Q3 2024 Helios Technologies Inc Earnings Call
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Speaker Change: Ladies and gentlemen greetings and welcome to the Hediosh Technologies third quarter 2024 financial results conference call. At this time all participants and the listen only mode, a brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad.
As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host, Tania Almond, Vice President of Investor Relations and Corporate Communication. Please go ahead.
Tania Almond: Thank you, Operator, and good day, everyone. Welcome to the Helios Technologies 3rd Quarter 2024 Financial Results Conference Call. We issued a press release announcing our results yesterday afternoon.
You will also find slides there that will accompany our conversation today.
On the line with me is Sean Bagan, Interim President, Chief Executive Officer, and Chief Financial Officer. Sean will review our third quarter results along with our outlook for the remainder of 2024. We will then open the call to your questions.
If you turn to slide 2, 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 those presented today.
Tania Almond: These risks and uncertainties and other factors have been provided in our 10-K filing as well as our upcoming 10-Q to be filed with the Securities and Exchange Commission.
Tania Almond: 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.
Tania Almond: 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 gaps with non-gap measures in the tables that accompany today's slides.
Speaker Change: Please reference slides 3 and 4 now. With that, it's my pleasure to turn the call over to Sean.
Sean Bagan: Thanks, Tania, and welcome, everyone. We appreciate you joining us today.
Sean Bagan: I would like to start the call with a heartfelt thank you to our suppliers, customers, business partners, and importantly, the Global Helios team, as we made advancements in the business during a challenging period for the organization.
Tania Almond: We delivered a solid quarter and made further improvements to our financial profile.
Sean Bagan: We hit sales within our guidance range for the quarter while contending with contracted markets. We generated nearly 35 million dollars in cash and reduced debt by over 19 million dollars.
Tania Almond: Our strong cash generated from operations is up almost threefold as we continue to unlock working capital.
Tania Almond: These results validate the progress we are making with enhanced discipline around cost, capturing efficiencies, managing inventory, and honing our capital priorities.
Tania Almond: We also had meaningful margin improvement on lower sales reflecting the team's efforts to align costs with current conditions, reduce input costs, drive manufacturing productivity, and realize the expected cost adjustments primarily from the officer transition.
Tania Almond: We utilized our excess cash to reduce debt for the fifth consecutive quarter and have brought our net debt to adjusted EBITDA leverage ratio to 2.8 times.
Tania Almond: Over the course of a two-month period, we faced three hurricanes here in Florida, two within two weeks of each other, including a direct hit to Sarasota by Category 3 Hurricane Milton.
Tania Almond: We can count our blessings because every member of the Helios and Sun Hydraulics team made it through without injury.
Tania Almond: Operations were shut down for 18 cumulative shifts throughout these storms. One of our three manufacturing facilities in Sarasota requires some additional repair before it is 100% operational.
Tania Almond: All things considered, we pulled through relatively well. Additionally, many of our people had to deal with the destruction the hurricanes caused to their homes and families.
Tania Almond: Our Global Helios team stepped up wholeheartedly and contributed much-needed supplies and support for us and our community.
Tania Almond: Their physical and emotional support touched everyone here, and we cannot thank them enough. It is a testament to the incredible people that we have in our organization and the shared values that we all live by every day.
Tania Almond: While I am encouraged by the progress the team is making to improve the underlying fundamentals of the business, given extended weakness in key end markets combined with the operational impacts of the storms, we are updating our guidance for the remainder of the year.
Tania Almond: I'll turn now to discuss our results for the quarter in further detail on slides 5 through 8.
Tania Almond: Sales were 195 million dollars near the midpoint of our quarterly guidance and down 3% compared with last year.
Tania Almond: Strong sales in health and wellness over the year-ago period partially offset the continued weakness in the agriculture, industrial, and recreational markets.
Tania Almond: The third quarter contains our typical patterns, which generally tend to be lighter than our second quarter, especially in Europe with the summer holiday shutdowns and maintenance work.
Tania Almond: The extended market weakness that we are seeing are reflected in the declines in both hydraulics and electronic sales year-over-year.
Tania Almond: By region, sales in APAC were the relative bright spot as there were declines in EMEA and the Americas when comparing with last year.
Tania Almond: During this time, we remain focused on bringing our best effort to customers with respect to quality, service levels, and responsiveness.
Tania Almond: Our Sun Hydraulics past-due backlog is at a 12-month low as we have stabilized from the post-Damon acquisition integration period, particularly as it relates to supply bottlenecks created from our manifold centers of excellence.
Tania Almond: The team is actively accelerating delivery dates and driving order commitment improvements.
Tania Almond: Our gross margin expanded 150 basis points over last year, despite $7 million in lower sales and the mixed weighting of our Balboa business. Concerted efforts to reduce overhead costs, as well as lower material costs, have benefited gross profit.
Tania Almond: We believe we will continue to make progress toward our goal of returning to the mid to high 30% range for gross margin over time from a combination of enhanced cost control, productivity improvements, and most importantly, growing volume.
Tania Almond: This includes the optimization of our manufacturing operations. For example,
Tania Almond: We have had line transitions from Tulsa to Tijuana, stood up our two Hydraulic Centers of Excellence in the Americas last year, and we are aligning manufacturing processes regionally in EMEA and APAC for improved efficiencies.
