Q4 2024 Helios Technologies Inc Earnings Call
Operator: Greetings and welcome to the Helios Technologies fourth quarter 2024 financial results. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero.
Greetings and welcome to the Helios technologies fourth quarter 2024 financial results.
At this time all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad.
Tania Almond: As a reminder, this conference is It is now my pleasure to introduce your host, Tania Almond, Vice President of Investment Relations and Corporate Communication. Thank you. You may begin.
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 communications. Thank you you may begin.
Tania Almond: Thank you, Operator, and good day, everyone. Welcome to the Helios Technologies fourth quarter 2024 financial results conference call. We issued a press release announcing our results yesterday afternoon. If you do not have that release, it is available on our website at hlio.com. You will also find slides that will accompany our conversation today, as well as our prepared remarks.
Speaker Change: Thank you operator, and good day, everyone welcome to the Helios technologies fourth quarter 2024 financial results Conference call. We issued a press release announcing our results yesterday afternoon. If you do not have that release. It is available on our website at H L. I O Dot com.
You will also find slides that will accompany our conversation today as well as our prepared remarks.
Tania Almond: Here with me is Sean Bagan, President, Chief Executive Officer, and Chief Financial Officer. Sean was promoted to President and CEO in early January of this year. The company is currently conducting a search for a new CFO. Also joining us is our Vice President, Corporate Controller, Jeremy Evans. Jeremy joined Helios in January 2024. Some of you have met him before, either telephonically or at an investor conference.
Speaker Change: Here with me is Sean begun President Chief Executive Officer, and Chief Financial Officer, Shawn was promoted to President and CEO in early January of this year.
Speaker Change: Company is currently conducting a search for a new CFO.
Speaker Change: Also joining us is our vice President corporate controller, Jeremy Ovens, Jeremy joined Helios in January 2020 for some of you have met him before either telephonic Lee or at an Investor Conference <unk>.
Tania Almond: Sean will start the call with highlights from the 2024 fiscal year, then hand it over to Jeremy to review our fourth quarter and full year results. Sean will then conclude our prepared remarks with our 2025 outlook, financial priorities, and key focus areas. We will then open the call to your questions.
Speaker Change: John will start the call with highlights from the 'twenty 'twenty four fiscal year, then hand, it over to Jeremy to review, our fourth quarter and full year results.
Speaker Change: Sean will then conclude our prepared remarks, with our 2025 outlook financial priorities and key focus areas.
Speaker Change: We will then open the call to your questions if.
Tania Almond: 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. These risks and uncertainties and other factors have been provided in our 10-K filing filed in February 2024, as well as our upcoming 10-K to be filed with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov.
Speaker Change: If you turn to slide two you will find our safe Harbor statement.
Speaker Change: 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.
Speaker Change: These risks and uncertainties and other factors have been provided in our 10-K filing filed in February 2024, as well as our upcoming 10-K to be filed with the Securities and Exchange Commission you can find these documents on our website or at SEC Gov.
Tania Almond: I'll also point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP with non-GAAP measures in the tables that accompany today's slides.
Speaker Change: 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.
Speaker Change: We have provided reconciliations of comparable GAAP with non-GAAP measures in the tables that accompany today's slides. Please reference slide three now with that it's my pleasure to turn the call over to Sean.
Tania Almond: Please reference slide 3 now.
Sean Bagan: With that, it's my pleasure to turn the call over to Sean. Thanks, Tania, and welcome, everyone. We appreciate you joining us today. Before jumping into the fiscal 2024 results and our outlook for 2025, I would like to start with a few comments reflecting on the past year. We continued investing in innovative new products despite stubbornly depressed end markets that have pressured our top line sales. Our most impactful product introductions in 2024 on the hydraulic side included launching 11 new cartridge valves, including an electro-proportional flow control valve and a commercialized Energent valve. On the electronic side, we launch PowerVue U150 15-inch and PowerVue U120 12-inch displays, SenderCan plus solution, and the PowerVue U35 display.
Sean Shawn: Thanks, Tanya and welcome everyone. We appreciate you joining us today.
Speaker Change: Before jumping into the fiscal 2024 results and our outlook for 2025, I would like to start with a few comments, reflecting on the past year.
Speaker Change: We continued investing in innovative new products. Despite stubbornly depressed end markets that have pressured our top line sales.
Speaker Change: Our most impactful product introductions in 2024 on the hydraulics side included launching 11, new cartridge valves, including in electro proportional flow control valve and a commercialized energen belt.
Speaker Change: On the electronics side, we launched our view you want 50, 15 inch and power view you. One 2012 inch displays sender can plus solution and the power of you use 35 display.
Sean Bagan: On the service and software side, we issued a press release last week highlighting the work our team at i3 Product Development did with Alto Sham, helping to rebuild their ChefLink infrastructure, ensuring a more robust and scalable commercial kitchen solution. That solution also integrated our Cygnus Reach remote support technology, which empowers their service teams to not only provide real-time insights into oven performance, but can also diagnose issues remotely and address potential concerns before sending out a field technician. This is our first customer case study showcasing our entry into the commercial food service market. Our teams also stayed close to our customers in the regions we serve them, while actively showcasing our leading brands at trade shows across the globe.
Speaker Change: On the service and software side, we issued a press release last week highlighting the work our team at <unk> three product development did with alto sham, helping to rebuild their shuffling infrastructure, ensuring a more robust and scalable commercial kitchen solution.
Speaker Change: That solution also integrated our sickness reach remote support technology, which empowers their service James to not only provide real time insights into oven performance, but can also diagnose issues remotely and address potential concerns before sending out a field technician.
Speaker Change: This is our first customer case studies showcasing our entry into the commercial foodservice market.
Speaker Change: Our teams also stay close to our customers in the regions, we serve them well actively showcasing our leading brands at trade shows across the globe, we drove operational efficiency and have been right sizing our cost framework thoughtfully with year over year operating expense declines each of the last three quarters for.
Sean Bagan: We drove operational efficiency and have been right-sizing our cost framework thoughtfully, with year-over-year operating expense declines each of the last three quarters. For the year, we had record cash generation as we focused on our cash conversion cycle with a concerted effort to reduce inventory. We further strengthened our balance sheet and improved our financial flexibility by reducing and refinancing our debt that resulted in lowering our borrowing spreads. Despite hurricanes, challenging market conditions and leadership changes, the global team united to support each other and importantly, our customers while delivering on operational improvements that have enabled us to expand quarterly margins on softer revenue.
Speaker Change: For the year, we had record cash generation as we focused on our cash conversion cycle with a concerted effort to reduce inventory.
Speaker Change: We further strengthened our balance sheet and improved our financial flexibility by reducing and refinancing our debt that resulted in lowering our borrowing spreads despite.
Speaker Change: Despite hurricanes challenging market conditions and leadership changes the global team United to support each other and importantly, our customers while delivering on operational improvements that have enabled us to expand quarterly margins on softer revenue.
Sean Bagan: I am incredibly proud of how my colleagues persevered through it all and humbled to be leading such an incredible team.
Speaker Change: I'm incredibly proud of how my colleagues persevered through it all and humbled to be leading such an incredible team.
Sean Bagan: Before I hand the call over to Jeremy, I would like to highlight that during my first year with the company in my CFO capacity, I prioritized building upon the strong foundation my predecessor had put in place. This included an assessment of the finance and accounting team, along with the structure to align them as business partners within the organization. Early organizational moves I made were to insert segment CFOs into the business. and top-grading talent in both voluntary and involuntary attrition. Jeremy was my first strategic hire to top grade our corporate controller position, bringing a wealth of experience from his 25 years at Tech Data, now TD Cenex.
Speaker Change: Before I hand, the call over to Jeremy I would like to highlight that during my first year with the company and my CFO capacity I prioritize building upon the strong Foundation my predecessor had put in place. This included an assessment of the finance and accounting team along with the structure to align them as business partners within the <unk>.
Speaker Change: Organizationally.
Speaker Change: Early organizational moves I made where to insert segment cfo's into the business.
Speaker Change: And top grading talent in both voluntary and involuntary attrition.
Speaker Change: Jeremy was my first strategic hire to top grade, our corporate controller position, bringing a wealth of experience from his 25 years at Tech data now TD Sonics.
Sean Bagan: While there, his responsibilities scaled with the company over the decades across logistics, procurement, sales operations, finance, and accounting. His servant leadership management style paired with his global mindset and experience in a larger organization has made him invaluable to the company. I have relied on his expertise, and he has been a great business partner to our leadership team.
Speaker Change: While there his responsibilities scaled with the company over the decades across logistics procurement sales operations finance and accounting his servant leadership management style paired with this global mindset and experience in a larger organization has made an invaluable to the company I have relied on this expertise.
Speaker Change: And he has been a great business partner to our leadership team Jeremy over to you.
Jeremy Evans: Jeremy, over to you. Thanks, Sean. My first year serving as corporate controller at Helios has been an exciting one as I've learned about the company's exceptional brands and met many members of our astounding global team. I'm proud to be part of such a strong leadership group that has shown great collaboration this past year, navigating through internal changes and macro challenges in our industry.
Jeremy Ovens: Thanks, Sean.
Speaker Change: My first year, serving as corporate controller Helios has been an exciting one as I've learned about the company's exceptional brands and met many members of our outstanding Global team.
Speaker Change: I'm proud to be part of such a strong leadership group that has shown great collaboration this past year navigating through internal changes in macro challenges in our industry.
Jeremy Evans: Now turning to our fourth quarter results, please reference slides four through eight. Sales in the quarter were $180 million, landing the year just above the upper end of our recent guidance range. Market growth and health and wellness partially offset the continued weakness in the agriculture, mobile, and industrial markets, while recreational markets remain depressed below historical levels. Our fourth quarter is typically the seasonally weakest quarter in the year given the holidays and was also impacted in 2024 because of Christmas and New Year's being midweek. By region, sales in APAC continue to improve, driven by the strength of our Australian custom fluid power business, helping to offset declines in EMEA and the Americas.
Now turning to our fourth quarter results. Please reference slides four through eight.
Speaker Change: Sales in the quarter were 180 million landing that you're just above the upper end of our recent guidance range.
Speaker Change: Growth in health and wellness, partially offset the continued weakness in the agriculture mobile and industrial markets, while recreational markets remain depressed below historical levels.
Speaker Change: Our fourth quarter is typically the seasonally weakest quarter in the year given the holidays and was also impacted in 2024, because of Christmas and new year's being a bit weak.
Speaker Change: By region sales in APAC continued to improve driven by the strength of our Australian custom fluid power business, helping to offset declines in EMEA and the Americas.
