Q3 2023 Helios Technologies Inc Earnings Call

Greetings and welcome to the Helios technologies third quarter 2023 financial results Conference call. At this time, all participants are in a listen only mode.

Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host 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 third quarter financial results Conference call.

Issued a press release announcing our results yesterday afternoon.

You do not have that release it is available on our website at H L. I O Dot com you.

You will also find slides there that will accompany our conversation today.

On the line with me are Joseph matter stomach, our president and Chief Executive Officer, and Sean Bacon, Our Chief Financial Officer.

They will review our third quarter results, along with our updated outlook for the remainder of 2023.

We will then open the call to your questions.

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 well 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 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 spot.

Please reference slide three through six now.

With that it's my pleasure to turn the call over to Jeff.

Thank you thank you and welcome to today's call.

I wanted to take a moment to extend our heartfelt sympathies to everyone who's been impacted.

New conflict in the middle of this year.

All living very tenuous time.

Good thing for the business.

Let me start by welcoming Sean to his first quarterly call with UBS.

He joins US most recently from Polaris, where he spent 23 years advancing through their global right.

He has a proven track record building, they're growing and transforming global businesses into highly productive and profitable operation.

John has hit the ground running and is a great fit within our team and our company that.

He joins us at a very important time as we face the dramatic shifts in the market dynamics this quarter.

I would like to.

Kim.

And that's the key and never getting these challenging conditions, while maintaining focus on our long term goal.

We saw positive trends starting this year last quarter, so stalling vishal.

Vishal it's.

As we advance through August and September they took it out.

As I noted on our last call our near term visibility is in fact less clear than our long term outlook.

Yeah, My show signs of weakening before it improves the.

The U S economy has pockets of softness.

So do you think recovery is taking longer than even that the region, especially China. It expected.

Our customers in the Americas children, you're representing 55% of total revenue are beginning to hesitate.

Those customers are facing a less favorable environment for consumer spending and financial liquidity.

This equates to what the fed has been pushing for a slow the economist would tamp down inflation.

Given current conditions, we have been taking proactive actions to protect our margin.

By optimizing our cost structure, while balancing our resources there.

But the top notch service our customers have come to expect.

Even with global macroeconomic and geopolitical uncertainty I am confident our strategy is intact.

While we manage through the short term, we must continue to lead and execute for the long term.

What's the last several years.

We have been methodically investing for growth.

Yeah, well position to be able to drive significant leverage across the top and bottom line when the market starts to recover.

Okay.

We are encouraged with the progress we are making across several customer projects.

Scribe last quarter.

All these deals are still in play.

The timeline for a decision on some have been pushed out based on the macro.

Those customers are facing near term challenges, but remain optimistic and committed.

Most of these projects are currently expected to begin 2024.

And started to show contribution in the latter half of the year.

We continue to demonstrate our innovation and engineering excellence are Paramount.

Example, we recently now to advance new products from our electronics segment, both with initial customer example.

The first being the power of U P 70, and most recently climate zone two yes.

We are also building under value.

Our acquisitions bring to create revolutionary technology.

We recently introduced remote support software by integrating ice cream capabilities with its thickness support platform into all open T V software.

Together this creates a solution.

While increased end user satisfaction and loyalty.

Customer support and enable our recurring revenue stream to capture added value.

In fact, <unk> has created a software platform or a car.

So this customer who has added the software.

<unk> thousand you on it.

These same customer intends to also leverage just taking this platform will.

Will connect directly with this new software.

We are seeing traction with our new products and services.

It has just been masked now but the macroeconomics.

<unk> is.

That's correct.

I will now turn the call over to Sean to review our financial results.

An updated outlook and then he will hand, it back to me for some closing remarks.

Sean please.

Thank you Joseph and Hello, everyone I'm thrilled to be here.

As most of you know I joined Helios as CFO on August nine.

In my first 87 days I had the opportunity to visit all of our major operations.

Adding a great number of our global team.

I'm impressed with the strength of our leadership and believe we have the right strategy to continue to grow the business and leverage our diversification across markets geographies and products.

Yes, strong brands, leading market positions and expansive manufacturing capabilities.

These spanned across processes that range from injection molding.

<unk>, Oh, you're harnessing Chris.

Precision machining through to circuit Board printing.