Tania Almond: Operating margin of 11.4% was up 450 basis points from last year.
Tania Almond: Non-GAAP-adjusted operating margin of 16.6% was up 290 basis points from last year. We have steadily improved operating margin through the year, even as depressed sales from challenging end-market conditions.
Tania Almond: Adjusted EBITDA margin expanded 320 basis points over the prior year period. These favorable variances reflect gross margin improvement, cost control measures, and the previously mentioned expected cost adjustment.
Tania Almond: Our effective tax rate in the third quarter was 14% and was primarily due to an overall increase in discrete tax benefits driven by the officer transition in July 2024.
Tania Almond: We now expect our effective tax rate for the full year of 2024 to be in the range of 20 to 21 percent.
Tania Almond: Diluted EPS was $0.34 in the quarter, up 209% over last year. Diluted non-GAAP EPS was $0.59 in the quarter, up 34% over last year.
Tania Almond: Starting on slide nine, I'll give more color by segment.
Tania Almond: Hydraulic sales declined 2% over the prior year period with gross profit dollars flat. The 2% sales decline was driven by declines in agriculture partially offset by growth in the industrial and mobile end markets.
Tania Almond: Foreign Exchange had a $600,000 favorable impact on segment sales.
Tania Almond: Power in Motion recently published statistics from the National Fluid Power Association reflecting the continued industry decline in total fluid power shipments of 14.9% in August 2024 compared to the previous year, as shown in our supplemental slides.
Tania Almond: We also just received the September data, and it reflects a 13.9% annual decline.
Tania Almond: The Ag Economy Barometer published by Purdue University, along with the AEM Ag Tractor and Combine Report, continue to reflect the U.S. agriculture market remains in decline. We are seeing these trends reflected in our hydraulic sales.
Tania Almond: We have maintained investments in new products and will continue to protect this investment as it's the lifeblood of Helios. This quarter, Sun Hydraulics announced a high-capacity electro-proportional flow control valve solution.
Tania Almond: The FP-JP valve takes full advantage of Sun's XMD series valve driver, co-developed in partnership with Helios operating company Innovation Controls, demonstrating the power of our integrated strategy.
Tania Almond: Sun also commercialized Energen in the quarter, and we have multiple pilot customers currently working to bring this into production. In addition, the hydrolith team has a handful of new product launches planned before year-end with a robust product pipeline that will continue to expand.
Tania Almond: Gross profit was relatively unchanged year-over-year while gross margin expanded 50 basis points on lower overhead.
Tania Almond: Operating income grew 32% driven by targeted cost controls in the current demand environment along with previously mentioned allocation of expected cost adjustments.
Tania Almond: Run rate SEA expenses declined over last year, displaying our work to adjust to changing market conditions and customer order timings.
Tania Almond: Turning to slide 10, I'll now discuss the electronic segment.
Tania Almond: Year-over-year, electronic sales declined 6%.
Tania Almond: Continued strength and health and wellness partially offset declines in recreational, industrial, and mobile markets.
Tania Almond: In the quarter, Alboa launched a new Compact Climate Zone 2 heat pump, along with new touchpads and advanced controllers, which have been integrated into several customers' cold plunge products.
Tania Almond: We also released a new SPA Touch 4 display with upgraded software and light controllers that have been adopted by several SPA OEMs.
Tania Almond: We also continue to invest in new display and control platforms from Innovation Controls with electronic subsystem solutions launches planned in Q4 and early 2025.
Tania Almond: We are encouraged by the early customer reception of recent display product launches cutting across multiple industries including the 12 and 15 inch Ultimate Series, the 7 inch Pro Series, and the 10.25 inch custom display in the recreational space.
Tania Almond: Electronics gross profit was up $1 million, while gross margin expanded 330 basis points over last year, reflecting the concerted focus on operational efficiencies and facility footprint optimizations.
Tania Almond: Operating income grew 62% from gross profit benefits along with previously mentioned allocation of expected cost adjustments.
Tania Almond: Run rate SEA expenses in this segment also declined over last year, displaying our work to adjust to changing market conditions and customer order timings.
Tania Almond: Slide 11 clearly presents how effective our cash management efforts have been with a free cash flow conversion rate of 244 percent.
Tania Almond: We generated cash from operations of $34.8 million in the quarter, up nearly three times over the third quarter of last year.
Tania Almond: We continue to reduce inventory, which is now down 7% since the end of last year. This is a meaningful part of our efforts to improve our liquidity profile as we finish out 2024.
Tania Almond: Capital expenditures in the quarter were six million dollars or 3% of sales. Spending is focused on strategic investments and operational improvement and productivity including machines tooling and footprint optimization.
Tania Almond: Based on the investments we have made over the last couple years, our capital expenditure needs will be driven primarily by maintenance and opportunistic investments for the foreseeable future.
Tania Almond: Turning to slide 12, at the end of the third quarter, cash and cash equivalents were $47 million, and we had $325 million available on our expanded revolver.
Tania Almond: Despite year-to-date sales contraction, total debt was down 8%, or $41 million, from the end of fiscal year 2023, and it's shown steady declines over the last five quarters, bringing our net debt to adjusted EBITDA leverage ratio down to 2.8 times.
Tania Almond: We have a solid balance sheet and financial flexibility to continue to pay down debt and invest organically in innovation and productivity.
