, but I mean like I would imagine that you know, the size of product is different and all of that I mean, yeah My instinct would be to think that a large tractor has higher dollar content for you than a small one But I'm not sure that's correct. So that's no it would be higher dollar per unit but if there's more units obviously in the markets recovering in the small, that can clearly make up for declines in, in the larger equipment. So I think it's, for us, it's back to like, like we had a great win with AGCO on, on Fendt and Massey Ferguson on their rear loaders. And it's really bringing that innovation to them and the differentiation and, and just winning more content, um, for, for our focus. But absolutely, a large piece of equipment usually comes with a higher average ticket for that unit. OK, I want to talk a little bit about margins. And, you know, the really the discussion here is predominantly on a hydraulics business. I understand some of the elements of guidance as they pertain to the fourth quarter and inflation and so on. I'm thinking more forward-looking than that. As I think about 2027, you talked about having quite a bit of excess capacity at a point in time in your hydraulics business. I think it was something like $400 million worth of revenue that could be accommodated. Has that changed at all? Do you still have that excess capacity? And, you know, what are normal incremental margins given this degree of excess capacity that folks should be expecting all else equal on a go-forward basis? So, yeah, I mean, I believe we've shown in downturns and upturns, the incrementals and decrementals, that that is the number one lever on our P&L to drive margin rate improvement. And you see it on the way down, you see It on the Way Back Up. But anchor back to our core 2030 strategy, where we're committing to year in and year out, driving 100 basis points improvement, both at the operating income line and adjusted EBITDA line, and feel really good about just launching that this year and our first year at the low end of our guidance will be 100 basis points better. But clearly there's incremental. When you look at this year, how it's played out, fourth quarter is always the lowest quarter for Helios for the last five years it was. It happened to be last year where it wasn't, where our sales started inflecting, as we talked about earlier. The comp is plus 29% on a pro forma basis from last year. So when you look at the first three quarters of $230 million of revenue, roughly, and then you look at the fourth quarter guide of roughly $210 million, naturally that $20 million you lose some margin on it. But we're not managing any one single quarter. We're managing back to our commitment to drive that 100 basis points. And clearly, our number one lever is driving more volume, which goes back to strategic planning work and our go-to-market focus. And we feel really good about driving over $100 million of planned organic growth this year on a pro forma basis once you take out the CFP divestiture out of last year's compare. So absolutely. And then You can talk about some of the other cost pressures and margin levers. Yeah, absolutely. Specific to hydraulics, we've seen cost increases in the metals. So we had locked in some long-term pricing. Some of those contracts came due, so we did take increases, whether that's aluminum, cast iron, steel, even tungsten carbide, which a lot of our tools are made of, cost on those is going up. We went out with a price increase in hydraulics. A lot of that business distribution is priced off of a list price, so we were able to raise the list price with advance notice. That's what caused some of those orders to get pulled in from the fourth quarter to the third quarter. But there is a little bit of a lag in the timing where we would expect to see that start to recover in early 2027. A couple other things impacting hydraulics. One is freight cost. If you just look at fuel and our transportation costs have risen. So we're addressing that through our freight policies, in some cases looking at fuel surcharges. Again, that will start to flow through here as we end the fourth quarter. And then finally, we've talked a lot about consolidating our Faster North America operations. So Faster had space in Sarasota, Florida. They were in Mishawaka, Indiana. They had a small office in Canada. We've now consolidated all of that in Toledo, Ohio. We've closed the office in Canadia. So there are some costs related to that activity that's showing up in gross margin as well. So that should be behind us. We substantially completed that here at the end of the third quarter. There's a few kind of operational things we're working through. But I would say those three things. It's the input price specifically on the materials. It'sthe additional freight cost. And then it's the cost related to this consolidation of our faster operations. All right. Well, to be honest, I have plenty more questions, but I'm afraid we're out of time. So we're going to continue this conversation in the breakout session. I want to thank you both for being here at the Baird Conference, and thank you for your comments. Likewise. Thank you.