We are nimble and responsive and Helios has a culture of excellence grounded in strong value system.

Combine this with our regional manufacturing capabilities and low cost operations and I believe it is clear our strategy to innovate with integrated solutions, including remote service through software systems makes us Barry.

Hello.

We are starting from a very solid foundation from all the investments we have made as we further optimize our cost structure.

This enables us to weather near term challenges and be well positioned Patrick compounding effects of driving leverage across our businesses as conditions improve.

Let me start with the review of third quarter results talking to slides seven through 13.

I believe the slide speak for themselves and provide quite a bit of detail. So I plan on hitting some key points and providing additional color.

The surprise factor in our results for the quarter was most visible in the $26 2 million or 12% sequential sales decline from the second quarter of this year.

And in the third quarter reflected a rather swift change in dynamics as certain customers across mobile agriculture, Marine industrial and health and wellness and markets shifted gears and began pulling back orders and pushing out decisions.

Given we have quite a bit of a book and bill business. This readily impacted the third quarter.

Every region was down sequentially this quarter the exact opposite of what we saw in the first and second quarters.

P and markets were especially weak.

Both segments and were down 24% compared with the second quarter or $13 8 million more of that.

Half the total decline.

The Americas were down, 7% or $8 $7 million sequentially, while APAC was up 8% or $3 7 million.

The lower volume in the quarter heavily impacted gross profit and margin year over year and sequentially due to under absorption.

Gross profit declined $9 6 million and gross margin contracted 380 basis points year over year.

While we had benefits from pricing and foreign exchange it only partially offset the volume impact along with inflationary costs.

Given the larger decline in volumes sequentially gross profit was up $16 1 million from the trailing second quarter, resulting in gross margin of 29, 6%.

The $6 million increase in SGA expenses, compared with Q3, 2022, primarily relates to acquisitions integration higher wage and benefit costs, along with increased R&D investments to maintain our leadership positions.

As evidenced with our actual Q3 2023 sequential reduction of SDA expenses, we are executing plans to control overhead expenses, while continuing to position the business for the opportunities we have to continue to diversify and grow.

Adjusted EBITDA in the quarter of $35 6 million or 17, 7% of sales reflects the impacts of volume and investments.

Volume is significant for the business as our decremental margins, Brian that about 40%.

Our strategic plans are focused on improving our incrementals, while reducing our decrementals.

I see opportunity to leverage fixed costs, as we gain new customers and new markets.

Also continuing to gain efficiencies from our integrated manufacturing and operating strategy.

Our effective tax rate in the third quarter was 35% up 690 basis points from 23, 6% in the prior year based on the mix of earnings in various jurisdictions.

Diluted non-GAAP cash, yes up 44 cents in the quarter reflects the impacts I've discussed as well as the <unk> impact from higher interest expense compared with last year.

Firstly by segment on Slide 12, you will find the third quarter review of our Hydraulics segment sales were up 1% over the prior year driven by sales to the Americas and some pricing.

We estimate about $7 $8 million and sales were delayed due to the supply chain shortages.

This has started to come down sequentially compared with last quarter.

Sales declined due to mobile industrial and agricultural end markets.

Acquisitions added $11 million and there was $2 2 million favorable foreign exchange impact this quarter.

Sequentially hydraulics declined $24 million driven by Swift changes in the mobile agriculture, and industrial end markets.

Notably all of.

Those markets on a year to date basis, agriculture is still up which only intensifies. The degree of unexpected change in demand this quarter.

The decline is rapidly seen by region with EMEA being down $12 5 million quarter over quarter more than half of the overall decline.

Gross profit declined $5 4 million year over year, resulting in gross margin contracted 430 basis points as pricing and efficiencies, we're not able to offset flattish volume the different margin profile of acquired businesses restructuring costs and higher wage and benefit costs.

Actually gross profit was down $8 6 million, although gross margin contracted just 150 basis points.

SCA expenses increased by $5 6 million year over year.

This increase was driven by incremental FCA from acquisitions, as well as inflation with labor and operating costs and investments in R&D.

Sequentially.

CA was unchanged.

Please turn to slide 13, and we'll discuss the electronics segment.

Given its U S sales concentration there was no foreign currency impact in the quarter for the segment.