Tania Almond: Importantly, our strong cash generating capabilities support our over 27 years of consistent dividend payments or 111 consecutive quarters.
Tania Almond: Turning to slide 13, as I mentioned earlier, we are adjusting our four-year outlook to reflect the weekend end markets combined with impact from the storms.
Tania Almond: As referenced in the beginning, the cumulative impact of the 18 lost manufacturing shifts equates to approximately $10 million in revenue. In addition, we estimate approximately $3 million in recovery expenses.
Tania Almond: The remaining reduction in revenue is due to markets in EMEA and the Americas continuing to decline with customers pushing out delivery dates as well as a weakened order book.
Tania Almond: We are adjusting our full year sales range to $800 million to $805 million. This implies revenue for 2024 down approximately 4% at the midpoint compared with 2023.
Tania Almond: We expect our adjusted EBITDA margin to be in the range of 19.0 to 19.6 percent and adjusted diluted non-GAAP earnings per share to be in the range of $2.10 to $2.20.
Tania Almond: Even with this updated outlook, we still expect to pay down debt in the fourth quarter while reducing our net debt to adjusted EBITDA leverage ratio further by the end of the year.
Tania Almond: You can find the other modeling line items in the supplemental slides.
Tania Almond: Slide 14 provides some additional understanding of where we see our market and operational drivers by segment along with updated full-year sales projections.
Tania Almond: Turning to slide 15, I believe our results this quarter and year to date show that we are making progress against our financial priorities. We have been demonstrating our ability to elevate the business even with the tough backdrop of weakening end markets and managing through multiple hurricanes.
Tania Almond: This is our third quarter in a row that we have expanded our operating margins. The changes we have made are yielding positive outcomes.
Tania Almond: This is the fourth quarter in a row that we have delivered on the Forward Quarter Financial Outlook that we have provided.
Tania Almond: While we acknowledge we have had to make four-year adjustments and there is room for us to keep improving our forecasting abilities, this highlights the short cycle order patterns and lead times we have across our businesses.
Tania Almond: For five quarters in a row, we have been able to reduce our debt balance and improve our leverage ratio, further strengthening our balance sheet.
Tania Almond: Through 2024, we have kept our foot on the gas from a product development perspective and continue to innovate and bring products to market.
Tania Almond: We are poised to capitalize on growth as and when markets turn. Our underlying business is more diversified than it has been historically, and this, combined with benefits of our focused efforts on continuous improvement, will become more apparent in our results as market conditions improve.
Tania Almond: As we approach the end of 2024 and commence planning for 2025, we are starting to form our views of the year ahead.
Tania Almond: We are cautiously optimistic that our end markets will start to exit their cycle troughs as they lap softer comps, especially come the back half of 2025. We plan to provide our modeling expectations when we report our fourth quarter results.
Tania Almond: Global GDP is forecasted for growth in 2025. Interest rates are expected to come down further.
Tania Almond: Industry data is pointing towards end market recoveries to begin at staggered timings in 2025, and our preliminary internal plans, considering current customer demand forecasts, are reflecting annual growth.
Tania Almond: Based on the investments we have made over the last several years, combined with our ability to continue to strengthen our financial profile, I could not be more excited about the prospect of shifting gears into growth mode by capitalizing on the opportunities that lie before us.
Tania Almond: In closing.
Tania Almond: I want to once again thank our global Helios team, who has demonstrated that through adversity, we can continue to unite. The resilience, dedication, and energy are undeniable across the Helios team.
Tania Almond: It is driven by a connectedness and engagement that is more powerful than it has ever been during my first 15 months with the company. There are no bounds to our potential as we continue to transform the business.
Tania Almond: With that, let's open the lines for Q&A, please.
Speaker Change: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad.
Speaker Change: The confirmation tone will indicate your line is in the question queue.
Tania Almond: You may press star and 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Ladies and gentlemen, we will wait for a moment while we poll for questions.
Speaker Change: The first question comes from Mick Dover with Baird. Please go ahead.
Mick Dover: At least to me, when I looked at your report here, what stood out was the SG&A, and if I'm looking at SG&A in hydraulics in particular, quite a significant year-over-year decline.
Mick Dover: I guess two questions. The first one is can we sort of separate out what was unique in a quarter in terms of
Tania Almond: benefits whether it's like you know bonus accruals that reversed or something of the sort versus what might be kind of like sustainable as we think about savings into the fourth quarter and maybe even into 2025
Speaker Change: Hey Meg, good morning. Thanks for joining. Appreciate the question and...
Speaker Change: Yeah, let me try and unpack a bit of that. So the biggest adjustment was a
Speaker Change: stock-based compensation.
Speaker Change: a cruel reversal in the third quarter due to the officer transition. And not to get too detailed in the accounting, but there's two methods you do that.
Speaker Change: One method a company elects to take them on an estimated basis and you assume a forfeiture rate throughout your
Speaker Change: periods, that the stock-based comp is...
Tania Almond: is being expensed, or alternatively...
Tania Almond: You take the expense on a cash basis at the time of forfeiture. We elect the former, so we take the one-time benefit. So, I'll give it to you on a year-to-date basis.
Speaker Change: that adjustment was 2.7 million dollars of a expense pickup net of the cost in the third quarter in isolation it was five and a half million dollars so when you take that out for our third quarter just from a run rate perspective we were still down
Speaker Change: $2.1 million.
