Q2 2023 Helios Technologies Inc Earnings Call
Greetings and welcome to the Helios technologies second quarter 2023 financial results Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Tania I'm, Vice President of Investor Relations and corporate communications. Thank you you may begin.
Thank you operator, and good day, everyone welcome to the Helios technologies second quarter financial results Conference call.
We issued a press release announcing our results yesterday afternoon. If you do not have that release. It is available on our website at H L. I O Dot Com you will also find slides there that will accompany our conversation today.
On the line with me are Joseph Madison stomach, our President and Chief Executive Officer, and Tricia Fulton Executive Vice President and Chief Financial Officer.
They will spend the next several minutes reviewing our second quarter results.
Discussing our progress with our augmented strategy.
Reviewing our updated outlook for the second half of 2020 three.
And then we will open the call to your question.
If you 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 the Q&A session.
These statements apply to future events that are subject to risks and uncertainties as long as other factors that could cause actual results to differ materially from where we are today.
These risks and uncertainties and other factors have been provided in our latest 10-K filing as well as our upcoming 10-Q to be filed with the Securities and Exchange Commission.
You can find these documents on our website or at S. E T Dot 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 slide.
Please reference slide three four and five now.
With that it's my pleasure to turn the call over to Joseph.
Thank you and thanks to everyone joining us.
Our global team has stepped up to the plate and deliberate.
We had strong sequential growth in the quarter with revenue up 7%, including 6% organic growth over Q1.
Operating margin increased 140 basis points, while we continue investing to grow.
Our acquisition and expand our capacity to meet growing customer demand.
This translated to a bottom line increasing 21%.
Thank you once again to our global team for their great performance.
We have methodically invested over the last three years to develop or acquire new technology.
Fourth product yet.
Julien geographic white spaces and drive opportunities for growth by expanding our addressable end markets.
All of this work is done the garage are bearing fruit.
Currently we are in our next phase preparing for another growth cycle.
And we are accelerating this transition.
Our customers appetite, while a new offering is rapidly building.
We want to be ready to address that indicated interest.
As such we are putting forward with investment and project timelines to enable this new capacity to take on step change growth starting in 'twenty to 'twenty four.
Our innovation and ingenuity extra land is the lifeblood of this organization.
The quarter, we closed our acquisition of <unk>.
And we are already far along with the integration of <unk>.
Both field service platform into the Helios solution.
And so it is all recurring revenue could start to show up in our P&L as early as next year.
Okay.
Heelys continues driving technological breakthroughs and we are well positioned to capitalize on many mega trends with our solution.
These include the electrification.
Dosing in Michigan, and creating more energy efficient solutions, while continuously improving our user interface.
Our long term outlook in Chile.
He is very bright.
In the short term we are faced with some near term challenges for the second half of 'twenty three.
We're seeing a slower than expected recovery in APAC about 40% of our CVT hydraulics volume goes through APAC with dual fall lodges just stupid that's located there.
In North America, the distributor inventory levels have been trending in the right direction since the end of last year, but also a bit slower than expected.
Additionally, our hydraulic colleagues in Europe dealt with a plant fire in the second quarter.
Then in July they had to endure tornado hailstorm and flooding.
I am grateful to report all of our teammates our state which is most important.
These macro issues combined with the natural disasters.
Is pressurizing, our topline for the second half.
As a result, our near term visibility is in fact less clear than our long term outlook.
We are adjusting to current conditions, while continuing to prepare for what we believe will be a very healthy 2024.
Before I turn the call over to Tricia, who reviewed the financial I would like to wish you well until retirement.
So Asia has been a cornerstone of our company during his 26 years of service.
17 of which she served as the CFO .
On behalf of the board of directors and the entire company I would like to express our gratitude for his significant contribution.
We wish him the best in her next jet Salt life.
Starting tomorrow Tricia passes the baton off to our new CFO , Sean Baghdad.
<unk> joins us most recently from a 23 year career with Polaris.
He has a proven track record of building growing influence for me global businesses into highly productive and profitable operation.