Year over year electronic sales declined $6 6 million or 9% and had about $3 4 million in sales play due to the supply chain.

Marine which has held fairly steady in sales every quarter for the last two years had a drop off this quarter impacting both the year over year and sequential comparisons.

Notably another category in our recreational market off road vehicles, mostly offset the decline in marine.

This does validate our diversification strategy is working this quarter, we broadly had so many markets impacted at once our diversification was not able to overcome the macro drag.

Health and wellness was down over 20% year over year, and 8% sequentially, but still up over 50% from the trough in the fourth quarter last year.

Gross profit was off $4 2 million from lower volume, while gross margin contracted 320 basis points as pricing and efficiencies, we're not able to offset lower volume higher material costs restructuring costs and reduced leveraged our fixed cost base.

SCA expenses increased 22% compared with last year, which included incremental SG&A from acquisitions increased personnel costs.

<unk> and R&D so.

Sequentially.

<unk> grew 2%.

Please turn to slide 14 for a review of our cash flow, we generated $11 8 million and adjusted cash from operations.

Capex of $5 $9 million was 3% of sales for the quarter as investments in capacity expansion in North America and Asia are essentially complete.

<unk> purchased.

Trailing 12 month, adjusted free cash flow was $53 $1 million with a conversion rate of 103%.

Turning to slide 15.

Even as we faced headwinds we have an extremely healthy balance sheet and the financial flexibility to execute our strategy for growth.

Helios, a track record of delivering exceptional margins drive strong cash flow engine.

Our capital allocation framework prioritizes dollar wanted to be invested back into the business to support new product development and operational efficiency.

Our long standing dividend is an important component overall shareholder returns.

Finally, we remain opportunistic on executing both flywheel and transformational acquisitions that fit strategically into the Helios portfolio.

Cash and cash equivalents were $35 2 million, providing us sufficient liquidity.

Total liquidity at the end of the quarter was $219 million.

We reduced debt by $4 6 million in the quarter and our net debt to adjusted EBITDA leverage ratio was 290 times and in the quarter.

In summary, while our near term outlook is less than expected from the start of the year to now I'm extremely encouraged with the underlying strength of our foundation and strategy.

Almost white space opportunity and the prospects around trading more discipline to prioritize investments that will produce shorter payback and higher returns.

Turning to slide 16, we'll talk to our updated expectations for the remainder of the year.

I'll start by saying, we have an opportunity to further our discipline around financial forecasting processes through greater rigor of data analytics and leveraging the power of business intelligence.

Our updated outlook considers the rather swift change in demand we experienced in the third quarter.

Feedback, we're receiving from our sales channels and customers.

Having been abruptly impacted by global macroeconomic uncertainty and the resulting dynamic market conditions, we are modifying our outlook appropriately for the remainder of the year.

We now expect revenue in the range of 822 $835 million, implying fourth quarter revenue of approximately $178 million to $193 million.

With the decline in volume and the impact to margins combined with continued disciplined investments we are moderating our adjusted EBITDA targets for this year to $152 million to $167 million.

I believe our business can support delivering mid 'twenty and better adjusted EBITDA margin overtime with sufficient volume.

In the near term our focus is on executing our long term strategy, while protecting margins and controlling expenses in our operations.

We have several significant projects underway that should start to materialize in more meaningful ways later in 2024 and built through 2025.

So we expect with current market conditions 2024, we'll start off slower than we had earlier anticipated.

Like my experience at Polaris.

Involved in the growth of the company from $1 billion to nearly $10 billion.

Believe that Helios continues to execute on our solid strategy, while improving our processes and systems, we can grow well beyond the next milestone of $1 billion in revenue.

While the near term has macro headwinds Helios is positioned well to weather these market fluctuations with its expansive end markets innovative products.

First by geographies.

Leading market positions strong brands and extensive manufacturing capabilities, we have significant potential and our long term future is very bright so.

So let me turn it back to Joseph who will reference slide 17 to 18.

Thanks, So much Dan yeah very.

Very happy what have you on the team.

Hey, So certainly an interesting time right now.

Look at what <unk> been able to accomplish together over the last three plus years.

I am incredibly proud of the team's hard work and dedication.

You can see from the last couple of slides, we have a great foundation of established safe levels grow.

Building from <unk>.