Jeremy Evans: As a side note, Custom Fluid Power as a distributor operates below our company's average margin profile. Foreign exchange unfavorably impacted sales by $100,000. For the quarter, gross margin expanded 150 basis points over last year, despite the 7% decline in sales. Likewise for the year, while sales were down 4%, gross margin remained unchanged. This is a direct result of realizing targeted pricing benefits in combination with actions taken to improve productivity and take out costs. Our objective is to return to the mid to high 30% range for gross margin over time, predicated on volume growth.
Speaker Change: As a side note custom fluid power as a distributor operates below our company average margin profile.
Foreign exchange unfavorably impacted sales by $100000.
For the quarter gross margin expanded 150 basis points over last year, despite the 7% decline in sales.
Speaker Change: Likewise for the year, while sales were down 4% gross margin remain unchanged. This is a direct result of realizing targeted pricing benefits in combination with actions taken to improve productivity and take out cost.
Speaker Change: Our objective is to return to the mid to high 30% range for gross margin overtime predicated on volume growth.
Jeremy Evans: We have refined our focus on driving returns on invested capital and working to deliver growth targeting our historic margin profile. To achieve these goals, we are re-energizing our sales engine. This starts with a clear focus on the customers and channel partners who have been with us for decades and identifying how we can further cross-sell as well as capture more share of wallet from our existing customer base. Beyond that, we will look to grow through markets that are leading products position us well to win by targeting new business to drive incremental growth. We are also using our mantra of continuous improvement on the way we innovate.
Speaker Change: We have refined our focus on driving returns on invested capital and working to deliver growth targeting our historic margin profile.
Speaker Change: To achieve these goals we are reenergizing our sales engine.
Speaker Change: It starts with a clear focus on our customers and channel partners, who have been with us for decades and identifying how we can further cross sell as well as capture more share of wallet from our existing customer base.
Speaker Change: Beyond that we will look to grow through markets that are leading products position us well to win by targeting new business to drive incremental growth.
Speaker Change: We are also using our mantra of continuous improvement on the way we innovate.
Jeremy Evans: To support this effort, we are simplifying the business and have reorganized the Helios Center of Engineering Excellence. We are moving the engineering expertise into our business segment operations and will close our facilities in San Antonio, Texas by mid-year. We are pivoting the organization to drive a customer-centric, sales-oriented culture that leverages the strengths of our hydraulics and electronics engineering expertise, our high-quality product portfolio, and our solid customer relationships. Operating income in the fourth quarter grew 12 percent. Despite the decline in sales, an operating margin expanded 120 basis points to 7.4 percent. On an adjusted basis, operating margin of 13.3 percent was up 70 basis points from last year.
Speaker Change: To support this effort we are simplifying the business and have reorganized the Helio Center of Engineering Excellence, we are moving the engineering expertise into our business segment operations and we will close our facilities in San Antonio, Texas by mid year.
Speaker Change: We are pivoting the organization to drive a customer centric sales oriented culture that leverages, the strength of our hydraulics and electronics engineering expertise, our high quality product portfolio and our solid customer relationships.
Speaker Change: Operating income in the fourth quarter grew 12%. Despite the decline in sales and operating margin expanded 120 basis points to seven 4%.
Speaker Change: On an adjusted basis operating margin of 13, 3% was up 70 basis points from last year.
Jeremy Evans: This improvement was the result of a 7 percent reduction year-over-year in SEA expenses combined with strength and growth margin. Adjusted EBITDA margin expanded 70 basis points over the prior year period. Our effective tax rate in the fourth quarter was 37.2%, while the full-year effective tax rate was 22.8%. This came in higher than our guide due to a change in the income mix in the various tax jurisdictions as well as some discrete items in foreign jurisdictions. As most of you realize, the effective tax rate is based on the full year, and quarters can vary based on discrete tax items from period to period.
Speaker Change: This improvement was the result of a 7% reduction year over year in SBA expenses combined with strength in gross margin adjusted.
Speaker Change: Adjusted EBITDA margin expanded 70 basis points over the prior year period.
Speaker Change: Our effective tax rate in the fourth quarter was 37, 2%, while the full year effective tax rate was 22, 8%.
Speaker Change: This came in higher than our guidance due to a change in the income mix and the various tax jurisdictions as well as some discrete items in foreign jurisdictions.
Speaker Change: As most of you realize the effective tax rate is based on the full year and quarters can vary based on discrete tax items from period to period.
Jeremy Evans: Diluted EPS was $0.14 in the quarter, up 40% over last year due to a one-time gain on insurance recoveries related to the 2023 fire and weather-related incidents at our FASTER facility in Italy. Diluted non-GAP EPS was 33 cents in the quarter, down 13% over last year. Fourth quarter EPS was negatively impacted by 4 cents compared to our guidance due to the higher effective tax rate and foreign exchange impact.
Speaker Change: Diluted EPS was <unk> 14 cents in the quarter up 40% over last year due to a one time gain on insurance recoveries related to the 20th twenty-three fire and weather related incidents at our faster facility in Italy.
Speaker Change: Diluted non-GAAP EPS was <unk> 33 cents in the quarter down 13% over last year.
Speaker Change: Fourth quarter EPS was negatively impacted by four cents compared to our guidance due to the higher effective tax rate and foreign exchange impacts.
Jeremy Evans: Starting on slide nine, I'll give more color by segment. Hydraulic sales declined 10% over the prior year period. This decline reflected weakness in agriculture and mobile end markets. Foreign exchange had an unfavorable $100,000 impact on segment sales.
Speaker Change: Starting on slide nine I'll give more color by segment.
Speaker Change: Hydraulics sales declined 10% over the prior year period.
Speaker Change: This decline reflected weakness in agriculture, and mobile end markets.
Speaker Change: Foreign exchange had an unfavorable 100000 dollar impact on segment sales.
Jeremy Evans: Keep in mind that our Sun Hydraulics business based in Sarasota, Florida contended with the impacts of Hurricane Milton early in the quarter combined with the previous two hurricanes before it. Our entire Sarasota operations lost production across 18 cumulative shifts. Hydraulics gross profit and gross margin contracted year over year 14% and 110 basis points respectively on lower sales volume. SEA expenses were down 10% compared with the prior year period, demonstrating the assertive efforts of cost control in streamlining our business given the current demand environment. Operating income was down $3.5 million, reflecting the contraction in gross profit with offsetting SEA cost control benefits.
Speaker Change: Keep in mind that our Sun hydraulics business based in Sarasota, Florida contended with the impacts of Hurricane Bill early in the quarter combined with the previous two hurricanes before it.
Speaker Change: Our entire Sarasota operations loss production across 18 cumulative shifts.
Speaker Change: Hydraulics gross profit and gross margin contracted year over year, 14% and 110 basis points, respectively on lower sales volume.
Speaker Change: SCA expenses were down 10% compared with the prior year period, demonstrating the assertive efforts of cost control and streamlining our business given the current demand environment.
Speaker Change: Operating income was down $3 5 billion, reflecting the contraction in gross profit with offsetting S. T a cost control benefits.
Jeremy Evans: Please turn to slide 10, and we'll discuss the electronics segment. Year over year, electronic sales were relatively unchanged. Higher sales and health and wellness help counter ongoing declines in mobile and industrial end markets compared with the same period last year.
Speaker Change: Please turn to slide 10, and we'll discuss the electronics segment.
Speaker Change: Year over year electronic sales were relatively unchanged.
Speaker Change: Higher sales in health and wellness help counter ongoing declines in mobile and industrial end markets compared with the same period last year.
Jeremy Evans: Our advanced new PowerVue products made headlines during the quarter as we won a key position on select Mastercraft boats. Electronics growth profit increased $4.4 million on flat sales, while gross margin expanded 730 basis points over last year, reflecting operational improvements and lower material cost, while also leveraging lower cost manufacturing in Mexico.
Speaker Change: Our advanced new power of your products made headlines during the quarter as we won a key position on select master craft boats.
Speaker Change: Electronics gross profit increased $4 4 million on flat sales, while gross margin expanded 730 basis points over last year, reflecting operational improvements and lower material cost, while also leveraging lower cost manufacturing in Mexico.
Jeremy Evans: SEA expenses were contained year-over-year despite inflation given the work on cost takeout. As a result, operating income measurably improved with stronger gross profit and stabilized SEA expenses.
Speaker Change: S. T. A expenses were contained year over year, despite inflation given the work on cost takeout.
Speaker Change: As a result operating income measurably improved with stronger gross profit and stabilized SCA expenses.
Jeremy Evans: Slide 11 shows we focused heavily on cash management this past year, as it was a cornerstone of the financial priorities Sean implemented when we started the year. Our efforts paid off with the free cash flow conversion rate of 244%. We generated cash from operations of $35.7 million in the quarter, a 6% improvement over the fourth quarter last year. We use that cash to meaningfully reduce debt and strengthen our financial flexibility.
Speaker Change: Slide 11 shows we focused heavily on cash management. This past year as it was a cornerstone of the financial priority Sean implemented when we started the year.
Speaker Change: Our efforts paid off with the free cash flow conversion rate of 244%.
Speaker Change: We generated cash from operations of $35 7 billion in the quarter, a 6% improvement over the fourth quarter last year.
Speaker Change: We use that cash to meaningfully reduce debt and strengthen our financial flexibility.
Jeremy Evans: For the year, we achieved record cash from operations of $122 million. I commend the team's work and optimizing cash flow will remain a focus for 2025. We reduced inventory in 2024 by $25 million, or 12%, a critical area for improving our liquidity and generating cash to reduce debt. Capital expenditures in the quarter were $7.4 million, or 4.1% of sales, and total $27 million for the year, or 3.4% of sales, as we prioritized projects based on returns.
Speaker Change: For the year, we achieved record cash from operations of $122 million.
Speaker Change: Commend the teams work in optimizing cash flow will remain a focus for 2025.
Speaker Change: We reduced inventory in 2024 by 25 million or 12% a critical area for improving our liquidity and generating cash to reduce debt.
Speaker Change: Capital expenditures in the quarter were $7 4 million or four 1% of sales and totaled 27 billion for the year or three 4% of sales as we prioritize projects based on returns.
Jeremy Evans: Our capital expenditure plans for 2025 will be focused on tooling, maintenance, and productivity enhancements that demonstrate evident returns on invested capital.
Speaker Change: Our capital expenditure plans for 2025 will be focused on tooling maintenance and productivity enhancements that demonstrate evident returns on invested capital.