We are excited to welcome Sean to the Healy and his family.
I will now turn the call over to Tricia to review our financial results for the final time.
She will then hand it back to me for some closing comments.
Krishna please.
Thank you Joseph and Hello, everyone.
Slides six through 10, I will review our second quarter 2023 consolidated result.
We continued to deliver solid sequential improvement with revenue up 7%.
Profitability also improved sequentially with operating income and net income up 19% and 21% respectively.
Adjusted EBITDA expanded 170 basis points and free cash flow was up $15 million or 475%.
We were able to deliver these results even as we drive investments in our future.
By market Australian mining began a recovery and grew significantly in the quarter, both sequentially and year over year.
Encouragingly health and wellness increased more than 20% over the first quarter continuing to build off the floor, we hit in the fourth quarter last year.
Agriculture, a large end market for Helios saw robust growth in the quarter over the year ago period and modestly improve sequentially.
Recreational sales had a solid quarter with high single digit annual growth and double digit sequential growth.
There were mixed results within the mobile market, the specialty vehicles and construction being the top performers sequentially.
As you might imagine, we can have variability from quarter to quarter within our market.
Our strong revenue growth over Q1, 'twenty three was driven by the electronics segment, which was up 15% while the hydraulic segment was up 3%.
Year over year Hydraulics was up 7% and if you exclude the health and wellness electronics increased 5% over last year's second quarter.
Geographically, we saw growth across all regions sequentially led by the Americas at 10% EMEA was 4% growth in APAC at 3%.
Compared with last year revenue decreased both in EMEA and in the Americas by 5%, each and by 10% and APAC, reflecting macroeconomic condition.
Overall, we had nominal unfavorable FX impact on revenue of <unk> 3 million in the quarter.
Sequentially gross profit grew 7% and gross margin was unchanged over the first quarter.
We would expect on a year over year basis, the lower volumes impacted our gross profit.
The benefits of pricing net of material cost increases.
Acquisition.
And improved direct labor efficiency on gross profit.
Were offset primarily by lower volume.
Our SDA expenses sequentially were down slightly about $5 5 million or 17% compared with the second quarter of 2022.
As we have discussed we are investing heavily in our growth plan and incremental SBA related to acquisition integration growth.
Our new product development, which are driving the year over year increase.
As I mentioned adjusted EBITDA increased 16% sequentially and adjusted EBITDA margin of 22% was up 170 basis points over the first quarter level.
Even though this may make growth investments, we delivered top tier EBITDA margins as an industrial technology company.
Our effective tax rate in the second quarter was 22, 9% up slightly from the prior year based on the mix of earnings in various jurisdictions.
Diluted non-GAAP cash EPS of <unk> 81 in the quarter reflects the impacts I've discussed as well as the nine impact from higher interest expenses compared to last year.
Slides nine and 10 provide visual trends on overall key metrics for the past several quarters.
We estimate that supply chain constraints late $14 2 million in sales at Borger and up sequentially from $12 4 million and down from $15 1 million in the year ago period.
On Slide 11, you will find the highlights for our second quarter Hydraulics segment.
Sales grew 7% over the prior year period.
<unk> added $15 2 million.
Sequentially. The segment grew 3% over Q1 'twenty three.
Gross profit increased modestly driven by price efficiency and acquisition.
Firstly offset by rising material costs.
Gross margin this quarter decreased 210 basis points compared with Q2, 'twenty, two primarily due to rising material cost and the margin profile of acquisition.
SCA expenses increased by $4 3 million or 23% year over year, the increases were driven by acquisitions as well its growth investments.
Please turn to slide 12 for a review of our electronics segment.
This segment is more concentrated in the U S. The foreign currency, usually does not have much of an impact.
Sequentially as mentioned, we had 15% growth in this segment.
Electronic sales decreased by 24% to $75 2 million of demand across all regions declined primarily related to the softness in the health and wellness market.
Excluding health and wellness electronics grew 5% over last year, driven by recreational mobile and agriculture market.
The electronics gross profit of $26 million grew 24% sequentially and gross margin expanded 260 basis points.