Speaker Change: from the prior year.
Speaker Change: And as you highlighted, there are specific actions we had taken. As you know, when we put out our guidance for the full year, it was predicated on a back half growth story. And with that back half growth story, we had assumed that we would be layering in more cost to support that girl. As we saw that not materializing starting in the second quarter.
Speaker Change: and now reinforced even further with our cut in the fourth quarter, we tapped the brakes and frankly took some cost actions to try and match with the current demand environment. And I can talk specifically to some of those.
Speaker Change: But they're the ones you would think about when you look at our cost buckets, headcount is a big one. And so it's not adding those incremental roles, it's not being as quick from a backfill perspective.
Speaker Change: Those more discretionary costs like travel, I'm not going to call it a travel freeze. I'll call it a travel frost unless it's really, truly customer facing. And we need to take that trip, dial that back. A lot of the corporate expenses minimizing that consultants.
Speaker Change: Those sales and marketing efforts, those engineering efforts, we're not cutting there. We're continuing to invest there because we see this as temporary.
Speaker Change: Market Headwinds that we want to be positioned really well coming out of it as our markets recover and I think to try to highlight some of those things on the call in terms of our product development and our new products that we've launched that will help support that growth as and when these markets turn.
Speaker Change: David Tarantino, David Tarantino, David Tarantino,
David Tarantino: I see. That's helpful. Thank you. You know, you referenced gross margins several times in your prepared remarks.
David Tarantino: talking about getting back to a more normalized level, but you know, if we're looking at hydraulics specifically...
David Tarantino: You're running call it 31 ish percent gross margin, you know looking back this business just a couple years ago Was it 35 36 at a point in time? It's even higher than that at 37
Speaker Change: Now, there's been some volume compression. We recognize that over the past couple of years. But I'm kind of curious as to how you think about this business going forward.
Speaker Change: At what point in time do you guys have to make some decisions around...
Speaker Change: Tania Almond, Josef Matosevic, Sean Bagan
Speaker Change: or is there something that you can proactively do to get margins closer to what you would consider to be a more normalized level?
Speaker Change: Yeah, great question and it's specific to hydraulics.
Speaker Change: recognize the gross margin contraction but a hundred percent would point first and foremost to the volume and you've seen that contract.
Speaker Change: and keep in mind too during this period of contraction there's also been new acquisitions that have been added to that hydraulic segment specifically Schultes
Speaker Change: and Damon and so you factor in that incremental growth as well and then that highlights that the Sun and faster businesses have had more contraction.
Speaker Change: Those acquisitions didn't come with the same gross margin profile that we enjoy at Faster and Sun and so they've been dilutive at the gross profit level but from a EBITDA perspective pretty strong given they have lower cost structures.
Speaker Change: The other thing I'd maybe highlight just within the segment of hydraulics is that mixed segment. Particularly this year, we've been more impacted by the ag down cycle, which the faster business is more indexed towards.
Speaker Change: and the Sun business is actually holding pretty flat year over year from the cartridge valve and the manifolds.
Speaker Change: and from a margin perspective that that fast food business typically runs a little higher and so within the segment you got a little bit of a bad guy developed there as well.
Speaker Change: But overall, with the volumes, that's the number one factor, and as we return those, we will expect and we will show and demonstrate that. I think you would have seen that, too, in the first half of the year.
Speaker Change: looking at it sequentially to the back half of last year, and now we're in this constrained environment right now, but we would expect
Speaker Change: Last thing I'll point to is there was numerous centers of excellence, repositioning of products, manufacturing plants, not only here in the Americas, but also what we're working on in Europe.
Speaker Change: and in Asia positioned really well. The Asian market continues to be a bright spot for us. So as and when the volume returns and you have that fixed cost structure already in our actual results, we're going to naturally get more leverage out of that.
Speaker Change: So it sounds to me that we just have to wait for higher volumes. If that's the case...
Speaker Change: What sort of volume do you think is required here, given all the changes that you talked about, in order to get back to 35-36% gross margin?
Speaker Change: Is that target even achievable or tangible at this point or should we set our sights a little bit lower?
Speaker Change: No, I think it's levels that we've achieved as a company before. It's the $225 million type quarters where we'd expect to be in the mid-30s at that point.
Speaker Change: And as we can push towards that billion-dollar run rate of $250 million quarters and beyond, that's when we see our ability to surpass the 35% and be marching towards the upper 30s.
Speaker Change: Last question for me. It sounds, in the way you've described the setup for 2025, it's likely going to be a year with sort of a tail of two halves, right? You're starting slow in your hydraulics business, probably down year over year, maybe things get better in the back half.
Speaker Change: and I recognize that I already kind of asked this question but you know how do you plan on running the business?
Speaker Change: to sort of address that slow start to 2025. Is there something else that you can do from a temporary cost standpoint, or should we basically think about modeling average or above-average decremental margins to start the year? Thank you.
Speaker Change: Yep, thanks, Meg. Yeah, I...
Speaker Change: For me, that's the...
Speaker Change: That's a million-dollar question, and we don't want to cut too deep that we're not ready when the markets return, but for us it's continuing to focus on those discretionary type expenses, but we we've come out, we came out of our long-range planning, strategic planning cycle, and we're in the midst of our budget planning and certainly, there's still a lot of mixed signals out there, but
Speaker Change: What we're seeing is the timing and the
Speaker Change: duration of these market downturns and the cycles historically that these markets have operated in.