Jeremy Evans: Turning to slide 12. At the end of the fourth quarter, cash and cash equivalents were $44 million, and we had $352 million available on our expanded revolver. Despite sales contraction in the year, we reduced total debt by 14% or $75 million with consistent reductions over the last six quarters. Our net debt-to-adjusted EBITDA leverage ratio is down to 2.6 times, and we expect to reduce this further throughout 2025.
Speaker Change: Turning to slide 12.
At the end of the fourth quarter cash and cash equivalents were $44 million and we had 352 million available on our expanded revolver.
Speaker Change: Despite sales contraction in the year, we reduced total debt by 14% or 75 billion with consistent reductions over the last six quarters.
Speaker Change: Our net debt to adjusted EBITDA leverage ratio was down to two six times and we expect to reduce this further throughout 2025.
Jeremy Evans: Given our strengthened balance sheet and improved financial flexibility, our capital deployment priorities are evolving. In the near term, we will continue to pay down debt and invest organically in innovation and productivity. In addition, we intend to continue to prioritize dividend payments, which we have consistently done for over 27 years.
Speaker Change: Given our strengthened balance sheet and improved financial flexibility our capital deployment priorities are evolving.
Speaker Change: In the near term, we will continue to pay down debt and invest organically in innovation and productivity and.
Speaker Change: In addition, we intend to continue to prioritize dividend payments, which we've consistently done for over 27 years.
Jeremy Evans: We're also pleased to announce our inaugural share repurchase program. The continued execution of our strategy and accompanying growth initiatives support our confidence in Helios' continued cash flow generation capabilities and improved earnings profile. The Share Repurchase Program will complement our acquisition strategy and illustrates our continued commitment to a disciplined capital allocation strategy, delivering attractive full cycle returns and maximizing value to our shareholders.
Speaker Change: We're also pleased to announce our inaugural share repurchase program.
Speaker Change: Continued execution of our strategy and accompanying growth initiatives support our confidence in Helios continued cash flow generation capabilities and improved earnings profile.
Speaker Change: The share repurchase program will complement our acquisition strategy and illustrates our continued commitment to a disciplined capital allocation strategy delivering attractive full cycle returns and maximizing value to our shareholders I.
Sean Bagan: I will now turn the call back to Sean to speak to our 2025 plans and initial guidance for the year. Thanks, Jeremy. Turning to slide 13, we are establishing our outlook for 2025 with sales in the range of $775 to $825 million. While we expect that in general, markets should start to improve as we advance through the year, we are constructing our outlook cautiously to the extent they do not. We expect adjusted EBITDA for the year of $140 to $165 million. This represents an adjusted EBITDA margin of 19% at the midpoint of the range. As the markets recover and our volumes grow, our capacity utilization will improve, resulting in enhanced margins.
Speaker Change: I will now turn the call back to Sean to speak to our 2025 plans and initial guidance for the year Sean.
Sean Shawn: Thanks, Jeremy turning to slide 13, we are establishing our outlook for 2025 with sales in the range of $775 million to $825 million, while we expect that in general market should start to improve as we advance through the year, we are constructing our outlook cautiously to the extent they do not.
Sean Shawn: We expect adjusted EBITDA for the year of $140 million to $165 million. This represents an adjusted EBITDA margin of 19% at the midpoint of the range as.
Sean Shawn: As the markets recover and our volumes grow our capacity utilization will improve resulting in enhanced margins.
Sean Bagan: Touching briefly on tariffs, as part of our facility footprint and global supply chain, we have manufacturing operations in the Americas region, including Mexico, the EMEA region, and the APAC region, including China. We have been evaluating potential impacts and assessing our options under various scenarios. There are many potential outcomes of the tariff regulations, as well as several different approaches we could consider pursuing in response once we know what the final rulings will be. As an example, as we look at our electronics segment, we have proactively moved some manufacturing lines from Tulsa to Tijuana to take advantage of labor and overhead savings, which are currently being realized.
Sean Shawn: Touching briefly on tariffs as part of our facility footprint and global supply chain, we have manufacturing operations in the Americas region, including Mexico, The EMEA region, and the APAC region, including China.
Sean Shawn: We have been evaluating potential impacts and assessing our options under various scenarios.
Sean Shawn: There are many potential outcomes of the tariff regulations as well as several different approaches we could consider pursuing in response once we know what the final rule change will be.
Sean Shawn: As an example, as we look at our electronics segment, we have proactively moved some manufacturing lines from Tulsa to Tijuana to take advantage of labor and overhead savings, which are currently being realized.
Sean Bagan: We have the available capacity to move those lines back to Tulsa. This is just one example of a way we could address this issue, depending on the final rulings. So we are analyzing our supply chain and footprint for each segment and each operating company. Of course, it may not be possible to anticipate all the outcomes yet in the highly fluid environment. are in the region for the region strategy and the capacity we have invested in over the last couple of years does provide us the flexibility to move relatively quickly to realign our supply chain footprint as needed.
Sean Shawn: We have the available capacity to move those lines back to Tulsa.
Sean Shawn: This is just one example of a way we could address this issues depending on final rulings. So we are analyzing our supply chain and footprint for each segment and each operating company of course, it may not be possible to anticipate all the outcomes yet in the highly fluid environment.
Sean Shawn: In the region for the region strategy and the capacity we have invested in over the last couple of years does provide us the flexibility to move relatively quickly to realign our supply chain footprint as needed.
Sean Bagan: As signaled last quarter, we inform our forecasting process with a wide array of inputs. These include feedback from customers, market data, channel inventory levels, order bookings, competitive insights, historical performance trends, macroeconomic factors, and information from our public company customers' earnings presentations. Our order bookings remain mixed, especially in EMEA, with limited markets turning positive. But we see opportunities should the macro environment improve, as indicated in some data points. NFPA data and PMI data as shown in our supplemental slides are starting to either reflect or call for an improving environment starting at various points throughout 2025. Importantly, we remain confident in our market positions and customer relationships, so as economic conditions improve, we intend to benefit.
Sean Shawn: As signaled last quarter, we inform our forecasting process with a wide array of inputs. These include feedback from customers market data channel inventory levels order bookings competitive insights historical performance trends macroeconomic factors and information from our public company.
Sean Shawn: Customers earnings presentations.
Sean Shawn: Our order bookings remained mixed especially in EMEA with limited markets, turning positive, but we see opportunities should the macro environment improve as indicated in some data points.
Sean Shawn: N F P. A data and PMI data has shown in our supplemental slides are starting to either reflect or call for an improving environment starting at various points throughout 2025.
Sean Shawn: Importantly, we remain confident in our market positions and customer relationships, so as economic conditions improve we intend to benefit.
Sean Bagan: We expect first quarter sales in the range of $185 to $190 million down compared with the first quarter last year, but up sequentially from last year's fourth quarter. We believe some of the actions we are taking on the cost and simplification side will show up in the form of improved margins as we step through the year. We expect adjusted EBITDA margin in the range of 16% to 17% in the first quarter, which would be slightly behind last year's fourth quarter with full compensation accruals coming back into the mix. As a reminder, the first quarter is typically our lightest in terms of cash flow.
Sean Shawn: We expect first quarter sales in the range of $185 million to $190 million down compared with the first quarter last year, but up sequentially from last year's fourth quarter. We believe some of the actions. We are taking on the cost and simplification side will show up in the form of improved margins as we step through the year, we expect.
Adjusted EBITDA margin in the range of 16% to 17% in the first quarter, which would be slightly behind last year's fourth quarter with full compensation accruals coming back into the mix.
Sean Shawn: As a reminder, the first quarter is typically our lightest in terms of cash flow. We expect the first half of 2025 volume to be challenged while the back half of the year sales to increasingly grow on a year over year basis on lower comparable.
Sean Bagan: We expect the first half of 2025 volume to be challenged, while the back half of the year sales to increasingly grow on a year-over-year basis on lower comparables. When we factor in all of our inputs, including where we are in the various trough cycles of our more challenged markets, the current indicated patterns in our order book, the downtick in distributor inventory levels, and the market indicators that are starting to improve or forecasted for improvement in 2025, we believe all of this supports our back half of the year will be slightly larger than the first half.
Sean Shawn: When we factor in all of our inputs, including where we are in various trough cycles of our more challenged markets. The current indicated patterns in our order book the.
Sean Shawn: The downtick in distributor inventory levels and the market indicators that are starting to improve or forecasted for improvement in 2025. We believe all of this supports our back half of the year will be slightly larger than the first half.
Sean Bagan: Slide 14 provides some additional understanding of where we see our market and operational drivers by segment to supplement the consolidated view.
Sean Shawn: Slide 14 provides some additional understanding of where we see our markets and operational drivers by segment to supplement the consolidated view.
Sean Bagan: Turning to slides 15 and 16, I believe our results in the fourth quarter and full year validate that the financial priorities we laid out at the beginning of 2024 remain sound and continue to be a strong guidepost as we start 2025. We were able to execute to varying degrees on four out of the five priorities.
Sean Shawn: Turning to slides 15, and 16 I believe our results in the fourth quarter and full year validates the financial priorities, we laid out at the beginning of 'twenty 'twenty four remain sound and continue to be a strong guideposts as we start 2025.
Sean Shawn: We were able to execute to varying degrees on four out of the five priorities.
Sean Bagan: You will see we are setting the stage now with our 2025 key focus areas to address head-on how we reenergize our go-to-market strategies, structuring them with a customer-centric focus and an emphasis on new product development. You will see firsthand how the pace of new product launches will increase throughout 2025. We are streamlining our organization to capitalize on our customer relationships and industry know-how.
Sean Shawn: You will see we are setting the stage now with our 2025 key focus areas to address head on how we reenergized our go to market strategies structuring them with a customer centric focus and an emphasis on new product development, you will see firsthand, how the pace of new product launches will increase throughout 2025.
Sean Shawn: We are streamlining our organization to capitalize on our customer relationships and industry Knowhow based on how much I have witnessed this team navigate together in a relatively short time I've been with Helios I'm confident in our ability to unlock profitable organic growth across the variety of end markets and applications that are highly <unk>.
Sean Bagan: Based on how much I have witnessed this team navigate together in the relatively short time I have been with Helios, I am confident in our ability to unlock profitable organic growth across the variety of end markets and applications that our highly engineered premium products are positioned to win. Continuous innovation and regular product launches are embedded into our corporate DNA, and we will proudly continue that practice.
<unk> premium products are positioned to win.
Sean Shawn: Continuous innovation and regular product launches are embedded into our corporate DNA and we will probably continue that practice, we will invest more in developing our team as they are our most valuable asset. Finally, we are happy to announce it more sophisticated capital deployment mindset focus on investments that drive that.
Sean Bagan: We will invest more in developing our team as they are our most valuable asset.