Year over year lower gross profit reflects the slow down in the health and wellness market.
Gross margin increased 150 basis points over Q2, 'twenty, two due to favorable sales mix and material costs.
<unk> expenses increased sequentially, 4% over Q1 'twenty three level.
Please turn to slide 13 for a review of our cash flow.
We had strong cash generation in the quarter with $28 8 million in adjusted cash from operations.
Cash and cash equivalents were $37 5 million, providing us sufficient liquidity.
Capex of $10 5 million was 5% of sales for the quarter at the upper end of our expected range to support our growth and expansion plan.
Adjusted free cash flow was $68 8 million on a trailing 12 month basis with a conversion rate of 100% compared with 79% for the full year 2022.
You can see on slide 14, we have a solid balance sheet and financial flexibility to execute our strategy for growth.
Total liquidity at the end of the quarter was $221 million.
Our net debt to adjusted EBITDA leverage ratio was two point something many times and in the quarter.
As you know we have a well established track record of managing our leverage ratio as we execute on our acquisition strategy.
As we increased above our target level for recent acquisitions, we have been able to quickly delever back to or below our target leverage ratio of two times based on our cash generation.
Before I hand, it back over to Joseph for review of the outlook and closing comments I would like to express my gratitude to each and every member of Helios past and present for their role in what has been a rewarding career for me.
I've had the honor and privilege to work with so many exceptionally talented and brilliant people throughout the year.
I also want to thank all of you on this call as well for being with me on this great journey.
Importantly, I have great confidence in the future of Helios, a power of our strategy and the capabilities of the team to execute on them.
Please reference slide 15 to 17 as I hand, it back to Joe.
Thank you much push yet again, we truly appreciate your dedicated service to Southern Hills, Raleigh and tend to Helios over so many years.
We are moderating our outlook for the second half of the year given the factors I mentioned did have reduced near term visibility.
We now expect revenue in the range of $880 million to $900 million.
Playing the second half would be stimulus to the FES pet.
We expect more weighting in the fourth quarter versus the third.
As a result of the accelerated capacity expansion, we are investing over 10 million.
With these revenues and investment expectations, we are moderating our adjusted EBITDA target for this year 187 to 196 million still a healthy 21% to 22%.
We intend to get to the mid Twenty's M beyond an adjusted EBITDA margin over time, but we are don't shifting our geos in the short to them to absorb the onetime macro factors and build momentum to climb our next growth slow.
Yeah, clearly a lot of great things coming together Juliet.
We are executing against the pillars of our business system.
Second quarter demonstrate our ability to protect our business and margins while investing for the future.
As we think and act globally, we efficiently leverage our expanding footprint through our new regional centers of excellence.
We are diversifying our end markets and revenue through our new innovations and solutions to grow wallet share while our team continuously demonstrate that.
The dedication and tenacity to our ship purpose, we develop I would tell them by fostering a diverse and customer centric learning organization.
We have our sights set on driving shareholder value far into the future.
As I said earlier, our future is very bright.
With that let's open up the lines for Q&A. Please.
Thank you we will now be conducting a question and answer session if.
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Thank you. Our first question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.
Hey, good morning, guys. Thanks for taking a couple of questions.
Maybe I'll start with Joseph <unk> Joseph.
Hoping you could talk a little bit more about what's transpiring. This year you know what have you seen so far kind of what what you expect for the rest of the year into 'twenty, four and beyond with the investments that you're making.
Hey, good morning, Chris.
Certainly let me break this down into maybe two parts.
So the first part of your just addressing the current state and the headwinds we have seen and has been seen going into 2023 and San switching over to the more exciting part.
2021 and beyond.
So when we entered this year you know.
On the OEM side, we usually have pretty good visibility.
And third is panning out to be exactly wouldn't be expected.
On the distributor side, which is very heavily weighted on sun hydraulics CVT business.
In North America, we saw elevated inventory levels, but they started to come down pretty nicely. So it's a trend clearly show a month or a month that the inventories are coming down into will be or the pattern back to somewhat of a normal.