And I think back in 2019 going into 2021 and that makes all of that and.

There was a market pullback no one knew exactly what could be accomplished in the near term.

You can see how much we have grown since then.

So much better position today from all of the investments we have been making the last several years.

This is why I'm more excited today than I.

Hey, Bob.

Thinking about our ability to jump up to the next step on the graph.

When you think about how we have been transforming into an integrated operating company.

Starting to generate recurring software sales as early as next year that is really true transformation.

Yeah, it's a great future in front of US we will navigate through this Jeff It's Scott.

Scott.

Through the pandemic.

We have a proven strategy a dedicated team and are excited to keep driving towards our goal every day.

With that let's open up the lines for Q&A.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the starkey.

One moment, please while we poll for questions.

Our first question comes from Chris Moore with CJS Securities. Please go ahead Sir.

Hey, good morning, guys. Thanks for quite a few questions.

Jim maybe you could just provide.

Just some more thoughts.

On 24, it sounds like the large deals you're working on arent lost they've been they've been push but.

You know, maybe just a little bit more how youre thinking about 24 at this stage.

Hey, good morning, Chris.

Look this is probably the key part to understand it but it was totally right now.

So we are getting and put on.

This large Oems and.

We have been bidding on deals did we have never had the chance to bid.

Four.

You'll see the shift in our mix of OEM business in Q2 was up 61%.

In Q3 declined 53%.

Which was reflected.

In our results and as we saw the broad macro.

<unk> does.

Most all of our end markets, including AG, especially in the Marine health and wellness.

Industry, that's kind of what you saw.

And in Q.

In Q3.

The other hand, we grew in absolute dollars sequentially in the distributor and integrator channel.

So back to your question the size of those OEM deals that we are bidding on.

Bigger.

<unk>.

You can imagine at the beginning.

And there are clearly still in play and have not been canceled.

And we continue.

Work with those customers hand in hand.

And pretty much.

Everything we have said from day number one.

When you get invited to the table with those Oems you've got to have the right products, you've got to have that technology and differentiation and you've got who have most importantly, the capacity and the processes and systems.

They can feel it touches before you even get.

The final signature on the paper.

Combined with our regional.

Our approach in manufacturing it makes us really a good candidate so.

We are building out a center of excellence for maximum leverage is the ultimately always you have a margin improvement.

This has been a.

Very methodical step by step approach did we have been constructing now over two years.

And we certainly expect that this will play out exactly how we have structured.

It's really no indicators that tell us that you will not.

Once we are back then it becomes just a very sticky relationship building up on the core Foundation did we have.

I'll start with the last.

Yes so.

Look we are like everyone else somewhat frustrated by the macro environment right now.

Unless we think they will.

This is going to end tomorrow.

Youre going to stay laser focused on investing in our future and execute on those deals and protect our business.

The scope of those deals Chris is expanding pretty much day by day.

Additional customers they've learned of our capability.

You know.

Flywheel acquisitions have contributed towards making this stickiness.

Even stronger.

We had to invest in additional talent in engineering and that explains the investment portfolio.

And capacity in S E.

And we don't want to cut into this because we are within.

Literally finishing stages of those deals.

So Kim.

Key message been here you know stay the course with US we continue to be extremely confident we will execute our strategy.

Got it it's extremely helpful. Thanks, Joseph maybe just one follow up so it's interesting how broad based the decline wasn't you know kind of how quickly that that you saw that downturn.

Yeah, as you mentioned Oems, where I don't know 61% of Q2, so as you as you.

You kind of become more and more focused on the OEM Route is is that where you saw the you know that that quick decline. It was the oem's ability to make a quick decision and pull back versus.

On the distribution side.

That is correct.

And largely on marine sector.

And recreational and health and wellness and then we saw also egg pulling back.

In Europe.

And in North America too.

Got it so I would guess longer term that means.

Quarters can be a bit.

More lumpier, because the OEM focus, but the flip side, obviously is there as well in terms of the the quicker decisions on the positive so I will I'll leave it there I appreciate it.

Thank you Chris Thanks, Chris.

Our next question comes from Jon Braatz, with Kansas City capital.

Please proceed with your question.

Joseph when you look at the projects that are upcoming in 'twenty 'twenty four late 'twenty for maybe 25 are they more in the consumer markets versus the industrial markets. How can you can you parse that out for us.