Sean Bagan: Finally, we are happy to announce a more sophisticated capital deployment mindset, focused on investments that drive the greatest returns, along with our inaugural share repurchase program aimed at delivering long-term shareholder value creation. Our board of directors has authorized the company to repurchase up to $100 million in shares, which we will start executing against this year. I will highlight that we continue to seek acquisition opportunities to accelerate our growth, as well as continually evaluate the makeup and footprint of our entire portfolio.
Sean Shawn: Greatest returns along with our inaugural share repurchase program aimed at delivering long term shareholder value creation.
Sean Shawn: Our board of directors has authorized the company to repurchase up to $100 million in shares, which we will start executing against this year.
Sean Shawn: I will highlight that we continue to seek acquisition opportunities to accelerate our growth as well as continually evaluate the makeup and footprint of our entire portfolio. Our goal is to maximize shareholder value through all forms.
Sean Bagan: Our goal is to maximize shareholder value through all forms. In closing, I am incredibly excited about our future and confident in our ability to continue executing on our commitments as we prepare to return Helios to grow.
Sean Shawn: In closing I'm incredibly excited about our future and confident in our ability to continue executing on our commitments as we prepare to return Helios to grow I would like to extend a heartfelt. Thank you to each one of the approximate 2500 Helios employees across the globe and to all our partners, including <unk>.
Sean Bagan: I would like to extend a heartfelt thank you to each one of the approximate 2,500 Helios employees across the globe and to all our partners, including suppliers and customers.
Sean Shawn: Suppliers and customers finally, thanks to all of you for joining our call along with your interest and support.
Tania Almond: Finally, thanks to all of you for joining our call along with your interest and support.
Operator: With that, let's open the line for Q&A, please. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate the line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star 2.
Sean Shawn: With that let's open the line for Q&A. Please.
Speaker Change: 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 confirmation tone will indicate your line is in the question queue. You May press star two to remove yourself from the queue for participants using speaker equipment. It may be necessary to pick up the handset before questions. He started one moment. Please my uncle.
Operator: One moment, please, while we go for a quick break.
Sean Shawn: More questions.
Chris Moore: Our first question comes from the line of Chris Moore with CJS Securities. Please proceed with your question. Hey, good morning, guys. Thanks for taking a couple questions. Yeah, maybe we can just start where Sean ended in terms of the, you know, kind of institutionalized the go to market. Just trying to understand if that's focused more on one segment than another. I think, you know, historically hydraulics, more channel partners, electronics, more OEMs. Is it aimed in one specific area or, you know, kind of more broad brush?
Sean Shawn: Our first question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.
Chris Moore: Hey, good morning, guys. Thanks for taking a couple of questions.
Speaker Change: Yeah, maybe we can just start where we're shown ended in terms of the you know kind of institutionalized. The go to market. Just just trying to understand if that's focused more on one segment and another I think you know historically hydraulics more channel partners electronics more Oems does is it is it aimed in one specific area.
Are you now kind of more broad brush.
Sean Bagan: https://TheBusinessProfessor.com Morning, Chris. Hey, morning, Chris. Thank you. So, yes, it would be broad-based, Chris, across the company. As you know, our company at Helios is a combination of great assets, great products that fulfill unique niche needs for our customers. And certainly, we have great product quality, very low warranty rate. outstanding engineers, outstanding product focus, but really it's bringing that sales-driven culture to the organization across all of the companies. And we started that work last summer as we kicked off our long-range planning processes and really started a very big picture in terms of identifying those markets that we feel entitled to win with our existing products that we either are not participating in or we expect we could go deeper.
Speaker Change: Yeah.
Speaker Change: Good morning, Chris Hey, Chris Thank you.
Speaker Change: So yes, it would be broad based Chris across the company as you know our company set Helios is a combination of great assets great great products.
Speaker Change: Yeah.
Speaker Change: Fulfill unique niche needs for our customers.
Speaker Change: And certainly we have.
Speaker Change: Great product quality very low warranty rates outstand.
Speaker Change: Outstanding Engineers outstanding product focus, but really it's bringing that sales driven culture to the organization across all of the companies and we started that work last last summer as we kicked off our long range planning processes and really started very big picture.
Speaker Change: In terms of identifying those markets that we feel entitled to win with our existing products that we either are not participating in or we expect we could go deeper with the collection of the companies. We have there'll be a tremendous amount of focus on cross selling across across both the segments and within the segments as well.
Sean Bagan: With the collection of the companies we have, there will be a tremendous amount of focus on cross-selling across both the segments and within the segments as well. and really get going deeper with our existing customers. From a WalletShare perspective, we have. various customer examples. Many times we put out press releases about product wins that we have, and really it's holding the sales team and our internal teams accountable to driving those new business wins, and at the end of the day, limiting the leaky bucket of customer losses, ensuring that we're satisfying the customer. So really putting that customer at the center of everything we do and back that up with a lot of metrics and accountability to really change the culture of the company to become much more sales driven.
Speaker Change: <unk>.
Speaker Change: And really get going deeper with our existing customers from a wallet share perspective are we we have.
Speaker Change: Various customer example is many times, we put out press releases about product wins that we have and really it's holding the sales team and our internal teams accountable to driving those new business wins.
Speaker Change: And at the end of the day limiting the leaky bucket of customer losses, ensuring that we're satisfying the customers are really putting the customer at the center of everything we do.
Speaker Change: And back that up with a lot of a lot of metrics and accountability to really change the culture of the company to become much more sales driven.
Chris Moore: God, I appreciate that.
Speaker Change: Got it I appreciate that maybe.
Chris Moore: Maybe talk a little bit about the... The Alto Shem Partnership, you know, how significant is that in terms of, you know, leading to new opportunities within the commercial food service? Yeah, we're very excited about that.
Speaker Change: Maybe talk a little bit about the.
Speaker Change: The outflow Sham partnership you know how significant is that in terms of you know leading to new opportunities within the commercial foodservice.
Speaker Change: Yeah, we're very excited about that.
Sean Bagan: I'm sure you saw the press release. And if you didn't see the accompanying video, there's a great testimonial video in there as well to highlight that. Certainly, the company has been talking about entering the commercial food service market. And the interesting part of that opportunity is that's a software opportunity that could enable future hardware sales as well. We also have our first hardware win as well in the commercial food service that will begin shipping this year.
Speaker Change: Sure you saw the press release.
Speaker Change: If you didn't see the accompanying video Theres a great testimonial video in there as well to highlight that certainly the company has been talking about entering the commercial foodservice market and the interesting part of that opportunity is is that the software opportunity that that could enable future hardware sales as well we also have.
Speaker Change: Our first hardware.
Speaker Change: Then as well in the commercial foodservice that will begin shipping this year. So we're excited about that but more so with the sickness reached platforms, how that can certainly disrupt and transform that back end support of different businesses.
Sean Bagan: So we're excited about that, but more so with the Cygnus Reach platform, how that can certainly disrupt and transform that backend support of different businesses. Got it.
Speaker Change: Got it and maybe just last one from me obviously.
Sean Bagan: And maybe just the last one from me, obviously, very strong free cash flow in 24. I'm not sure if you gave a number, just trying to understand how you're thinking about free cash flow in 25. Yeah, so... As we highlighted, I mean, it was a record year for cash flow, despite our sales being down almost $25 million, but really, it was a testament to those financial priorities and focusing on our cash conversion cycle. The biggest impact was our inventory reduction in 2024. We certainly are prioritizing those same financial priorities, but given the range of our guidance from a top to a bottom end, we'll likely change the trajectory of how we attack inventory and obviously AP would flow with that as well.
Speaker Change: Strong.
Speaker Change: Free cash flow in 'twenty four.
Speaker Change: I'm not sure. If you gave a number just trying to understand how you're how you're thinking about free cash flow in 'twenty five.
Speaker Change: Yeah. So.
Speaker Change: As we highlighted I mean, it was a record year for cash flow, despite our sales being down.
Speaker Change: Almost $25 million, but really it was a testament to the financial priorities and focusing on our cash conversion cycle. The biggest impact was our inventory reduction.
Speaker Change: In 2024, we certainly are prioritizing those same financial priorities, but given the given the range of our guidance from a top top to bottom and will will will likely change the trajectory of how we attack inventory in.
Speaker Change: And obviously, a P would flow with that as well.
Jeremy Evans: But if we can get the growth out of the business with the improving returns, we expect to be able to generate not quite as much as we did last year, but close to that.
Speaker Change: But if we can get the growth out of the business with the improving returns we expect to be able to generate.
Speaker Change: Not quite as much as we did last year, but close to that and Jeremy I know you've got a couple of points to add to that.
Jeremy Evans: And Jeremy, I know you got a couple of points to add to that. Yeah, thanks, Sean. Definitely, we look at 2024, there was a big focus on taking down some of the inventory levels that had ticked up. You see that in the in the overall inventory reduction year over year. I think we have some some room to take that a little lower, obviously aligning with the overall sales progression. And then, you know, CapEx, a big piece of that we we guided, you know, call it 3.25 to 3.75% of sales, just making sure that we're managing that and really investing in those, those projects, those capital items are to give us the required return that we're expecting.
Jeremy Ovens: Yeah, Thanks, Sean definitely when we look at 'twenty 'twenty four there was a big focus on taking down some of the inventory levels that had that it ticked up you.
Jeremy Ovens: You see that in the in the overall inventory reduction year over year.
Jeremy Ovens: We have some some room to take that a little lower.
Jeremy Ovens: Obviously aligning with the overall sales progression.
Jeremy Ovens: And then you know capex, a big piece of that we guided.
Jeremy Ovens: Call. It three to five years to 375% of sales just making sure that we're managing that it really investing in those those projects those capital items or if you can give us the required return that we're expecting.
Chris Moore: God, I appreciate it.
Jeremy Ovens: Got it I appreciate it I'll leave it there guys.
Chris Moore: I will leave it there, guys. Thank you, Chris. Thank you.
Speaker Change: Thank you Vince.
Speaker Change: Thank you.
David Tarantino: Our next question comes from the line of David Tarantino with KeyBank Capital Markets. Please proceed with your question. Hey, good morning, everyone. Hey, good morning, Dave.
Speaker Change: Our next question comes from the line of David Tarantino with Keybanc capital markets. Please proceed with your question.
David Tarantino: Hey, good morning, everyone.
Speaker Change: Hey, good morning, David.
David Tarantino: Maybe just to build on the seasonality thoughts, could you give us some more color? I want the outlook embeds here. It looks like we're starting from an unusually slow versus what the typical seasonality would suggest. So maybe could you give us what's informing the expectation for the second half to be stronger than the normal seasonality would suggest? Yeah, morning, David.