And then we.
Had substantial conversations with all our distributors in Asia, specifically in China, and there was a pretty good sense of men to recovery.
Sort of taking shape.
In Q1.
Ramping up into Q2 and continue into Q3.
So we obviously baked it in the forecast and clearly we own this island. This so.
You know hasn't gotten paid customer feedback, we anticipated stronger orders coming out of Asia.
Since 40% of all.
Hydraulic CVT revenue goes into Asia, specifically into China, They didn't pan out.
Beyond that.
Following by.
Bye.
Oh Marine.
Demand has been very stable, but tend to bring all slightly.
Not falling off the cliff, but temporary loss in Gabon Board business in the health and wellness showed very strong signs of recovery in Q1 going into Q2, and now kind of plateauing off it.
At the levels, we saw in Q1 and Q2, so all in that's what drove us to kind of be.
A little bit more.
70 from the forecast just by not having enough visibility in the second half.
Not knowing if China world really recover this year will not be recovered this year.
So thats kind of whats in that you know.
Naturally.
When you add those three factors between.
You know 40% of volume going into China.
Distributor inventories still slightly higher than expected.
You know, we lose leverage on the top line and then.
You know to add a little bit more flavor to that story.
Current stage, we had a.
Im very unfortunate situation in Europe , where we literally lost 10 production days.
Ultimate and saturating.
<unk> bye.
But mother nature kicking in and adding a few more days so colossal.
All in that's what drove all pulling.
Pulling back in terms of top line.
So to kind of summarize Chris I Hope your first question.
Of the current state.
We're going into.
'twenty 'twenty four and beyond.
You know, we have been saying now for a year and a half a couple of years, we have methodically worked with some customers.
Some.
One is a current customer to our new customer to us, but more importantly, it also very new markets to us.
And.
We went through the initial out of Q stage to an RFP stage and.
<unk> got much stronger as the customer needs to make certain strategic decisions before year end and did accelerated obviously, our investment portfolio and as part of the process is they want to see.
In review, our operations and its alliance into equipment in place.
Before we can hit the ground running so Ted.
The main reason why we are adding.
Over 200000 square feet of capacity.
To be able to absorb that new incoming business.
So it has been in play for the last year and a half it's it's finally around the corner.
And we are gearing up.
The journey and we have invested year to date over 10 million additional dollars into that because we truly feel that is the right thing for Helios and third is the right thing for our shareholders.
So that's kind of the two answers to your question Chris.
Got it very helpful and what's the timing on the the additional capacity is that first half of 'twenty four or what do you see at this stage.
Yes.
Our plans indicate.
We believe our revised plans indicate that we will be completed by around Q1 of 2024.
It's broken down into different geographic territories, Chris.
Leave a lot of them is in North America between Damon and CVT.
Yes.
Significant expansion.
Going on in Europe .
It's a fast the location there is two different phases phase one we are adding.
An additional 35 to 40000 square feet in 10 days, another phase coming in 2024, where.
We will add another 100000 square feet.
So faster will go from 300000 square feet to 600000 square feet over time.
And then we are standing up a brand new facility.
Go to our current one.
One in Mexico, adding another 75000.
<unk> feed so.
If you extrapolate this into potential future orders.
You know we will.
Nobody has capacity, we wouldn't feel comfortable with the demand is coming so.
So they tend to do question is we should be complete with phase one in Q1 2024.
Got it I appreciate that I will leave it there. Thank you. Thank.
Thank you Chris.
Our next question comes from the line of Jeffrey Hammond with Keybanc. Please proceed with your question.
Hi, good morning, everyone.
Gerry Best of luck to you Tricia.
Thank you.
So I wanted to make sure I understand these accelerated cost. So it looks like you had $2 million and <unk> want to know what what the accelerated costs were in <unk> and I think you said $10 million in second half and just want to verify these are you know.
What's what does it entail in terms of you know pointed.
Florida expansion and just to be clear that these are all kind of one time and go away next year.
Yeah, Jeff certainly so.
To date.
