HELIOS TECHNOLOGIES, INC. Q3 FY2025 earnings call

Management Statement and Operational Highlights:

• Strategic focus on go-to-market, innovation, and portfolio optimization.
• Closed the sale of Custom Fluidpower, recording a $21 million gain, and wrote down $25.9 million of goodwill related to i3 product development.
• Returned to growth with a 13% sales increase, adjusted EBITDA margin above 20%, and net debt-to-adjusted EBITDA leverage ratio improved to 2.4x.
• Invested in engineering resources and production capabilities, focused on organic growth, reducing debt, and maintaining dividends.

Segment Performance:

• Electronics: Sales grew 21% year-over-year to $79 million, contributing 21% of total sales. Gross profit increased 38% and gross margin expanded 420 basis points.
• Hydraulics: Sales grew 9% year-over-year to $141 million, contributing 64% of total sales. Gross profit increased 12% and gross margin expanded 90 basis points.

Guidance:

• Fourth quarter sales expected $192 million to $202 million (10% year-over-year growth).
• Fourth quarter adjusted EBITDA margin expected 20% to 21%.
• Full-year sales midpoint (adjusting for CFP) expected 4% growth over fiscal 2024.
• Full-year adjusted EBITDA margin expected 19.1% to 19.4%.
• Full-year diluted non-GAAP EPS expected $2.43 to $2.50.

Risks:

• Uncertainties in market conditions affecting end markets.
• Integration challenges with acquired businesses like i3PD.
• Impact of foreign exchange fluctuations on sales.

Q: Congrats on a nice quarter and the momentum. Maybe just talk about -- provide a little color on some of your recent commercial wins, how much visibility that gives you into '26?

A: Chris, thanks. I appreciate the kind words. And, yes, as you know, when we entered this year, we prioritized our go-to-market as our top initiative. We were coming off -- well, we are now coming off 12 quarters of sales decline. So it feels really good to put up a green number of positive growth and certainly would attribute that to our refocus on go-to-market. We really started with standing up new sales processes, reporting and most importantly, with the team across all of our businesses. And I certainly can give a few recent examples as we're seeing that. But ultimately, the success is going to be judged by our sales and order levels, which we have some really solid metrics that we'll share throughout the Q&A session here. So, across kind of all 4 businesses, we like to talk about them. A perfect example, recent win is with our Faster team. As you know, we're proud to celebrate our 55th anniversary here at Sun Hydraulics, but Faster actually will be celebrating their 75th anniversary next year and speaks to the deep, long customer relationships they have. And deep into the AG industry, AGCO is a long-term customer of ours. And a recent nice win for the Faster team that will start to stack in 2026, where our customer across kind of their 3 European brands, Fendt, Valtra and Massey Ferguson, decided to really commonize the back end of the hydraulic attachments. And so they chose us for our performance quality and price, frankly, of our coupling. So that's just an example, but there's many of that within the Faster team. The Sun team is really all about distribution and partnering with our long-term distributors and just stacking up wins, as I like to say, within the organization, whether recent wins in the wind power, alternative energy, AWP earthmoving, a leading OEM there through one of our distributors, the light compact construction equipment leader, specialized AG harvesting equipment. These are all small wins that are stacking and adding up. And then you go over to the Electronics segment and just at the International Pool Patio Spa Show in Vegas last week and a great win-back example, one of the higher premium hot tub spa brands, Bullfrog is a customer win back, and they had one of our displays on display at the show that we're very excited to win some of that business back. And then as I highlighted in our prepared remarks, Enovation had a record quarter. They are on the gas and driving innovation and growth for us across all of Helios. I would like to speak to one win that we've had recently that we haven't been able to announce yet, but it's in a new space, and it shows our ability to really target through our go-to-market approach, these adjacent opportunities. So this is in the neighborhood electric vehicle space. That will take some time to ramp and grow as we displace [ their ] competitor, but it shows, again, our focus on go-to-market, very targeted on where we're searching. And I couldn't be more prouder of what the Enovation team has done. I would put off our engineers against any of our competitors, whether that's software, mechanical application, that's allowing us to go get these win backs and is key to supporting our product strategy.

Q: Maybe just my follow-up. Obviously, margin progression is happening here. Fiscal '21 was an unusual year driven by Balboa. Adjusted EBITDA was 24.6%. What would it take over the next 2 or 3 years to get back to that level?

A: Yes. I'm glad you highlighted Balboa because I've highlighted that before that, that was about double what it currently is in terms of its revenue size during that year. And given that low-cost manufacturing, that was very accretive from an overall Helios mix perspective. But in addition, we were coming off also highs with innovation in the recreational products when everyone was buying outdoor equipment at that time. So I think what we're showing now is the demonstration of the operating leverage we have embedded within our business. And whether you look at kind of sequential step-ups or year-over-year, we showed a 200 basis points improvement in our gross profit margins here in the third quarter. But even sequentially, you look every quarter this year up. So it's going to come down to volume, and we highlight that, and I will tie that back to why it's so important that we go create growth in this go-to-market. It's no secret the markets we're operating in are not healthy. They're still recovering. Now we're seeing signs of growth, but really in order to get that EBITDA margin back into those mid-20s, we need more volume. The other piece that I would highlight there is we've been very focused on the rest of the value drivers within the company. And certainly, the operating expense of the company has been very well managed. We did want to continue to call out that last year and the compare has about a $5.5 million pickup that was due to the prior CEO's termination. But absent that, we've managed our costs below 2024 levels, and we're growing our sales. So on a year-to-date basis, we're up. So you can see the operating expense leverage we're also getting out of the business.