Speaker Change: Maybe just to build on the seasonality thoughts could you give us some more color on what the outlook Embeds here. It looks like we're starting from an unusually slow versus what the typical seasonality would suggest so maybe could you give us a what's informing the expectation for the second half to be stronger than the normal seasonality would suggest.
Speaker Change: Yeah. Good morning, David So from a seasonality perspective.
Sean Bagan: So from a seasonality perspective, The thing I've concluded since I've been here is we don't necessarily have seasonality. You can look at historical trends, but really the more impactful thing is the way our end markets have been performing. When you look at the U.S. ag market being down for four consecutive years, you look at the consumer pressure from interest rates and consumer confidence and our end market exposure to recreational products, marine health and wellness that are impacted by that. Those factors play a pretty significant impact, more so than just pure seasonality. We've got a little bit of that with the international footprint of the business, where the summer months are always slow with our European business that makes up almost a quarter of our total revenue out of Europe.
The thing I concluded since I've been here is we don't necessarily have seasonality.
Speaker Change: You can look at historical trends, but really the more impactful thing is the way our end markets have been performing when you look at our U S AG market being down for four consecutive years.
Speaker Change: You look at the consumer pressure.
Speaker Change: From interest rates and consumer confidence and on our end market exposure to recreational products Marine health and wellness that are that are impacted by that those factors play play a pretty significant impact more so than just pure seasonality, we've got a little bit of that with our with the international footprint of the business where the summer.
Speaker Change: Months are always slow with our European business that makes up almost a quarter of our total revenue out of Europe and so <unk>.
Sean Bagan: And so, you know, generally we're just not getting as much revenue in that third quarter from the European region. But what gives us more insight into the back half versus the first half this year is some of the things we highlighted in the prepared remarks in terms of our existing order trends and order books. Now, we have a big part of our business, as you know, that goes direct to OEMs, and those OEMs provide long-term forecasts to us. And we obviously triangulate that with what they're saying on their earnings calls, in addition to the other macro factors, PMI, what our NFPA is calling for.
Speaker Change: Generally we're just not getting as much revenue in that that third quarter from the European region, but is what.
Speaker Change: What gives us more a more insight into the back half versus the first half this year is.
Some of the things we highlighted in the prepared remarks in terms of our existing order trends and order books now we have a big part of our business as you know that goes direct to Oems and those Oems provide long term forecast to us and we obviously triangulate that with what they're saying on their earnings calls.
Speaker Change: In addition to just the other macro factors PMI.
Speaker Change: What our nfpa's, calling for and so putting all of those factors together, that's what gives us the thesis that the back half can grow and then when you look at it from a comparable perspective, obviously, we've got a much softer comps in 'twenty five.
Jeremy Evans: And so putting all of those factors together, that's what gives us the thesis that the back half can grow. And then when you look at it from a comparable perspective, obviously we've got a much softer comp than 25 for the back half of 24 versus the first half.
Jeremy Ovens: For the back half of 'twenty four versus the first half Jeremy.
Jeremy Evans: Jeremy? Yeah, the other thing I would add is, you know, we have a good portion of the business that goes through distribution as well, and we are constantly in touch with those distributors trying to understand inventory levels. And we did see a decline from Q3, Q4 in those distributor inventory levels, which was the first decline we've seen in four or five quarters. So probably needs to come down a little bit more, but definitely seeing that trend in the right direction. Okay, great.
Jeremy Ovens: Yeah. The other thing I would add is.
You know we have a good portion of the business that goes through distribution as well.
Jeremy Ovens: And we are constantly in touch with those distributors trying to understand inventory levels and we did see a decline from Q3 Q4, and those distributor inventory levels, which was the first.
Jeremy Ovens: First decline, we've seen in four or five quarters. So.
Jeremy Ovens: Probably needs to come down a little bit more but <unk> definitely seen that trend in the right direction.
Speaker Change: Okay, Great and then maybe just on the margins from a higher level of the midpoint roughly flat versus last year could you walk us through the key puts and takes here, particularly around how some of the footprint related inefficiencies abating should provide an offset.
David Tarantino: And then maybe just on the margins from a higher level, the midpoints, roughly flat versus last year, could you walk us through the key puts and takes here, particularly around how some of the footprint related inefficiencies of baiting should provide an offset? Yeah, so... I think with the range of the guidance. At the low end of the, you know, $775 million, obviously, that would be a contraction over the 806 delivered in 24 would put a little bit of margin pressure. And that's where we the low end of the EBITDA guidance at 18%. On the flip side, at the 825 high end of the revenue guidance, EBITDA margin at 20%, which would imply an 80 basis points improvement on the bottom line.
Jeremy Ovens: Yeah. So.
Jeremy Ovens: I think with the range of the guidance.
At the low end of the.
Jeremy Ovens: $775 million, obviously that would be a contraction over the 806 delivered in 'twenty four would put a little bit of margin pressure and that's where we the low end of the EBITDA guidance at 18%.
Jeremy Ovens: On the flip side at the 825 high end of the revenue guidance, our EBITDA margin at 20%, which would imply an 80 basis points improvement on the bottom line what I would point to is volume is the number one factor there, obviously Roman incremental and decremental perspective.
Sean Bagan: What I would point to is volume is the number one factor there, obviously, from an incremental and decremental perspective. If we continue to see contraction into this year for the third consecutive year, and as you know, the amount of capacity that was added starting about three years ago, that's probably when we would reevaluate the total capacity amount. Certainly the tariff topic, which we haven't touched on other than in the prepared remarks will play into that as well and how we respond. And so we potentially would solve some of the capacity as an outcome of the final rulings within the tariffs.
Jeremy Ovens: If we if we continued to see contraction into this year for the third consecutive year and as you know the amount of capacity that was added starting about three years ago, that's probably when we would reevaluate.
Jeremy Ovens: The total capacity amount certainly the tariff topic, which we haven't touched on other than in the prepared remarks will play into that as well and how we respond and so we potentially would solve some of the capacity is an outcome of the final rulings within the tariffs.
Sean Bagan: And then maybe if I could sneak one more in just to put a final finer point on the go to market strategy, should we think about this changing anything with the previous kind of more systems oriented approach? Or is that relatively? I would say relatively unchanged. We're aspiring to be that preferred supplier to our customers. And what that entails is we need to be closer with them. We need to really understand their needs. We need to understand their needs before they understand their needs, that we can design and develop those products that will be valued to our customers and their end customers.
Jeremy Ovens: And then maybe if I could sneak one more in just to put a final a finer point on the go to market strategy should we think about this changing anything with the previous kind of more systems oriented approach or is that relatively unchanged.
Jeremy Ovens: I would say relatively unchanged, we're aspiring to be that preferred supplier to our customers and what that entails is we need to be closer with them, we need to really understand their needs we need to understand their needs before they understand their needs that we can design and develop those products.
Jeremy Ovens: That will be value to our customers and their end customers.
Sean Bagan: As such, we still strongly believe in the ability for us to create system solutions, whether that's within the electronic segments by pairing multiple products together, controllers, distribution models, displays, wire harnesses, or on the hydraulic side with manifolds, valves, cartridge valves, couplers, bringing those all together in one system solution and software sitting across the top of that, as I mentioned, the Cygnus Reef software, in addition to all the great softwares we have within our electronic segments, not only at Innovation, but also at Balboa. Balboa has the Control My Spa app that now will be also improved with our new products that we'll be launching.
Jeremy Ovens: As such we still strongly believe in the ability for us to create system solutions, whether that's within the electronics segments by pairing multiple products together controllers distribution models displays wire harnesses or on the hydraulic side with manifolds valves cartridge valves are couplers.
Jeremy Ovens: Bringing those all together in one system solution and software sitting across the top of that as I mentioned this sickness reach software. In addition to all the great Softwares, we have within our electronics segment not only in innovation, but also at the Boa. Although it has the control my Spa App that now will be.
Jeremy Ovens: <unk> also improved with our new products that we'll be launching we've talked about some of them already peers, one being one of them in the water management side, that's integrated with that control my Spa App and on the innovation side. Some some really cool new technologies, when we talk about launched.
Sean Bagan: We've talked about some of them already, PureZone being one of them, and the water management side that's integrated with that Control My Spa app. And on the Innovation side, some really cool new technologies. When we talk about launching products that maybe customers don't even know that they want, we're pretty excited about that. And as we tried to allude to in the prepared remarks, we expect to accelerate the pace of new product development. And that's why the importance of our go-to-market strategy of having that sales-driven culture will be important to capitalize on those new products. And then finally, on the hydraulic side, I think you'll also hear throughout the year the new planned product launches that we think will drive incremental revenue.
Jeremy Ovens: Products that maybe customers don't even know that they want.
Jeremy Ovens: We're pretty excited about that and as we tried to allude to in the prepared remarks, we expect to accelerate the pace of new product development and Thats why the importance of our go to market strategy of having that that sales driven culture will be important to capitalize on those new products and then finally on the hydraulic side.
Jeremy Ovens: I think you'll you'll also here throughout the year, the new planned product launches that we think will drive incremental revenue.
David Tarantino: And that's, at the end of the day, what we try and do, bring in new products that are driving incrementality, not cannibalizing old existing product that's dated and aged within our portfolio. Great. Thanks, guys. Thank you.
Jeremy Ovens: And that's at the end of the day, what we're trying to bring in new products that are driving Incrementals city, not cannibalizing old existing product that stated in age within our portfolio.
Jeremy Ovens: Great. Thanks, guys.
Jeremy Ovens: Thank you.
Meg Dobre: Our next question comes from the line of Meg Dobre with Baird. Please proceed with your question. Thanks. Good morning.
Jeremy Ovens: Our next question comes from the line of.
So agree with Baird. Please proceed with your.
Speaker Change: Thanks. Good morning, maybe we can go back to the Mexico discussion My my recollection is that your facility down there is electronics facility that came with the Balboa acquisition. So a lot of your product in health and wellness is made there in <unk>.
Meg Dobre: Maybe we can go back to the Mexico discussion. My recollection is that your facility down there, the electronics facility, that came with the Balboa acquisition, so a lot of your product in health and wellness is made there, and you've moved some production from Oklahoma down to Mexico as well. So if we do have tariffs, and let's say, for argument's sake, it's 25% tariff, I guess two questions. Moving production back to Oklahoma, does that mean lower margin for the electronic segment on a kind of more sustained go-forward basis. And then, you know, for the product that you have there, you know, the health and wellness product that was there to begin with, you know, how do you sort of plan to address that?
Jeremy Ovens: Some production.
Speaker Change: I'm from Oklahoma.
Jeremy Ovens: Down in Mexico as well so.