Yes, good morning, John So.

All of them are really in the industrial.

Commercial markets.

That's where we are focused largely OEM.

System sales so.

The story is that we have been excited to tell over the last two years it starts with a.

Proprietary technology on the medical side.

And then.

You know.

It goes to the cabinet and then you build up did manual system into something much bigger than large and then you add electrification to that.

And as you know you can really put any other products.

Our products once you expect and so we continue that notion where it has been developed many years ago.

In the industrial.

Commercial application very niche Chi.

Just much more content.

Overtime.

Okay.

And then I wanted to add there was a quite a variety of different end markets. So when we look across whether it's foodservice or construction or so when we look across all of these deals we're really starting to see that diversification that we've been trying to foster continuing to blossom there as well.

Okay. Thank you and one last one question one last question Joseph.

In your commentary.

Obviously your results have been affected as you said by the macroeconomic conditions and also you said geopolitical issues and two things number. One can you is there anything it's probably difficult to parse out but is there anything specific to the geopolitical things that we're seeing that hope that helps.

Directly affected your your revenues and then also the conflict in the mid East and it was more of a late.

Our third quarter.

Item.

Have you seen any impact from what we're seeing in the mid east here in the fourth quarter.

That comment was more or less.

Waiting too.

John you know, we still have shipments suspended obviously.

Into the Russian market previously.

Previously had and then.

Days quite a bit of feel stands deal on some orders that should have come.

You know.

Folks that have just been a little bit more cautious and waiting on the sidelines, placing some of the orders did we anticipated to come.

In Q3.

And waiting out what's going to happen here if anything at all.

But nothing directly specific to the middle East Okay, Alright. Thank you.

Thanks, John.

Our next question comes from Jeff Hammond with Keybanc capital markets. Please proceed with your question.

Hey, good morning to everyone.

Sean welcome good morning, Jeff.

Thank you.

So.

I'm, just trying to get a better read on whats.

Destocking and what's real weakening in demand and I think you made a comment.

Around the fourth quarter that you would still assume that inventories are high like what are your customers.

Telling you about the level of Destocking, and where inventories are and when do you think you get through some of the destock.

Yeah.

Good morning, Jeff So we just had a.

A pretty large meeting with our distribution channel just over the last two weeks ago and in touch.

The top 25.

And clearly Sean Ken probably is a little bit more commentary to it because he was with me.

We are seeing the inventory coming down.

Is it coming down to the levels that they're getting ready to place large or those not quite yet, but when you look at the trend.

What's transpired Shawn I believe you went from 13% reduction to 62322, so it's clearly going in the right direction.

Hum.

Gives us a level of.

Of insurance against that.

Inventories are pulling back.

Or is this a continuing to flow, but way not at the level that we saw.

A year ago.

Yes, the only thing I would add Jeff too is just sequentially. We continue to see an increase here in the third quarter and that distributor channel and so.

Directionally with where the inventory levels are at and the experience that we saw of our sales in the third quarter. It gives us a confidence that there could be some opportunities to start replenishing that channel.

Okay can.

Can you just talk about the linearity through the quarter.

I think you said July was okay, and then it tailed off.

And then maybe just comment on October <unk>.

<unk> heard from some companies where they saw August September softness and then maybe after the Ted in October I'm not sure if youre seeing that.

Yeah. So.

We've communicated in.

In Q2, adjusted actually was not a stellar quarter, but it was.

Pretty pretty decent for us and then we got into.

You know August and started seeing.

The Marine segment.

Pulling back and then there was a sharp decline.

At the beginning of.

Of September and then pretty much fell off the cliff up too wedged on 40% at 37, 40%, though.

So between the marine.

Recreational and health and wellness still not.

Recovering Dan was the compounding effect did we saw and a direct result of.

The margin impact did we experienced here.

But other than that.

Following dead was some decline in Europe.

Tim was not substantial though.

The largest piece was in the marine recreational and health and wellness.

Okay.

And then just Sean I think you've talked about.

Controlling decrementals and I'm, just wondering kind of how you are.

About balancing cost control and managing the decrementals on the downside versus some of these investments in capacity adds that.

You need to move forward with or you want to move forward with.

Yeah.

Thanks for the question Jeff.