We <unk>.
Accelerated cost around $10 million and.
Towards the Opex cost meaning.
Certain.
Uh huh.
Equipment expediting costs.
Great. Thanks.
[noise] contracts those extra people setting up the manufacturing sales based on the agreement we have with our customers, where we have visual work aides, where we have.
Work instructions.
We can now make.
Addressable items.
Two separate cost is what drives a lot of.
Downloads and in many cases, when we ordered the material.
The lead times in terms of equipment was much much longer than we could have waited so we we.
We had to pay a premium to get the equipment in.
But once that is fully.
Fully paid Jeff density.
The answer to your question is yes, those will be onetime costs and we certainly expect.
To pay back with accelerated and better margins going forward.
Okay. So it's $10 million in first half $10 million in second half.
10 million in the first task that's in the books.
I'm not sure the 10 million will be exactly in the second half because youre going to watch it very closely here, Jeff we had a.
A couple of forecasting booths here when we anticipated strong the orders.
From the international markets, and we obviously own bad so we want to be.
Be careful.
How much do we spend is to protect our margins, but there clearly will be additional onetime dollars in the second half.
In the area of four to six four to $6 million to $8 million to ship the system right yeah.
We still have a pretty big range on the top line of our guidance.
Reflects some of the uncertainty that we have in the top line. So that the lower revenue levels, we understand that we can lose a little bit of leverage so we baked that into the assumptions.
Well.
Okay, and then you know.
You've been talking about this obviously, you're pulling forward you know $15 million of costs. So you know I think you mentioned in the prepared remarks kind of a step change.
Opportunity. So I just wanted to get a better frame the opportunity around.
You know the you know 24 and kind of the.
The pull forward and all the all the capacity expansions.
Yes, Jeff so.
[music].
We're talking about here is is a integrated systems package.
That two of our customers have been working with those four north of a year and a half now and one customer had that product for me.
And it's different elements of the product in source and now they have decided to outsource this as an integrated package.
And we our view to submit final prototypes next Thursday.
And the feedback has been very strong and very complementary.
The other customer is more on the commercial foodservice side.
We have worked very closely.
Together and feel comfortable now could we are farther along that.
Did step change will start to occur in 2024.
From a monetary standpoint or dollars so to say.
When you add 200000 square feet globally.
You're talking about a pretty nice size business.
<unk>.
Starting in 2024 through 2027 and we.
Pretty good this is.
Going to happen.
Okay.
Okay. Thanks, I'll get back in queue.
Thanks, Ken.
Our next question comes from the line of Mig <unk> with Baird. Please proceed with your question.
Alright, Thank you and good morning, and Trish all the best to you.
Working with you for the last 13 14 years I've always really appreciate it your health and insight so good luck.
Thank you I appreciate that it's been a pleasure.
I guess, where I would like to start.
I'm a little bit confused about on.
What's going on with capacity there are a lot of numbers that are flying around their faster going from 300000 square feet to 600000 Bel Board.
The facility in Mexico, adding 75000 square feet.
Maybe you can we can sort of take a 30000 foot view here.
And have you outline for us what percentage increase in your square footage or capacity are you currently arent undergoing versus maybe where we were a year ago.
And what exactly does that mean for the company's ability to support revenue or or you know.
Essentially what are you scaling your business up too.
Yes, good morning Mick.
The first part of your question I don't know if we had a technical issue here, but I apologize it didn't get the second part.
Yeah. So.
I can repeat the question I'm trying to understand.
The changes in capacity here.
Because because theres been a lot of numbers that we're kind of like floating around between faster and Balboa and so on so can you maybe talk about.
What percentage of your existing capacity.
Relative to your existing capacity are you, adding and what are you scaling this business up to what sort of annual revenue run rate will just capacity be able to support.
Okay.
So.
An example in Indiana, we are going in mishawaka, Ian in terms of.
Now becoming <unk>.
Central to excellence for all our manifolds.
We are going from 40%.
Two pretty much 70%.
Off of capacity.
Everywhere, we are adding capacity Mig is based on <unk>.