Speaker Change: has to be coming to an end. They've been sustained down for too long, and so we will be very cautious to not get ahead of ourselves and continue to operate. For instance, in the fourth quarter, implying in our guidance would be
Speaker Change: year-over-year operating expense reductions.
Speaker Change: We will continue to maintain that run rate and as and when we see the orders tick up and the leading indicators
Speaker Change: in the macro data.
Speaker Change: would be when we will trigger to invest further. But we're also have the playbook of what do we have to do if it gets worse and look at where could we take down costs further. So I wouldn't say we're at a point that we won't have some levers still.
Speaker Change: But it's going to be more predicated on the macro for us.
Speaker Change: Thank you. Good luck.
Speaker Change: Thanks, Meg.
Speaker Change: Thank you.
Speaker Change: The next question comes from Chris Moore with CJS Securities. Please go ahead.
Chris Moore: Hey, good morning guys. Thanks for taking a couple. Yes, so you talked about total fluid power shipments down 14.9% in August, 13.9% annual decline.
Chris Moore: Is the expectation for kind of slow and steady improvement when it does begin or is there
Chris Moore: the opportunity for, you know, a quick turnaround in certain products or end markets.
Speaker Change: Thanks, Chris. Good morning. I don't see it as a hockey stick drastic move, despite the market weakness that we highlighted and is well documented out there through the industry.
Speaker Change: data, we feel actually pretty good from a Sun Hydraulics perspective. We're flattish this year and year over year. So in fact, we're gaining some market share. We certainly last year had our own inflicted
Speaker Change: with our Centers of Excellence, if you recall, building the backlog with the Damon acquisition and quick expansion and moving all the manifold assembly up from Sarasota to Indiana. And so as these markets do recover
Speaker Change: I would expect that we can outperform because one, we are doing that now and we would expect that to continue, but on top of that, we're pretty excited about the product pipeline. I referenced a couple products in the prepared remarks.
Speaker Change: And I will tell you, I'm just as excited about what we haven't talked about yet that really, really will help accelerate. And then...
Speaker Change: The final thing that's really important in that market is our ability to hit our commitments on delivery lead times.
Speaker Change: that backlog didn't help last year. I understand and I apologize to our customer on some of the delays that we had in fulfilling their orders, but as we highlighted, we're in a way different spot right now with a 12-month low on that.
Speaker Change: that backlog and our commitment to not only hitting our delivery times but now moving to the next phase of improving them and getting back to what our
Speaker Change: legacy Sun customers are accustomed to with us. And so you put those factors together and that's what gives us confidence that we can actually outperform there.
Speaker Change: Got it. That's helpful. APAC looks like one of the bright spots. You know, revenue growth, I think both segments for Q2 and Q3. Maybe talk a little bit more about what you're seeing there.
Speaker Change: reminds how far below peak revenue are you there currently and you know just how important is it to have local manufacturing there you know especially in China
Speaker Change: Yeah, I think there's two stories to that group.
Speaker Change: I'm a hydrologist working on an electronics story, and to your specific question, we're not back to levels that were pre-pandemic, and certainly the APAC region was most severely impacted from us.
Speaker Change: in our sales that went down first. So we're we still got room to get back to where that was at and then start growing it. But when when and I was I was over in the region in the second quarter and what I see from a hydraulics perspective is we've got the in the region for the region strategy which is
Speaker Change: serving us very well to service our customers, be closer to them, don't have the long lead times, whether it's the supply chain or our deliveries to our customers and
Speaker Change: Within that there was a there was just a show here this past month in China and what we're seeing a trend develop is with the look there's a lot of local manufacturers it's not the big American and European
Speaker Change: OEMs that are selling the volume in China. It's local manufacturers and what was very noticeable at the show was a technology advancement to
Speaker Change: position ourselves both from a electronics but also hydraulics perspective to capitalize on that for instance faster. We sell a lot of couplers in China. We've got our subsidiary that sells directly to unique OEMs there but
Speaker Change: our advanced products from a faster perspective and our system solutions.
Speaker Change: would be perfect for that as that market advances. And so we're excited about that, but also within the hydraulic segment, we've got a beautiful business in Australia called CFP that continues to outpace
Speaker Change: The rest of the region and continues to outpace our hydraulic segment growth and even our overall company growth.
Speaker Change: It's a distribution business, but also heavy into the mining industry, so we sell our sun cartridge valves through that.
Speaker Change: but also servicing business from an engineering perspective in the mines.
Speaker Change: Unfortunately, from a mixed perspective, it's not as profitable as the rest of the hydraulic segment, just purely selling cartridge valve components or coupler components that faster. And so, it actually has been a headwind from a profitability perspective, but the top line has been a good trend. When I moved to electronics,
Speaker Change: one particular
Speaker Change: A trend that we're seeing there is on the health and wellness side. The Chinese manufacturers are getting very aggressive. We've been on the ground recently and seen a tremendous amount of investment in manufacturing.
Speaker Change: Automation and a lot of those spas are right now being made in China and exported to Europe.