For me as I look at the capacity it was important that we get that capacity in place we're continuing to.

Try and secure some of these larger OEM system sales and we need to demonstrate that we have that.

When we look at the cost control side of things, we did a nice job in the third quarter reacting swiftly when we saw some of the volume coming down.

Hi.

We're not going to get the full effect you won't see that in the third quarter, but as we get into the fourth quarter you will see the full effect of those kind of very targeted savings now I will tell you we did not cut into R&D because thats. The lifeblood of this company, but when you look at the when you look at our run rate of our operating expenses. Despite some acquisitions that we've done this year.

<unk> will be relatively flat relative to the fourth quarter of last year, which that was the highest quarter of opex last year.

Okay I appreciate it.

Thanks, Jeff.

Our next question comes from Mig <unk> with Baird. Please proceed with your question.

Yes. Thank you.

I want to put a finer point on the discussion here and maybe focus it.

I think the segment level. So you know if we if.

If we're looking at your hydraulics segment.

Obviously.

We don't have big health, and wellness and marine and all of that exposure there.

The AG softness.

That that's terribly surprising given what the Oems are going through right now so that at least to me that part makes sense.

I'm, just sort of curious on mobile and industrial.

You talked about emerging softness there as well.

And related to this I'm curious as to how you think about your Americas portion of the hydraulics business, specifically because organically.

This business has declined now for two quarters in a row and I'm kind of curious as to what is embedded in our guidance for the fourth quarter specifically.

Yeah. Good morning, Mick in particular to the North American piece and to answer your question specifically.

Above and beyond some of the market softness we also head on.

An internal paths here too and that's in.

And as it relates to standing up the center of excellence in North America again, it supports and will support.

The new incoming business.

And.

As we transfer products from from Sarasota into Indiana.

And Tim Damon from.

You know 25 30 million in just shy of 200 million dollar business, we had a couple of little thumb booths here.

As you can imagine you know when you move so much product and Dan you rely on the latter outside contract as we put a brand new building up.

So we.

Probably.

Mr around $7 million to $10 million in in revenue, which is not in our backlog.

Playing these forward, where we're sitting now that <unk> has been recovered.

We are we are at the run rate now.

A little bit better than the sun around rate used to be and we should be truing up the backlog here between now and.

The next couple of three months, but there was another contributor that you saw specific too.

Who he is here.

I'll now demand.

But in terms of your comment for mobile and for industrial end market softening.

I'm trying to understand your perspective, there because at least from what I've heard thus far this earnings season.

On a construction side there doesn't seem to be any production cuts on that.

That's not mistaken please correct me.

And maybe the same thing with with industrial as well.

Yeah.

I can see but it's the other part that I find surprising so.

Can you comment at all on that.

Yeah look Mega man.

Looking at the chart now and in all of the numbers to end.

At least in the markets we are participating in.

No well enough did we are a pure play.

Hydraulic and.

In electronics, we don't come mingling anything else so.

Well the communicated is exactly what is going on I mean days a temporarily pull back here.

If the orders being canceled no, but the market has slightly pulled back.

So when you want to add this yeah, hey make Sean.

I would just highlight specific to the hydraulic segment when we when we look at it I mean, certainly it's that construction piece of the mobile so the lighter construction type vehicles.

In the industrial side more of the industrial machinery that we saw the most severe year over year declines so that's where the pressure points youre at but there were pockets that were up as well I mean oil and gas renewable energy kind of what you hear more of the macro theme. So it was certainly mix, but there was more to the downside throughout the <unk>.

Third quarter.

Okay.

In and electronics, I guess, you talked about the health and wellness and in the marine.

A portion of the business.

Seeing some pressure.

When when I'm kind of looking at your implied guidance for the fourth quarter.

You know its got revenues, maybe stepping down sequentially down to call it like 55 million.

Is this the sort of run rate that you think carries into 2020 for because that would be I mean, this run rate would basically be consistent with the prior year. When you were experiencing pretty significant destocking.

And your health and wellness wellness business.

Can you clarify did you say 55 million sequential reduction.

Sequential reduction debt.

The implied revenue for the fourth quarter in electronics is 55 and I am curious if you if you think of that as being a run rate into 2024.

Or do you think that I mean is there something that's temporary in terms of destock.