Jeremy Ovens: If we do have a para IV, let's let's say for argument's sake, it's 25% tariff I guess two questions moving production back to Oklahoma does that mean.
Jeremy Ovens: Lower margin for the electronics segment on a kind of more sustained go forward basis, and then you know for the product that you have there you know the health and wellness product that was there to begin with you know how do you sort of plan to address that is it that you're moving that production to the U S as well.
Sean Bagan: Is it that you're moving that production to the U.S. as well? Do you think the market can just cope with price increases to reflect these tariffs? What exactly is your strategy? Amen.
Jeremy Ovens: Well do you think the market can just cope with price increases to reflect these tariffs what exactly is your strategy.
Jeremy Ovens: They make thanks.
Sean Bagan: Thanks for the question. Obviously, a topic we've been spending a lot of time evaluating and not making any definitive moves until rulings are in place and such. But, yeah, I think the way you characterized it is a pretty clear understanding. I was just down in Tulsa here last month, meeting with the team in terms of, you're right, we did move some lines, about five lines down to Tijuana from the innovation side. That clearly we're benefiting from that cost benefit, not only on labor, but also overhead rates. And we could absolutely move them back to Tulsa.
Jeremy Ovens: Thanks for the question, obviously, a topic, we've been spending a lot of time evaluating and not making any definitive moves until rulings are in place and such but yeah. I think the way you characterized it as a pretty clear understanding.
Jeremy Ovens: Just down in Tulsa here last month meeting with the team in terms of Youre right. We did move some are aligned about five lines down to Tijuana from the innovation side that clearly we're benefiting from that cost benefit not only on labor, but also overhead rates and we could absolutely move them back.
Sean Bagan: We have ample capacity to do that now. And then certainly the discussion would be of those products that we have manufacturing capability existing in Tulsa that are Belbois related. Those would be easy. So you think about SMT lines and things that we're really good at in Tulsa. Those are things that would be much easier to execute, but to your point would likely come with an incremental cost from a labor and overhead perspective. And so then that gets into how you're going to deal with that. And certainly that's engaging with our vendors and our customers. And more so on that health and wellness side, you look at our main competitor, who's a Canadian based company.
Jeremy Ovens: Tulsa, we have ample capacity to do that now and then certainly the discussion would be of those products that we have manufacturing capability existing Intel.
Jeremy Ovens: In Tulsa that are bellboy related those are the easy. So you think about SMT lines and things that we're really good at and Tulsa.
Jeremy Ovens: Those are things that would be much easier to execute but to your point will likely come with an incremental cost from a labor and overhead perspective, and so then that gets into how are you going to deal with that and certainly that's.
Jeremy Ovens: That is engaging with our with our vendors and our customers and more so on that help them wellness side, you look at our main competitor who's our Canadian competitor Canadian based company. So they're gonna be dealing with the same challenges as we are and the footprint of the Oems for instance, the largest one and theres multiple tier.
Sean Bagan: So they're going to be dealing with the same challenges as we are. And the footprint of the OEMs, for instance, the largest one, and there's multiple in Tijuana, but it's right down the road from us. So I think from an industry perspective, that's one that's hard to envision, not inflation coming in and costs going up to the end consumer, ultimately paying that price.
Jeremy Ovens: But it's right down the road from US So I think from an industry perspective that that's one that it's hard to envision not inflation coming in in <unk> and costs going up to the end consumer ultimately paying that price.
Sean Bagan: The other piece that maybe isn't as noticeable, and we did have a bullet in our 24 year in review, is we acquired a company kind of at the onset of COVID called Joy Anhui in China. And what we've observed absent the tariff, this is well before the tariff talk began, was that that health and wellness industry was exploding in terms of local OEMs. And for us, we used to export product from Mexico to China, and now 65% of Balboa branded product is now built in China for local customers. And again, two years ago, that was 0%.
Jeremy Ovens: The other piece that maybe isn't as no noticeable and we did have a bullet in our 24 year. In review is we acquired a company kind of at the onset of Covid called Joy on way in China, and what we've observed absent the tariff this is well before the tariff talk deanne.
Jeremy Ovens: Was that that helped them wellness industry was exploding in terms of local Oems and for US we used to export product from Mexico to China, and now 65% of <unk> branded products is now built in China for local customers and.
Again, two years ago that was zero percent. So I think what it could disrupt too is that whole supply chain dependent upon the costs.
Sean Bagan: So I think what it could disrupt too is that whole supply chain, depending upon the cost benefit and things, you could actually see Chinese OEMs exporting more SPAs into the US. And so I think it's a real challenge for the OEMs to decide what they're going to do from a manufacturing perspective. But for us, our in the region, for the region strategy is what differentiates us, and we can navigate quickly based upon, again, the final rulings, because we have localized supply chains and such. So that's kind of at a high level how we're thinking about it, but know that we've got plans in place across different scenarios that we've been game theorying out as to the direction this could go.
Jeremy Ovens: The benefit.
Jeremy Ovens: Things you could actually see Chinese Oems exporting more spas into the U S and so I think it's a real challenge for the Oems to decide what they're going to do from a manufacturing perspective, but for US are in the region for the region strategy is what differentiates us and we can navigate quickly based upon again the final rulings.
Jeremy Ovens: Because we have localized supply chains and such so that's kind of at a high level, how we're thinking about it but know that we've got plans in place across different scenarios that we've been gain theory and out is the direction. This could go.
Meg Dobre: Okay, that's helpful. The second thing that maybe stood out to me in your outlook is the way you kind of structured the guidance for Q1 and, you know, we're looking here at revenues actually, you know, using the midpoint, I guess, being up sequentially, but not been compressing sequentially, right? You're going from, call it 17.4 to 16.5 on higher revenue. And I guess I'm wondering why that is the case, and then I'll have a follow up. Yeah, I think one thing I'd point to is just the, and I think we have that in the preparing remarks, the incentive comp accruals where they come back in.
Speaker Change: Okay. That's helpful.
Jeremy Ovens:
Jeremy Ovens: The second thing that maybe stood out to me in your outlook is the way you kind of structured the guidance for for Q1, and you know where we're looking here at revenues actually you know using the midpoint I guess AR being up sequentially.
Jeremy Ovens: Been compressing sequentially right you're going from.
Jeremy Ovens: Call it $17 four to 16 five on higher revenues.
Jeremy Ovens: And.
Jeremy Ovens: I guess I'm wondering why why that is the case and then I'll have a follow up to this.
Jeremy Ovens: Yeah.
Jeremy Ovens: One thing I would point to is just the and I think we had that in the prepared remarks, the incentive comp accruals, where they come back and you think about the fact.
David Tarantino: You think about the fact that we didn't have a CEO other than an interim one and myself for the back half of the year last year. And then from an incentive comp perspective, because the subpar performance last year weren't at 100% targeted payouts, you flip to the new year and you start recruiting at target, targeted levels. And so that's one of the biggest movers I would highlight. But we also, from a revenue perspective, I think you're referencing relative to the sequential comparison, but relative to the first quarter, it's down even more than that as well.
Jeremy Ovens: That we didn't have.
Jeremy Ovens: CEO other than an interim one and myself for the back half of the year of last year, and then from an incentive comp perspective because.
Jeremy Ovens: The sub par performance last year weren't at 100% targeted payout you flip to the new year and you start accruing that targets targeted levels and so that's one of the biggest movers I would highlight.
Jeremy Ovens: But.
Jeremy Ovens: We also from a revenue perspective I think.
Jeremy Ovens: You referenced it in relative to the sequential comparison, but relative to the first quarter, it's down even more than that as well and so hence a little bit more margin pressure.
David Tarantino: And so hence a little bit more margin pressure. Yeah, the year-over-year one, I certainly understand. It was the sequential that I was struggling with, but I appreciate the explanation. And then when you were sort of thinking about the cadence for the year, I recognize that the comparisons are strange, and you sort of had the weather events as well that impacted 2024. So we're starting the year organically down about 10 percent. You're at the midpoint saying, OK, we're going to be flat for the year. At what point in time do you anticipate getting above that break even?
Jeremy Ovens: Yeah, the year over year at one I certainly understand it was the sequential debt that it was struggling with but I. Appreciate the explanation and then when you were sort of thinking about the cadence for the year I recognize that the comparisons are strange and you sort of had the weather events as well that impacted 2024, so we're starting the year.
Jeremy Ovens: You're organically down about 10%.
Jeremy Ovens: You're at the mid point, saying more okay, we're gonna be flat for the year at what point in time do you anticipate getting above that breakeven is it in Q2 is it in the second half if we're thinking about Q2 should we expect that to be down organically some amount.
David Tarantino: Is it in Q2? Is it in the second half? If we're thinking about Q2, should we expect that to be down organically some amount? Yeah, I think you should. And I think that point, as we have it framed as in Q3, that where it would turn positive. But yeah, and I think that's partially that comment of first half, second half, the way we have it constructed right now. And again, trying to protect for that in our guidance that if that back half recovery doesn't materialize, or it's later, trying to protect for which is a little bit of a wider range than we went into last year.
Jeremy Ovens: Yeah, I think you should and I think that point is we have it.
Jeremy Ovens: Framed as in Q3 that that where it would turn positive.
Jeremy Ovens: But yeah and I think that's partially that comment of first half second half the way we have it <unk>.
Jeremy Ovens: Constructed right now and again trying to protect for that in our guidance that if that back half recovery doesn't materialize.
Jeremy Ovens: Or it's later are trying to protect for that which is.
Jeremy Ovens: Little bit of a.
Jeremy Ovens: A wider range than we went into last year. So we have that $50 million range that we will expect to tighten as we get through the year.
David Tarantino: So we have that $50 million range that we will expect to tighten as we get through the year. Okay, and final question for me on margin and sort of I guess, longer term or medium term, I should say, question, you know, you're, you're guiding margins flattish on flattish revenue relative to 2024. But if we're looking historically here, right, you know, before you had these capacity additions, meaning back in, say, 2022, you did. 23% EBITDA margin on $885 million of revenue. In the year prior, it was even better. It was even better. You were at 25% margin on $870 million.
Okay and final question for me on margin and it's sort of a.
Jeremy Ovens: I guess longer term or medium term I should say question.
Jeremy Ovens: You know, you're you're guiding margins flattish on flattish revenue relative to 2024, but if we're looking historically here right you know.
Jeremy Ovens: Before you had these capacity additions, meaning back in say 2022.
Jeremy Ovens: You did.
Jeremy Ovens: 23% EBITDA margin on $885 million of revenue in the year. Prior we have them better. It was even better you were at 25% margin on 870.