Percentage of volume increase.
And our strategy of center of excellence to regional structure coming to play and in the region for the region. So.
As we look at our new incoming business with the step change we are talking about.
In the integrated.
Package.
When we extrapolated our overall opportunity for the next.
Three years.
To come and the volume associated with that and how much we need per square foot that's what drove.
Investments.
Globally. So in so many words with the one particular customer we are working on there would be.
Absorbing.
Purchasing an integrated package did has.
Different sizes of menopause.
Some cartridge valves first the couplings.
Why <unk>, it says and innovation controls.
So every business has a piece of the square footage.
Signed two debt volume and Thats, how we came up with the capacity and the.
Hours needed to manufacture that product.
So capacity is going up what 20% 30%.
25%.
Globally.
From a pure square footage perspective, but I think the opportunity really is how we can better utilize all of the square footage that we have with this additional space on the wafer laying out the plan with the additional space.
Well, hopefully getting more more out of the 25% 25% top line.
I appreciate that and what exactly is your guess here in terms of where your goals in terms of what this.
What the business will be able to support as far as total revenues are concerned are we talking one point to $1 3 billion or more.
We're talking about an additional.
New this question will come so.
I'm going to.
Learned a little bit here from.
Previous to.
The previous forecasting assumptions, we have made in particular to my opening comments in Asia, but I would say it's around $300 million. In addition to.
Our.
Cooling guidance.
Understood.
You're adding the capacity now the revenues coming in the future are we to infer then that at least until this revenue starts to really materialize and reach kind of like the full rate capacity, we should be thinking that there is going to be an under absorption element from a cost standpoint, which is going to pressure.
Margins.
Into 2024.
Well I think.
Our manufacturing strategy that we've laid out and you guys to understand really what offsets a significant piece of the mix.
And.
We also have other levers we are pulling as we speak to really.
Minimized the risk.
At the same time would we don't want to do is you know.
Start cutting in the SCA Struction SCA people, because we're going to need those people as the capacity is finished.
Good day trend folks. So I think we have the risk that offering based on our new.
Revised guy.
Guidance here.
And feel we can.
We can maintain that.
And with a little bit.
A little bit of uptick in the recovery in Asia.
And.
When you look at the distribution inventories are coming down now around $64 million in traditional movement that dropped down to 6100 $60 million, you'll see a stronger reorder pattern.
So.
We feel if the volume comes back just a little bit we can absorb that those investments and hold our margins and make this goes back to the comments that we've made the last few quarters about step level investment that's really a step level investments.
Takes a little bit this time, it'll absorb it but when Joseph talks about these new system opportunities and diversified market opportunities. We recognize that they can come in in big chunks. So we need to be able to have the capacity available to be able to take on those orders tend to fulfill that demand in those markets.
I see.
Wanted to ask a question about the guidance.
You reduced revenue to $35 million at the midpoint, if my math is right.
I'm curious to understand how your outlook is change in hydraulics relative to electronics, so what the moving pieces to that $35 million.
And then on EBITDA.
Caught EBITDA by about 30 milk and you know here.
I guess I can understand about 10 million of it right coming from from.
From the lower revenue and volume are we to infer that the remainder is all of it associated with these investments. So I guess, maybe I'm asking Jeff's question in a different way here.
Or is there something else other than the investments that's that's kind of contributing.
Contributing to EBITDA.
They're both revenue and EBITDA.
Yes.
So I'll start and then just if you can add on.
We were pretty specific in our guidance at the 925 mid point I don't really think we see a whole lot of difference on the electronics side, although it's still about where we thought it was going to be for the year.
On the innovation side, we're still up high single digits in our forecasting but down.
Side or the constraints really are coming more on the hydraulic side, we're seeing it in the sun business related to the inventory that we've already talked about as well is a little bit of a slowdown.
In the <unk>.
Acquisition companies for Damien <unk> from our original estimates, which both are in the hydraulics segment.
What's driving the majority of what Youre seeing in the change in guidance is coming from the hydraulic side. If you look at the EBIT.