Impacting the fourth quarter, specifically or is this sort of where the new sort of demand run rates.

On a go forward basis.

Yes, no I would not say, it's a new run rate I think you've got two dynamics. There. When you think of the electronics segment speaking the innovation controls.

And then more near term headwinds, particularly the marine space.

I think.

When you look at that business as we head into 2024.

It will be a tough start to the year, but we would expect that to recover as the year goes on from a bell Boll perspective, as you know last fourth quarter kind of was the trough had a nice first half and then third quarter kind of declined a bit but we clearly see that business on the up we're seeing order rates continue to increase so I would not say that.

As the new norm, but youre correct in terms of kind of the fourth quarter implied guidance and that kind of $55 million to $60 million range.

Relative to the suite.

Through the third quarter, where wireless a little bit higher than that.

Okay.

My last question is really on how you're planning on addressing all of this from a cost perspective because.

Obviously, the environment has changed for you.

I'm sort of curious as to where exactly are you tweaking.

And what the carryover from savings would be into 'twenty four thank you.

Yeah.

We are.

Very focused on.

Bringing those deals across the finish line and and you know how.

Holding on to our.

Our engineering and R&D, so on the people side.

We're going to need those folks that we invested in and trained.

Who.

Run the production as we.

Onboard those new new customers, we have taken conscious.

Discipline here in terms of cost control and.

Controllable expenses.

Travel and and.

And looking at many other areas in trade shows and what have you.

But.

We believe as it stands today again the world doesn't end Tomorrow did those deals will pay back.

And we shouldn't have this conversation.

Much longer so Sean I don't know maybe you can add your perspective, yes, I think Joseph hit that right on that.

If you think about the cost structure of the company certainly up in our cost of goods sold section. Some of the measures are in the near term is where we have the excess capacity, we're taking the opportunity over the holidays.

To shut down a couple of extra days save a little bit on overhead expenses, but really as I kind of tried to highlight on the operation our operating expenses.

Sequentially will be down a couple million dollars from where our run rate spend in the first three quarters. So you're really going to see the benefit of the actions. We took here in the third quarter as we saw the slowdown comment now.

When I look at the cost structure and you look at the fixed versus variable cost really looking at a third element to highlight what's flexible. So those are the opportunities to defer some things because again, we want to be mindful and not cut too deep into our muscle where when the volume comes back as you highlight the decrementals the incrementals are going to flow.

Nicely and and then we can lever back up the opex to support that growth.

Okay. Thank you.

Thanks, Nick.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Our next question comes from Nathan Jones with Stifel. Please proceed with your question.

Good morning, everyone.

Hello, Nathan good morning, Nathan.

A few follow ups to some of <unk> questions.

Starting off with that these large contracts and the capacity additions.

You guys are pretty confident that we're going to get signed in the third quarter.

And that volume was going to.

Scott in the first.

First half of 'twenty four it sounds like that's pushed out to the second half of 'twenty four.

The capacity additions have been added to the.

The increase of fixed cost there thats going on absorbed at the moment.

Maybe some more color around why those contracts didn't get signed in the third quarter as planned.

What kind of guarantees or commitments you had from those customers in order to go in and put that capacity in a way that ways.

A calculated risk to demonstrate your ability to deliver on volume without commitments in hand from those customers.

Just any color on expectations for when we might see these things actually get sought.

Yeah. So.

And once again.

The customers that we have been communicating to our investors, including all of you.

So with deals.

Well well in the play and.

You know, we expect to sign those deals based on wood we have.

Communicated there hasn't been no change we have some ownership in this as well.

As we have.

Assumed to capacity in many areas to be completed sooner, but due to some.

Supply chain challenges due to equipment challenges due to many.

The issue.

Issues as you stand up new processes those are not the same processes did we have.

So the in addition to so you're mixing a.

Hydro electric.

Operation and you got to step it up in the right way and.

Having been an operator for 27 years.

How do we make sure we stand it up in the right way. So we can come out of the gate swinging with the cost structure and the margin did we won so.

Not to deviate from your question, but we certainly are on track.

Who lack in those deals.

Macro pullback it didn't help.

In terms of the timing, but there is really no indication.

We are too far down the road with these customers we have been working with.

And one of them.

This is needed in the 99% now so it's.