David Tarantino: So if we're going to start to see a volume recovery here, if we're saying $840 million, $850 million of revenue. What's the right way to think about margins? Can we get back to that 23%, 24% range, or do you have to do something incremental to the cost structure that you haven't done and you're not announcing yet in order to get you there? Yeah, great question. And one we model and project as well. So I think what the first thing I want to point to is when the when the margins were in the mid 20s, or, you know, upper, you know, 23, 24, 25, Keep in mind, again, that's when the Balboa business was about double what it is now.
Jeremy Ovens: So if.
Jeremy Ovens: If we're going to start to see a volume recovery here, if we're saying 848 50 of revenue.
Jeremy Ovens: What's the what's the right way to think about margins can we get back to that 23, 24% range or do you have to do something incremental to the cost structure that you havent done and youre not announcing yet in order to get you there.
Jeremy Ovens: Yeah, Great question, and one remodel and project as well so I think the first thing I want to point to is when the when the margins were in the mid twenty's or upper 'twenty three 'twenty four 'twenty five.
Jeremy Ovens: Keep in mind again, that's when the bubble of business was about double what it is now.
Sean Bagan: of a business that has the highest amount of incrementals because of that very low cost structure. And that volume obviously has eroded, and we've added capacity in Mexico. So there's a big pressure point there. But how I would answer it is that that $225 million range is back when we get into the low 20s. And then as we can get to the billion-dollar run rate, the $250 million, I think that's when we get back into the lower to mid-20s. And we fully expect we can get our gross margins back into the upper 30s with that.
Jeremy Ovens: A business that has the highest amount of incrementals because of that very low cost structure and that volume odyssey's eroded and we've added capacity in Mexico. So there is a big pressure point, there, but how I would answer it is that that $225 million range.
Jeremy Ovens: It was back when we get into the low Twenty's and then as we can get to the $1 billion run rate the $250 million I think that's when we get back into the low to lower to mid twenties, and we fully expect we can get our gross margins back into the upper thirties with that I think beyond that it's it's looking at.
Sean Bagan: I think beyond that, it's looking at, again, across the whole portfolio and understanding that cost structure.
Jeremy Ovens: Again across the whole portfolio and understanding that cost structure and so we did announce on the call. It the one.
Sean Bagan: And so we did announce on the one that was an acquisition in San Antonio, Texas. We're called HCEE. Very, very talented engineers that have brought great innovation to us. But comes with a cost structure that's isolated away from the business. So the intent there is to integrate that back into the business. Don't lose the engineering mindset and such, but there's rooftop and kind of operating costs there that we feel can be leveraged with the existing infrastructure that we have across the building. And we've done a little bit of that within Europe as well, when you look at our UK operations, our German operations from a Sun Hydraulics perspective, our acquisition with NEM and the integration they're doing with Faster.
Jeremy Ovens: That was our acquisition in San Antonio, Texas for called H C. W. E Berry.
Jeremy Ovens: Very very talented engineers that are brought great innovation to us but.
Jeremy Ovens: Comes out with a with a cost structure, that's isolated away from the business. So the intent there is to integrate that back into the business.
Jeremy Ovens: Don't lose don't lose the engineering mindset, and such but Theres rooftop and kind of operating cost there that we feel can be leveraged with the existing.
Jeremy Ovens: The infrastructure that we have across the across the building I mean, we've done a little bit of that within Europe as well.
Jeremy Ovens: When you look at our U K operations, our German operations from a Sun hydraulics perspective, our acquisition with none in the integration they're doing with faster.
Sean Bagan: So we're looking at all of those opportunities, but I'd still go back to volume is the number one thing here. And that's the importance of this go-to-market strategy to drive top-line growth. I'm sorry, one final follow up on your comment about the billion dollar revenue run rate to get to mid mid 20s EBITDA margins, you know, in there, you were you were talking about Balboa, and where Balboa was from a revenue standpoint relative to now. But arguably speaking, Balboa post COVID experience, a bit of a mini bubble of demand, right? Like people were buying a lot of these home spas, this was not the only industry that experienced that, that that COVID rush.
Jeremy Ovens: So we're looking at all of those opportunities, but I would still go back to volume as the number one thing here and that's the importance of this go to market strategy to drive topline growth.
Jeremy Ovens: I'm sorry, one final follow up on your comment about the billion dollar revenue run rate to get to.
Jeremy Ovens: Mid mid Twenty's EBITDA margins.
Jeremy Ovens: Yeah. In there you were you were talking about Bell Boardwalk and worry about ball was from a revenue standpoint relative to now.
Jeremy Ovens: But arguably speaking Balboa post COVID-19.
Jeremy Ovens: Experience a bit of a mini bubble of demand right like people were buying a lot of these homes spas. This was not the only industry that experience that that that Covid rush.
Sean Bagan: So Why is that the right way to think about capacity for that business? I mean, is it reasonable to expect demand to get anywhere back to where it was during that period? Or, again, do you have to do something incremental to your costs? Right. No, it would take years to get it back to that COVID bump because, again, it nearly doubled from when Helios purchased Belboa. It almost doubled during that COVID bump that was being referenced. When you look before COVID, historically, it's a very sleepy, low single-digit end market that grows. So how we're going to grow and win in that is with the innovative new product.
Jeremy Ovens: So.
Jeremy Ovens: Why is that the right way to think about about capacity for that for that business. I mean is it reasonable to expect demand to get anywhere back to where it was during that period or again.
Jeremy Ovens: Do you have to do something incremental to your cost base.
Jeremy Ovens: Great No it'll take it would take years to get it back to that Covid bump because again it nearly doubled from a win when Helios purchased Bell boy it almost doubled during that Covid bump.
Jeremy Ovens: Bump that was being referenced when you look before COVID-19 historically, it's a very sleepy low single digit end market that grows so how we're going to grow and win and that is with innovative new product you talked about the delay.
Sean Bagan: You talked about the WaterSense and Treat that we're launching and other things, but the capacity was added there in anticipation of the innovation control moves that we did make in addition to the commercial food services opportunities that have been talked about extensively and then other just electronic customer opportunities that we were expecting to materialize that haven't yet. And so at some point, if we don't have a view or tariffs change that situation, that could be one that ultimately is downsized.
Jeremy Ovens: The water and treat that we're launching and other things, but we the capacity was added therefore.
Jeremy Ovens: In anticipation of the innovation control moves that we did make in addition to the commercial foodservice as opportunities that have been talked about extensively and then other just electronic.
Jeremy Ovens: Customer opportunities that we were.
Jeremy Ovens: Expecting to materialize that havent, yet and so at some point, if we don't have a view or tariffs change that situation that could be one that ultimately is downsized.
Jeremy Ovens: Yes.
Nathan Jones: Thank you for taking my question. Thanks Meg.
Speaker Change: Thank you for taking my questions.
Jeremy Ovens: Thanks, Nick Thanks, Tim.
Nathan Jones: Thank you. Our next question comes from the line of Nathan Jones of Stiefel. Please proceed with your question. Good morning, everyone. Good morning, Nathan.
Jeremy Ovens: Thank you.
Speaker Change: Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.
Speaker Change: Good morning, everyone.
Speaker Change: Good morning Nathan.
Nathan Jones: I'm going to start with a bit of a philosophical question about the portfolio. Under your two predecessors, Sean, there was a large transformation made within the company, number of acquisitions made with the intention that you were going to move up the value chain, create systems and subsystems, and sell a lot of those to customers. That started nine-odd years ago now, and there's been a lot of talk and a lot of promises made by the company about expanding into systems and subsystems, and frankly, not a lot of that delivered today. Does that strategy continue to make sense?
Speaker Change: I'm going to start with a bit of a philosophical question about the portfolio.
Speaker Change: Under the your two predecessor, Sean.
Speaker Change: There was a large transformation made within the company a number of acquisitions made with the intention that you were going to move up the value chain systems, and subsystems and sell a lot of those customers.
Speaker Change: You know that that started nine years non odd years ago now and it's been a you know a lot of talk on a lot of promises made by the company about expanding into the systems and subsystems and frankly, not a lot of that's a little bit today.
Speaker Change: Is that strategy continue to make sense do you think Helios can leverage these products and these businesses to drive that value that.
Sean Bagan: Do you think Helios can leverage these products in these businesses to drive that value that, you know, this strategy that was started about nine years ago? Or do you guys need to consider whether Helios is the best owner for these businesses, whether having capital in these businesses makes the most sense for shareholders? Just thoughts on where the portfolio is today.
Speaker Change: The strategy that was started about nine months ago or do you guys need to see to where the Helios has the best Arnaud for these businesses without having capital in these businesses makes the most sense for shareholders.
Speaker Change: Just thoughts on on where the portfolio is today.
Sean Bagan: Yeah, well, most of the yes, no questions you asked throughout there, Nate, because it is a loaded question is yes, yes, and yes. So here's how I'm thinking about it. First and foremost, I mean, it's well documented, whatever half of acquisitions typically don't deliver upon the synergy plans or the strategic intent when you set out for them. And it's no secret that Helios acquired many companies over that time. From a strategic perspective, I'm all about the system solutions opportunity. And frankly, the companies that were purchased. have great products. And to me, there's a tremendous amount more of value to be extracted that is just purely with synergizing sales teams, as I've talked about, back-end operations because of the cost structures of some of the businesses, and it hasn't been intentional integration efforts.
Speaker Change: Yes, well most of the yes no questions.
Speaker Change: AST throughout their name because it is a loaded question is yes, yes, and yes. So.
Speaker Change: Here's how I'm thinking about it.
Speaker Change: First and foremost I mean, it's well documented whatever half of acquisitions typically don't deliver upon the synergy plans or the strategic intent. When you had set out for them and it's no secret that Helios a acquired many companies.
Speaker Change: Over that time.
Speaker Change: From a strategic perspective, I'm, all about the system solutions opportunity and frankly, the companies that were purchased.
Speaker Change: Have great products and to me, there's a tremendous amount more of value to be extracted that is just purely with synergize in sales teams as I've talked about back end operations because of the cost structures of some of the businesses and it hasnt been intentional.
Jeremy Evans: So we're committed to all that, but absolutely looking at the overall portfolio as well. And to your language, are we the best owner for these different businesses? If it isn't adding some sort of strategic value near-term or something that we have planned, and it doesn't make sense, then absolutely it would be something we would look at over time. But on the flip side, given the strong returns and cash flow generation of the company, despite it being in a depressed end markets the last couple of years, we're still delivering a lot of cash. And so with getting our leverage ratio down, that's where we expect to look to, again, enhance that solution opportunities of what other products are missing from the portfolio or services or software.
Speaker Change: Our integration efforts.