Certainly.
We have the investments that we originally thought they were going to curtail a little bit more in the back half of the year, but we expect to continue analysis.
Taking into the EBITDA a bit but at the lower revenue levels. We're also losing leverage.
We recognize that we're going to have to possibly adjust the cost base as we go forward. If we're at the lower end of that range, but certainly it is cutting at least on a short term basis and your profitability recognizing that we need to make the investments. So that we have 2024 set up well to take on this additional.
Potential revenue that we're seeing from the system sale in diversified markets.
Okay.
Final question.
It sounds to me like you, you're saying that India Americas business, the primary headwind seems to be destocking.
And if I understand you correctly.
Your to the level of channel inventory now where that suggests that destocking runs runs its course.
Please correct me, if I'm wrong about that.
Are we to think then that.
Revenues in the Americas improved sequentially in the back half relative to where you were in Q1.
And also in Asia Pacific.
Or are things trending.
We're looking at the month of July August I mean, how have things changed either for the good or bad relative to what you've observed in Q2.
That'll be it thank you.
Yes.
So in terms of channel inventory.
Make the data points have been trending in the right direction over the last three months.
Started off at 78 million dropped down to 74.
Now it's in the.
<unk>.
So if we would.
Played Ted data point and put on the assumption on it you a comment around could there be an improvement in the back half, yes, there could be as long as.
The trend goes and continuous in the right direction, but we are baking in certainly a risk just learning from our first half and learning from the feedback we have gotten last year versus where they are here.
Oh, no actual basis.
In Asia it's.
How are the orders trending right now pretty much the same.
We have seen.
In the first half.
Yeah.
There hasn't been any improvements yet, but look I mean.
We are looking at this as a near term short term impact.
Market will tune.
And the inventories are coming down and eventually this will work itself out of the system and we're going to get back to the leverage we usually.
Guess what.
Volume.
Okay. Thank you.
Thank you Mike.
Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.
Good morning, everyone.
Good morning, Nathan Good morning, Nathan.
Maybe I'll ask a question about the margin profile here.
Typically you guys will see new products come out at better margins.
Is that the case with these large contract awards that you're looking at.
Hopefully to get awarded here in the back half and ramp up into next year are you anticipating those could be accretive to the gross margin profile and any color you could give us on how accretive they might be.
Yes.
Good morning, Nathan sorry for the disruption.
The answer to your question is the way we have quoted this business and we spend a lot of time on the pricing of the offering.
Quite honestly didn't know exactly how to price it considering where the supply chain.
Was is.
And in some cases, we're probably maintained for a longer period of time. So the answer to question is yes, it will be a healthy margin profile.
At the same time, we have.
As you saw the three acquisition.
A significant value to our offering.
With a service system components.
<unk> patented.
And patent protected.
And the adoption rate has started and thats kind of part of our journey as well that will further improve our margin profile starting in 2024.
I have three will contribute to the journeys treating nicely and they will extrapolate over the next two or three years into something.
Obviously much larger as we have said in the past we wanted to create a recurring revenue.
Arm for our offering.
Maybe a follow up on that.
Yes.
On these potential new contracts and you'll walk here I mean, we're obviously talking about very significant numbers and you've talked about I mean, why would you used in the.
Our prepared remarks were step function change in growth.
Are these contracts you know something that go from zero to 100 fairly quickly or do they ramp up over a period of quarters. Just anymore color you can give us on your expectation for how does lie arena over the next year or two.
Okay.
Yes. So look you know when you look at our customer base and everything.
No customer is really larger than four to.
Two 5%.
In our offering currently.
One of those wins, one of those customer wins will drive that to be our largest customer.
With one of the.
When we talk.
Getting so we certainly.
You know what.
We really look forward to that.
That step up journey.
Starting in 2024.
And once again.
One customer we're talking about.
And.
And then the question is how would that kind of ramp up is it something where you would be expecting production to go from and you've talked about this big new customer like a couple of them being new customers.
Are they something that would ramp up too.
10% of <unk>.