Speaker Change: We think the market will come to the U.S. as well, but there's obviously a lot of formidable
Speaker Change: customers of ours, OEMs in the U.S. that already have supply chain and manufacturing here. But it could be a trend there. And so we're seeing our health and wellness grow aggressively right now. And that was thanks to the Joy On Way acquisition, if you remember, that we made back in
Speaker Change: 2021. So we have full manufacturing capabilities and it's part of that strategy of in the region for the region. So that's where a lot of our growth is coming from right now in in Asia.
Speaker Change: Got it. Very helpful. Maybe just one last quick one. Given the election results, just any thoughts from a, you know, tariff perspective?
Speaker Change: Yeah, obviously we've been watching that closely.
Speaker Change: I think from the tariff perspective not as concerning for us and that goes back to the in the region for the region strategy most of our supply chain is localized
Speaker Change: So, I think it's more impactful for products that are in markets or if you have a strategy of sourcing from China for components into your production in the Americas. So that is not as impactful for us, but certainly we are excited about the opportunity to reduce corporate tax rates.
Speaker Change: We think local manufacturing will be rewarded. We're proud to have manufacturing throughout the United States across both of our segments.
Speaker Change: And overall, I think it should be a net neutral or a net good guy for us from an EPS perspective.
Speaker Change: Got it. I appreciate that. I'll jump back in line. Thanks, Sean.
Speaker Change: Thank you.
Speaker Change: The next question comes from Nathan Jones with Stiefel. Please go ahead.
Nathan Jones: Good morning, everyone.
Nathan Jones: I just wanted to start off following up on Nick's line of questioning on getting back to mid-thirties gross margins in hydraulics.
Speaker Change: You mentioned a $225 million quarterly run rate to get back to that level.
Speaker Change: You guys have added a fairly significant amount of capacity since a couple of years ago when you were at that level. Is there...
Speaker Change: Can you get back to that kind of historical gross margin levels at historical volume levels? Do you need additional volume to absorb that capacity that's been installed over the last couple of years?
Speaker Change: Yeah, well, so just to clarify, my 225 wasn't just specific to hydraulics. I know it makes questions, so that was total company, obviously, but I think if you look at.
Speaker Change: We were in the lower 30s the first half of the year, approaching kind of 34%, and not quite at that 225 level.
Speaker Change: The additional activities we've done and the investments we continue to make from a CapEx perspective are focused no longer on capacity because we view that we have ample capacity to support.
Speaker Change: hundreds of millions of dollars of incremental sales.
Speaker Change: collectively through all our plants and so as that volume goes through it we don't need to add fixed costs or anything and so that's going to drop so
Speaker Change: I think we can get there with the existing footprint cost structure at that $225 million level to the mid-30s.
Speaker Change: Thank you.
Speaker Change: And, again, I'd point back to where we were in the first half of the year to give you a little confidence in that, and not to mention some of the other just overall mixed headwinds we've had this year. For instance, on the electronic side, the growth is coming from the health and wellness space, the Balboa space that we know is lower margin than our innovation controls.
Speaker Change: indexed heavily to that REC and range space. So as and when that market turns, that will also help.
Speaker Change: Okay, thanks for that. I guess a follow-up question.
Speaker Change: You guys took down revenue guidance for the full year, about $25 million, most of which is in the fourth quarter.
Speaker Change: normal decremental margins on that revenue decline. It does appear that the floor quarter, kind of from an operating perspective, is maybe a little bit better than you were expecting before. If you hadn't have had these headwinds, it would have seemed that the margin would have been better than anticipated.
Speaker Change: Can you I guess I
Speaker Change: confirm or deny that my math is correct and then talk about you know the operating performance of the business outside of these disruptions that you're seeing.
Speaker Change: Yeah, well, that's certainly from a trend and a sequential and an improvement. Absolutely, we would have expected the fourth quarter to continue to improve.
Speaker Change: When we did have to adjust it down, certainly that hurt from a gross profit rate perspective. But I would also say because we hadn't paced in the expense that we had planned earlier in the year, that certainly is helping as well.
Speaker Change: You know, roughly 300 to 400 basis points. So, what was the number you threw out there, Nathan? Sorry, I missed it.
Nathan Jones: I think without the headwinds of lower revenue and the additional expenses for the hurricanes and things like that, the EBITDA margins in the fourth quarter were probably looking at something in the low 20s.
Speaker Change: before all of these adjustments around it would have been higher than was embedded in the prior guidance it's just
Speaker Change: question. Agree. No, you're exactly. I'm aligned with you. Sorry, I just missed that first part of your question.
Speaker Change: No worries. Okay, so maybe you could just talk about what's led to the just better core operating performance in the businesses there.
Speaker Change: David Tarantino, David Tarantino, Adam Farley,
Speaker Change: Sure, so the normalization of all of the activities from a back-end operational footprint certainly have have helped.
Speaker Change: from a specific activity perspective.
Speaker Change: I would refer to the Centers of Excellence.
Speaker Change: One is our continued efforts from the Tulsa to Tijuana facility, so we continue to ramp up production.
Speaker Change: in our Mexico. You know we expanded that facility last year and as we get more leverage and fill that up...
Speaker Change: That certainly helps just from a lower...
Speaker Change: and the cost perspective. I think the in the region for the region strategy is paying off. I mentioned the acquisition of Joyanwei that has helped on the electronic side.