Speaker Change: We're committed to all of that but absolutely looking at the overall portfolio as well and to your to your language or are we the best owner for for these different businesses. If it isn't adding some sort of strategic value near term or something that we have planned and it doesn't make sense then absolutely it would be something we would.
Speaker Change: We'll look at over time, but on the flip side, given the strong returns and cash flow generation of the company. Despite it being in a depressed end markets. The last couple of years, we're still delivering a lot of cash and so.
Speaker Change: With getting our leverage ratio down that's where we expect to.
Speaker Change: Look to again enhance that solution opportunities what other products are missing from the portfolio or services or software and so we.
Sean Bagan: And so we will do a and, and, and approach on a lot of those questions.
We will do and and an approach on a lot of those questions.
Jeremy Evans: Jeremy. Yeah, thanks, Sean. I just want to add that if you look at some of the Flywheel acquisitions, there was an intent to vertically integrate. If you look at companies like Damon and Schultes, Damon was a supplier of manifolds to the NCT organization. And through that, we created the Center of Excellence. And we still see opportunities there as the volumes come back to leverage that Center of Excellence. Another acquisition was NEM. That was a diversification effort to expand in the common cavity valve space. And we still see opportunities there. You know, that's based in Europe, and we're seeing that starting to gain some traction here in the Americas as well.
Speaker Change: Jeremy.
Jeremy Ovens: Yes. Thanks.
Jeremy Ovens: Sean just wanted to add that if you look at some of the flywheel acquisitions.
Speaker Change: There was an intent to vertically integrate if you look at companies like Damon and Shouldnt Shultes, David was a supplier to a band of boats to the M. C T organization.
Speaker Change: That we created a center of excellence, so we still see opportunities there as the volumes come back to leverage that center of excellence.
Speaker Change: Their acquisition was down that was a diversification effort to expand in the common cavity valve space and we still see opportunities there.
Speaker Change: You know that that's based in Europe, and we're seeing that starting to gain some traction here in the Americas as well so.
Jeremy Evans: So definitely the vertical integration and the diversification strategy that drove some of those smaller Flywheel acquisitions is still in play. And we've got plans to continue to develop those and execute against those.
Speaker Change: Definitely the vertical integration of the diversification strategy that drove some of those smaller flywheel acquisition is that still in play.
Speaker Change: And we've got plans to continue to develop those and execute against those.
Nathan Jones: Thanks for that. I guess this is a follow-up to Meg's question. The company, over the last couple of years, added, depending on... depending on when I asked you guys. So you were talking about something between $200 and $400 million in capacity. that was that was added that's obviously not filled. You know the businesses had already been running it 900-ish million a year, add 300 million to that you get a billion two. You guys should have plenty of capacity for quite a long time. Is that an area where we just need to wait for the volume to come back to fill that up and you should continue to generate very high incrementals as that volume comes back?
Speaker Change: Thanks for that I guess this is a follow up to <unk> question.
Speaker Change:
Speaker Change: The company over the last couple of years added depending on.
Speaker Change:
Speaker Change: Depending on when I asked you guys you were talking about something between 200 and $400 million of capacity.
Speaker Change: That was that there was added that's obviously not filled.
Speaker Change: The business had already been running at 900 ish million a year.
Speaker Change: 300 million to that you've got 1 billion too you guys should have plenty of capacity for quite a long time.
Speaker Change: Is that.
Speaker Change: An area, where we just need to wait and for the volume to come back to fill that up and you should continue to generate very high incrementals as that volume comes back.
Speaker Change: Or when do you need to take bigger cuts and I guess this is probably somewhat vague question is well when do you need to take big cuts to some of that capacity and some of that expense. That's been added to push that margin profile back up a bit more quickly.
Sean Bagan: When do you need to take bigger cuts to some of that capacity and some of that expense that's been added to push that margin profile back up a bit more quickly? Yeah, that's the discussion I have consistently with our presidents that are running the day-to-day business. And I think the numbers you referenced are still sound. If not, it went up a little bit because of our sales shrinking by $25 million a year over a year. So in theory, we've got another $25 million of capacity there. But we believe in the organic growth plan and the go-to-market framework we're laying out that we believe we can continue to fill up that capacity.
Speaker Change: Yeah. That's that's the discussion I have consistently with our presidents that are running the day to day business and.
Speaker Change: I think the numbers you referenced are still sound if not go up.
Speaker Change: It went up a little bit because of our sales shrinking by $25 million year over year. So in theory, we've got another $25 million of capacity there, but we're not a we believe in the organic growth plan and the <unk>.
Speaker Change: The go to market framework, we're laying out that we believe we can continue to fill up that capacity, but it absolutely could change with the tariff rulings.
Sean Bagan: But it absolutely could change with the tariff rulings and how we would respond there. And then to the extent we see further declines in sales, I think, naturally, we would look at that. But right now, our plans are how do we fill the capacity up and get more leverage out of it because those incrementals are really, really strong, as we've demonstrated a couple of times sequentially in quarters here in the more recent times. And as we get the top line going, we expect to benefit from that. And then the other point I just want to highlight is that mix profile.
Speaker Change: And how we would respond there and then to the extent we see further declines in sales I think.
Speaker Change: Naturally we would look at that but right now we're our plans are how do we fill the capacity up and get more leverage out of it because those incrementals are really really strong as we've demonstrated a couple of times sequentially in quarters here in the more recent times and.
Speaker Change: As we get the as we get the top line go on we expect to benefit from that and then the other point I was just wanted to highlight is that that that mix profile, although our overall hydraulics electronics mix didn't really move year over year in all two thirds hydraulics, one third electronics that mix within the segment.
Sean Bagan: Although our overall hydraulics-electronics mix didn't really move year over year, two-thirds hydraulics, one-third electronics, that mix within the segments was unfavorable across both of them. You think about our faster business highly indexed to that ag market being much more depressed, where actually our sun hydraulics business year over year grew a faster, higher margin than sun. And then you go over to the Balboa and innovation side, and Balboa is growing, innovation shrinking, and the margin profile being just the opposite of that. So as we get that more optimized and we get some of those ag and rep marine and markets growing again, we think that can produce notable margin improvement as well.
Speaker Change: <unk> was unfavorable across both of them do you think about our fastener business highly indexed to that AG market being much more depressed where actually our sun hydraulics business year over year group.
Speaker Change: Faster higher margin than Sun and then you go over to the.
Speaker Change: Belo and innovation side and double was growing innovation shrinking.
Speaker Change: And the margin profile being just the opposite of that so as we get that more optimized and we get some of those AG and rec Marine end markets growing again.
We think that can produce a notable mark.
Speaker Change: <unk> improvement as well.
Sean Bagan: Maybe one last one on the tariffs and cost increases there. You talked about, you know, I think you said it's hard to imagine that higher costs wouldn't get passed on to the consumer. In a number of those markets, you've already got a pretty weak consumer, so, you know, boy, you can raise prices to OEMs, OEMs can raise prices to consumers. How concerned are you that those price increases would then destroy demand and, you know, get lower revenue rather than lower margins. Well, and the comments for me is predominantly on the Arbel Boa business because of that Mexico facility and that whole side, the earlier comment in the call and I guess the one good thing for us is that's our smallest business of the four flagship brands.
Speaker Change: Maybe one last one on the entire Fs and cost increases there you talked about.
Speaker Change: I think you said, it's hard to imagine that higher costs wouldn't get passed onto the consumer.
Speaker Change: The number of those markets, you've already got a pretty weak consumer. So while you can raise prices that Oems can raise prices to consumers. How concerned are you that those price increases would then destroyed demand.
Speaker Change: Okay.
Speaker Change: Lower revenue should get lower revenue rather than lower margins.
Speaker Change: Well.
Speaker Change: The comments for me is predominantly on our Bell boll, a business because of that Mexico facility and that whole side. The earlier comment in the call.
Speaker Change: I guess the one good thing for US is that's our smallest business of the four flagship brands. So from an overall impact to the company.
Sean Bagan: So from an overall impact to the company, if there was a pullback in demand, not as severe to the total company, but I absolutely think it will put pressure. But I also think it's going to drive. supply chain changes. I talked about the China dynamic. Our leader for that Bilboa business and our electronics president spent some time in Asia seeing our OEM customers, and we're blown away by the level of automation and sophistication and investments, frankly, that the Chinese are making into health and wellness facilities. And a lot of that volume today is being exported, the majority of that volume today is being exported to Europe.
Speaker Change: If there was a pullback in demand.
Speaker Change: Not as severe to the total company, but I, absolutely think it will put pressure, but I also think it's going to drive.
Speaker Change: Supply chain changes I talked about the China dynamic our leader for for both business and our electronics President spent some time in Asia, seeing CNR OEM customers and more blown away by the level of order.
Speaker Change: Automation and sophistication and investments frankly that that the Chinese are making into health and wellness facilities and a lot of that volume today is being export or the majority of the volume today is being exported to Europe and so my earlier comment I could see that creeping back into the U S as well and so it may just sure.
Sean Bagan: And so my earlier comment, I could see that creeping back into the U.S. as well. And so it may just shift where the product is made, still being able to limit some of the pricing pressure. But no doubt at the end of the day, the consumer is going to feel some of that in the markets, at least that we serve from a consumer perspective.
Speaker Change: Where the product is made still being able to limit some of the some of the pricing pressure, but no doubt at the end of the day. The consumer is going to feel some of that in the markets at least that we serve from a consumer perspective.
Nathan Jones: Thank you very much for taking my questions. Thank you, Nathan. Yeah, thanks.
Speaker Change: Alright, Thank you very much for taking my questions.
Speaker Change: Thank you Nathan yeah. Thanks.
Speaker Change: And.
Speaker Change: Huh.
Operator: Operator, do we have any other questions? I think we may be at the end of our time, Amos. Correct. There are no further questions at this time.
Speaker Change: Operator, do we have any other questions I think we may be at the end of our time on that.
Speaker Change: Correct.
Tanya: No further questions at this time different I'll hand, it back to you Tanya for closing remarks.
Operator: Therefore, I will hand it back to you, Tania, for a closing Okay, great. I appreciate it. And thank you so much, everyone, for your attention and your interest in Helios Technologies today. If you have any follow-up questions, please feel free to reach out to me, and we look forward to seeing you on the road soon. Have a great day. Thank you, and this concludes today's conference. You may disconnect your lines. for your participation.
Okay, Great I appreciate it and thank you so much everyone for your attention and your interest in Helios technologies. Today. If you have any follow up questions. Please feel free to reach out to Nate and we look forward to seeing you on the road soon have a great day.
Tanya: Thank you and this concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Tanya: [music].