That is the best I can.

I can say right now Nathan without over committing another delivering I guess.

Yes.

I can add.

I'm Sorry go ahead go ahead go ahead go ahead.

I was just going to reference your capacity question too and the headwind you would have from the expenses and I know, we headed in and around materials, but if you look at the major expansions.

And in our electronics segment, that's certainly in our Tijuana factory for the Pilbara business, but also with some of the moves of the innovation control manufacturing there and it opens us up to significant more opportunities to bring in more business at highlight wire harnessing.

As a as a key one.

That really isn't going to affect us too much this year, because we're just bringing that onboard here in the fourth quarter and we will expect to fully have enough volume next year for that to pay back in terms of covering the additional overhead and depreciation when you look at the hydraulics segment.

In particular, it's over in Europe, what faster is doing.

Right.

I was just over there with Joseph last month, and what we're doing there from an efficiency perspective is really impressive between the automated warehousing and as an additional one we'll be putting in place next year, so that that will quickly pay.

The volume that we're going to be able to take on and then lastly, with the mishawaka Sarasota, Florida move that that Joseph referenced as well when you think about that it was really more of a space expanded 50000 square feet, but it was moving equipment from.

Florida, and Ohio into there and so.

There isn't much of a drag and we will completely start earning that back in 2024 is that volume pushes through that so the the headwinds from the expansions arent as significant as it may appear when you look at just the pure square footage.

Okay.

Just following update Joseph.

I mean.

I think you said you have some ownership of this as well and it sounds like potentially there are milestones that you need to hit before the customer will commit to these contracts and then maybe hitting those milestones slipped out of the third quarter and that was more behind what the delay in signing these contracts is.

But there was a couple of things Nate.

Nathan So one is finishing debt capacity.

And what I mean by that it's not just putting.

Building up or putting to expansion of setting up the equipment setting up the automation setting up the processes training. The people. This is a complete different practices. We are no longer talking about commodity we are talking about a system.

And then just them.

That training that comes with the testing that comes with it.

The way a couple of three or four weeks long.

Get it right.

Roche has started launching this and fumble there could be very costly. So we're not going to do that so thats one ownership in <unk> and the other ownership is just.

The fixed for them.

Contractual obligation how to price that product accordingly over the next three five years. Since then the following model change.

Because when you're expecting you expect in Savannah.

So we're not talking about one piece of.

Business CNA thing, we're talking about a.

A full system and.

And we don't have a straightforward application via a highly specified.

Complex product declaration that you know.

It allows us to.

The charge.

Accordingly.

Nathan I would just add you know I think what Joseph is describing is you know obviously each one of these deals with all of these very large Oems are very customized.

Applications and you know all of these different facets of you know.

Pulling knee systems together has to be customized and they're unique to the situation. So it's just a much more complex process. You know as we are evolving into this new model. So it just takes more time.

And.

Do you have commitments from these customers that once.

All of these processes are stood up and you can demonstrate that you can produce the products in the end. They work that day, we will commit volume to Helios.

In my opinion, we do.

Okay. Thanks, very much for taking my questions.

Thank you Nathan Thank you Nathan.

There are no further questions at this time I would now like to turn the floor back over to Tania Almond for closing comments.

Thank you very much everyone for joining us today. We appreciate your interest and continued support of Helios and look forward to updating you on our fourth quarter results in February we will be attending a number of investor conferences between now and the end of the year. So we look forward to seeing you out on the road. Please feel free to reach out to me with.

Any follow up questions have a great day take care.

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

Okay.

[music].

Hum.

Yeah.

Okay.

[music].

Okay.

Okay.

[music].

Yeah.

[music].

Mhm.

[music].

Hum.

Okay.

Hum.

[music].

Hum.

[music].

Hum.

Hmm.

[music].

Uh huh.

[music].

Okay.

[music].

Hum.

Mhm.

Hum.

Hum.

Mhm mhm.

Hum.

[music].

Mhm.

[music].

Hum.

[music].

Yeah.

Okay.

[music].

Okay.

Okay.

[music].

Hum.

[music].

Hmm.

[music].

Hmm.

[music].

Hum.

[music].

Hum.

Hum.

[music].

Uh huh.

[music].

Hmm.

Mhm mhm.

[music].