Speaker Change: but
Speaker Change: We continue to make other efforts on optimizing that footprint, even within EMEA right now. We acquired NEM, as you know, more recently, and between the NEM and FASTER being in Italy, some optimization efforts there. So, these benefits will ramp and continue to gain traction and improve, but will span
Speaker Change: multiple quarters and right now are subdued just because of the volumes. So those are, those would be the ones I would point to that are having the most impact here in the near term.
Speaker Change: Awesome, thanks very much for taking my questions.
Speaker Change: Thank you, Nathan.
Speaker Change: Thank you.
Speaker Change: The next question comes from Jeff Hammond with KeyBank Capital Markets. Please go ahead.
Jeff Hammond: Hey, good morning everyone.
Speaker Change: Hey, Jeff. Hi, Jeff.
Jeff Hammond: Maybe just give us an update on, you know, system win, progress, you know, is the weaker markets kind of slowing that sales cycle or are you still seeing, you know, good progress on that?
Jeff Hammond: Thank you.
Speaker Change: Yeah, for sure. Thanks, Jeff. So absolutely fully committed to that strategy and also very excited about what we've done over the last quarter in terms of progress.
Speaker Change: in advancing some system solution opportunities.
Jeff Hammond: In fact, next week, well, likely early in the week.
Jeff Hammond: have a press release out about a new subsystem win in the electronics segment.
Speaker Change: and it'll be a great example of what I've been talking about of us getting closer to our customers, gaining more wallet share from them, being in an extension of their engineering facilities. This particular one is, and I also have highlighted in the past, this is a space that came from that
Speaker Change: It takes a while. You got to get in early in the product development cycle, multiple years. And so this particular one we'll talk about was
Speaker Change: Three years ago, an existing customer where we were sitting with them with, you know, the drawings up on the wall, the cardboard cutouts of what it needed to look like.
Speaker Change: and then
Speaker Change: partnering, sitting next to them along that process all the way up to, all right, get the clay models, here's the production build, let's validate, test it, let's tweak it.
Speaker Change: And so...
Speaker Change: That's an example, but I would also tell you that's a big part of our strategy going forward is our go-to-market plans.
Speaker Change: and building that funnel further, getting closer to the customers. So we, and as a reminder, we don't put any of these into our guide until we know, and we are working some larger ones still. And once we know them and have them, we will absolutely talk about them. We'll absolutely put them in.
Speaker Change: We don't want to get in front of ourselves, but I would highlight I'm as excited as I was since I've been here because there's very real opportunities that the team across both segments are chasing.
Speaker Change: And frankly, as we get our leverage down, we've said we want to run this business between two times and three times. We're making good progress on that.
Speaker Change: That's going to be core to our M&A strategy of how we become...
Speaker Change: More, more beneficial to a customer, how we provide them with value and more solutions that makes it stickier. And many times we're displacing multiple suppliers with these types of projects.
Speaker Change: And once we're in, it's hard to eliminate that, and partially that's on us to continue to innovate, listen to the voice of the customer, partner with those customers to develop the things that their customers want, and ultimately to like them. So, long-winded answer, I know, Jeff, but no, we're really excited about that.
Jeff Hammond: That's helpful. Just on the 10 million revenue loss from the hurricane, I'm just wondering if there's a catch-up period in 1Q or first half 25 or is kind of the markets weakening make that you know less clear?
Jeff Hammond: Well, not only less, maybe, yeah, it's a little less clear, but also...
Speaker Change: What's happening now in a period where markets are a little bit strained?
Speaker Change: It's actually an okay time for that. I think we do get the volume back, but we're running three shifts. So we've got three facilities here in Sarasota that make carpentry valves.
Speaker Change: And they're running three shifts. So it's not like we can add additional production. But we also are experiencing 12-month high distributor inventory levels across the globe from a VELP perspective. Now it's
Speaker Change: It's continued to increase each quarter, and so
Speaker Change: One thing that's important and the easy button for us would have been, let's just continue building, let's continue to grow our own inventory.
Speaker Change: and to help preserve our markets. But we haven't done that. As we've talked about, we've taken inventory down $7 million. It's a big part of our working capital initiatives and debt reduction. And so I think it will be volume that can come back over time, but it will be more predicated on just the general markets improvements.
Speaker Change: Okay, and then last one, it seems like, you know, maybe more markets got worse than better this quarter, but, you know, as we move into 25, what do you think are...
Jeff Hammond: are some end markets that are maybe more clearly stabilizing or showing signs of maybe being the earlier, you know, earlier to return to growth.
Speaker Change: Thank you for watching!
Speaker Change: Yeah, you're right. I mean, certainly we felt that, that more markets turned negatively than positively. And again, hence why we got it down a little bit lower. But again, some of the...
Speaker Change: the positions in the market cycles that these challenging markets are would would tell us that
Jeff Hammond: They could be troughing and returning to growth next year. I'll point to the space that I came from I mean certainly the OEMs and the marine and power sports space
Jeff Hammond: have maintained really strict inventory and production.
Jeff Hammond: discipline in response to their current market demand and as a critical component supplier to them.
Jeff Hammond: When they're not producing or they're cutting their builds, that hurts us.
Jeff Hammond: I do think, with interest rates.
Jeff Hammond: One cut's not enough to move that market, but as further cuts develop, if they develop, that will bring those payment buyers back into that market. And that's going to be needed because a lot of that product is financed. And as that comes back in, I think that will help our innovation controls business. And I also highlight that we're operating off of.