Contract value in the first year or 20% in the second year or does it go does it ramp up more quickly than that how are you expecting that contract those contracts to ramp up.
Our expectation.
And this is exactly why we are putting this capacity ahead.
To be able to answer this question Nathan with.
Factual data, we need a little bit more time, but it's not going to start with.
$50 million in 2024, we've got to finish out capacity that is so vital towards.
We can commit to our customers that wanted to go faster that we can actually absorb right now so.
If you wouldn't mind just.
Allow us a little bit more time to be able to answer that question once we get out capacity closer to the.
To win needs to be.
And just one last one.
Ladies and I was just going to add a little color there too.
I would expect senior question just about how that comes into the P&L typically it will phase in over a period of time, it's not like it all comes in on day. One. So once you get that customer signed in the door. It would it will build over potentially a multiyear period and as you get multiple customers in the door.
So having that layering effect.
Add to that step level function that we're talking about for 'twenty four.
And if you're talking about customers, having to make strategic decisions for 2024 days or things that you should be able to announce to us. So you should be the customers you would have to move on before the end of the year is that right.
One particular customer has to pass to start the changeover by September .
Thanks Lee.
I should say sorry, one customer has to make a decision.
The terms of this year for production years 2024 through 2027 and beyond.
Yeah.
Great well look forward to hearing some announcements in the near term.
And Tricia just add my best wishes for the future.
Thank you Nathan I appreciate it thank you Nathan.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Jon Braatz with Kansas City Capital. Please proceed with your question.
Good morning, everyone and Tricia I too want to wish you the best of luck.
But.
I enjoyed working with you and.
Congratulations.
Thank you very much John I appreciate it.
Just wanted to change the pace a little bit.
The fire and the tornado and at a faster operation how is that impacting the second half of the year.
The second half.
This should not be in terms of faster in specific.
And the expectation we have in place will stay intact as we were able to.
To get some help with our integrated supply chain.
But we are back up and.
Back up and running now.
We originally planned for fast actually too.
To manufacture more product with into hydraulic segment to offset some of the headwinds we have seen with the CVT business in particular too.
To Asia to China.
And still some elevated inventory levels in North America. So.
They were not able to.
To do that with CVT, but certainly met all the expectations that we had under fastest side. So.
No impact to the second half okay. Okay, and then secondly, I think.
In response to one of the questions one of the earlier questions.
How about the Hum.
Accelerated investments.
I think I heard you use the term a phase one.
To describe some of this is there.
A phase two or are there additional investments of course, there's always additional investments or is there additional heavy investment program following.
This investment are these investment decisions.
So the comment about phase, one and phase two John was related to faster.
These are phase one that is adding around $35 40000 square feet intent there would be a phase two.
They will add around 100000 square feet.
It's all driven based on upcoming demand for <unk>.
Equally.
Generated through this.
Offering system sales.
And also in data science piece did we have been working with.
Fast and.
Hydraulics team.
Two.
Integrated with our customers, Okay, and then one final question.
After all of this investment is completed.
And the new programs begin and so on.
Would you.
Is there a sense that your your profitability.
Will be elevated.
Because of the investments in it more so than maybe what you were thinking.
Six months ago, a year ago are we going to what kind of return are we going to get on that investment.
Yes, certainly look I mean.
Our horizon Hasnt changed John I know this is a bold statement, but we truly as a team.
I believe in that.
And when you couple all the manufacturing investments we have made prior to the capacity.
Expansion here.
Creating to San of excellence, creating to regional structure investing.
New equipment investing in supply chain investing into new products and breakthrough technology.
Our horizon of been a 40% gross margin company and a 30% EBITDA company is not changing.
Okay. So its it okay. Okay alright, thank you very much.
Thank you.
Thank you Jim.
Mr. Chairman there are no further questions at this time I would now like to turn the floor back over to you for closing comments.
Great. Thank you very much operator, and thanks, everyone for joining US today. We appreciate your interest in Helios and look forward to updating all of you on our third quarter results in November please feel free to reach out to me with any follow up questions that you have have a great day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.