Q: Maybe just start on recreational vehicle. That seems like a market, maybe you touched on it, [ truck ] markets are still choppy. But is that -- what you're seeing, destocking ending? Is there a program win share gains? Or is there a real kind of demand recovery there? And maybe same for mobile, which again, seems pretty choppy, but you're kind of pointing the green arrow?

A: Yes. So starting with the recreational. We have -- what we've seen is the market has -- from a retail perspective has not rebounded. But what has changed is that the dealer channel inventory levels are in a much healthier spot. Our largest customer has been on the gas from an innovation perspective and has taken a lot of share, and we've benefited from that. And honestly, the other piece here is with interest rates, and I've talked about this on prior calls, that this is an industry where a lot of that product is financed. And with the lowering of interest rate environment, that certainly could help. When we look at it just in North America, I mean, even Canada is outperforming the U.S. from that perspective because their benchmark rates about 2.25% that they just reduced [ too ] in October. While our U.S. Fed is still in that 3.75% to 4% targeted range, but came down. And so I expect that to likely help. But when you look at those channel inventory levels, they're absolutely in a much healthier space. The non-currents are finally clearing through with the OEMs running their factory authorized clearance and types of things to pull that through. And dealer sentiment then gets a little bit better there. I don't expect dealers are going to go restock back up to prior levels, and that's not a bad thing. Leaner inventories and healthier turns are good for that industry. And finally, I would say, our largest customer is -- has very steady optimism that I frankly see it grounded in realism and the worst of the channel cleanups are behind us. And so, that gives us confidence. And then secondly, yes, we are on the gas from a go-to-market perspective. Looking for new wins. I highlighted the NEB, one. And I would tell you, we're looking at others within that space, whether that's both with just the off-road type vehicles or marine, which is really excited about our No Roads application that we have now launched the No Roads Marine, and we expect that to help us get some new wins there in that segment as well.

Q: I'll follow up on some of these destocking questions because I think it's -- I mean, it's probably an important distinction to make because we get questions about this from investors on Helios. You guys don't actually need to see the John Deeres and the Caterpillars of the world selling more wheel loaders and tractors in order to see revenue growth for Helios in 2026. What you need is the first signal of the bottom of the cycle, which is then stopping destocking inventory and actually producing more machines even if they're not actually selling more machines, correct?

A: That's fair. Yes.

Q: So I think then -- I mean, you talked about being well-positioned for growth in 2026 and without needing to forecast what Caterpillar sales are going to be or what Deere sales are going to be, you should have some decent visibility to growth just against the destocking comps that you had in '25. So I'm wondering if you're prepared to offer any color on what you're thinking about 2026 at this point?

A: Yes. So not in terms of full guidance and such, but I feel with conviction that we will enter the year in 2026 with growth. Now I will also highlight that we will have easier comps in the first half of the year than the second half as we enter 2026. But why I have conviction is what we're seeing in our demand trends. We haven't seen the level of order increases for multiple years. And even October came in, in double-digits just as the prior 5 months had done from a year-over-year perspective. The other thing我 want to make sure is clear is that CFP revenues coming out, that was a roughly $60 million a year business. Last year in the fourth quarter, it was $15.6 million. So we just got to keep that in mind that we're not anchoring on 2025 guidance at the midpoint of $825 million and growth off of that. Our really jumping off point is closer to $780 million.

Q: Sean, you took the charge-off on i3 this quarter. What are you doing specifically to turn that operation around and get it to make a contribution to the bottom line? What kind of changes are you making there?

A: John, this is Jeremy. I'll field that one. I want to first highlight that with that acquisition, we gained access to a team of highly talented engineers. And as we've been integrating them into the rest of the Helios portfolio, we've actually been consulting with them and having them help with some of the new product innovations that we've been coming out with, and others that we have in the pipeline. And as we evaluated that, we believe it makes a lot more sense to have those resources focus on projects that can benefit the broader Helios portfolio. And so, just to remind everyone, they were a third-party engineering design service firm that basically work project by project. We didn't retain any of the IEP for those projects. And then we also had some software, that's where that Cygnus Reach platform came. And we just think it's not a turnaround play, but it makes much more sense to refocus those resources on customers and projects that will benefit the broader Helios portfolio. So that's the main reason. The other piece我 would say is rather than try to sell the software platforms on a stand-alone basis, which requires a lot of customization kind of a long runway, we want to embed that software onto the products that we are launching. And we are doing that with some of the next-generation displays, both in our electronics and then also having them help out on the hydraulics side as well. So it's really less of a turnaround situation and more of leveraging those resources as to best add value to the broader Helios portfolio. But as a result of that, some of that third-party revenue projections, we've dialed that back as well as we've adjusted the, call it, the adoption rate on the software where it's going to be tied now into some of those product releases. And so, a result of that math came out and we said we can't support the goodwill that we had on the balance sheet for that under the new strategy. And that's really what led to the write-off this quarter.