Jeff Hammond: relatively low comps and relatively low expectations for a sustained period that again I think that that gives us an opportunity to start growing whether or not our existing customers grow or all of those diversification efforts and going deeper with existing customers or getting old customers to return to us as well.
Speaker Change: Okay, thanks a lot.
Speaker Change: Thanks, Jeff. Thanks, Jeff.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, a reminder to all the participants that you may press star and 1 to ask a question.
Speaker Change: Thank you for watching. Have a great day.
Speaker Change: The next question comes from John Brath with Kansas City Capitol. Please go ahead. Good morning, everyone.
John Brath: Sean, I'd like to return to FASTER a little bit, and I'm curious how far out you can see the business, obviously OEM related, and how far out does the order book extend? And then secondly,
John Brath: The agricultural cycle, at times, has some legs, and it takes a while for things to turn around. And should this cycle extend a little bit longer than maybe what you might think,
John Brath: Do you have some levers to pull at faster to improve the cost structure, maybe labor force reductions or something like that? Just curious how you might look at the business if the cycle continues to be soft for an extended period of time.
John Brath: Thank you very much.
Speaker Change: Certainly, that's an area that for us, we talked about last year FASTER having a record year. It was the best year ever, despite there was already some ag weakness in the marketplace.
Speaker Change: And I give Matteo Arduini and the team over there a lot of credit for really trying to diversify, not away from ag, but adding just construction, mobile, and markets, and looking for those adjacent markets that use couplers.
Speaker Change: And with our board at the strategy session, that was a key topic for FASTER, how we can go deeper and look for those other markets.
Speaker Change: There's a lot of things that use couplers in this world, and we're positioned really well to attack some of them. And so where are those growth markets? And so from that piece, longer term...
Speaker Change: We think we can sustain this, and whether it continues on further, we certainly don't see the ag improving in the first half, at least from our perspective, in the next year, but back half isn't out of the question.
Speaker Change: is closed down every Friday for the rest of the year. We're extending a little bit of that to our faster business as well. And frankly, slow playing some of the expansion that we talked about going on there. We're pacing that accordingly because we don't need that capacity. So there's levers there, but it goes back to we don't want to cut too deep because as and when that market returns or those diversification opportunities are realized, we need to be able to aggressively grow that business and get it back to where it was.
Jeff Hammond: And the last thing I would highlight, just from a cost, one thing we've done here in the Americas is we've absorbed the faster U.S. business into our sun hydraulics facilities and daemon facilities, so that helps certainly just from a cost perspective as well.
Speaker Change: Okay, Sean, thank you very much.
Jeff Hammond: Thank you.
Sean Bagan: Thanks, John. Thank you.
Speaker Change: We have the next question is from Mick Dover with Baird. Please go ahead.
Mick Dover: Yeah, thanks for taking a follow-up and this is really related to a question somebody asked earlier about the election and the outcomes here. I mean you mentioned your Tijuana facility several times and obviously we know that you have good exposure there and there's a
Jeff Hammond: Obviously, tariffs for Mexico are on the table, NAFTA gets renegotiated in 2026, and I recognize it's a little bit early to have a definitive answer here, but in terms of how you think about managing the business,
Jeff Hammond: Are we...
Jeff Hammond: It's sort of...
Jeff Hammond: U.S. locations, or is it that you're just going to try to manage through that with price increases and other cost savings or efficiencies that you might get, but still maintain sort of the existing manufacturing strategy that you have in place? Thank you.
Speaker Change: Yeah, it's a great question. Obviously, it's speculation at this point, but certainly we've heard the rhetoric in the news as well on Mexico and the large ag OEMs challenge there.
Speaker Change: TANIA ALMOND, JOSEF MATOSEVIC, SEAN BAGAN
Speaker Change: If there was a negative impact, that's the beauty of we do have dual manufacturing capabilities. What we do in Tijuana can be replicated here in the United States in our health facilities and other facilities in the Midwest as well, or vice versa. We've certainly enjoyed the benefit, particularly on the innovation controls.
Speaker Change: Thank you.
Speaker Change: shift of some of the Tulsa to Tijuana manufacturing from a cost perspective, but to your point.
Speaker Change: Thank you.
Speaker Change: Cheer ups
Speaker Change: new tariffs or new NAFTA, you know, renegotiated that, abate those, then yeah, we would look at different footprint optimization. I don't see a scenario that we shut down a plant completely because when you look at like the Balboa business, that's how when we acquired Balboa, how we acquired the
Speaker Change: the Mexico footprint from a manufacturing perspective. That's important strategically too. A lot of those customers are out there on the west coast. We also have a facility in the United States for Balboa down in Otay.
Speaker Change: near the border in San Diego that we could look to help augment some of that as well. So tough to prognosticate or speculate right now but certainly something we're aware of and watching.
Jeff Hammond: David Tarantino, David Tarantino, David Tarantino,
David Tarantino: Appreciate it. Thank you.
David Tarantino: Thanks, Meg.
David Tarantino: Thank you.
Speaker Change: As there are no further questions, I would now like to hand the conference over to Tania Almond for closing comments.
Tania Almond: Great. Thank you, Operator, and thanks everyone for joining us today. We published our upcoming conference schedule for the next few months this morning and we look forward to seeing many of you on the road and virtually. Thank you so much and have a great day.