Ladies and gentlemen, greetings, and welcome to the Helios Technologies Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in the listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tania Almond, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, operator, and good day, everyone. Welcome to the Helios Technologies third 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 there that will accompany our conversation today. On the line with me is Sean Bagan, Interim President, Chief Executive Officer and Chief Financial Officer. Sean will review our third quarter results along with our outlook for the reminder of 2024. We will then open the call to your questions. If you turn to Slide 2, you will find our Safe Harbor statement. As you may be aware, we will make some forward-looking statements during this presentation and the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from those presented today. These risks and uncertainties, and other factors have been provided in our 10-K filing as well as our upcoming 10-Q to be filed with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. I'll also point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP with non-GAAP measures in the tables that accompany today's slides. Please reference Slides 3 and 4 now. With that, it's my pleasure to turn the call over to Sean.

Thanks, Tania, and welcome, everyone. We appreciate you joining us today. I would like to start the call with a heartfelt thank you to our suppliers, customers, business partners, and importantly, the global Helios team as we made advancements in the business during a challenging period for the organization. We delivered a solid quarter and made further improvements to our financial profile. We hit sales within our guidance range for the quarter while contending with contracted markets. We generated nearly $35 million in cash and reduced debt by over $19 million. Our strong cash generated from operations is up almost threefold as we continue to unlock working capital. These results validate the progress we are making with enhanced discipline around costs, capturing efficiencies, managing inventory, and honing our capital priorities. We also had meaningful margin improvement on lower sales, reflecting the team's efforts to align costs with current conditions, reduced input costs, drive manufacturing productivity and realize the expected cost adjustments primarily from the officer transition. We utilized our excess cash to reduce debt for the fifth consecutive quarter and have brought our net debt to adjusted EBITDA leverage ratio to 2.8x. Over the course of a two-month period, we faced three hurricanes here in Florida, two within two weeks of each other, including a direct hit to Sarasota by Category 3 Hurricane Milton. We count our blessings because every member of the Helios and Sun Hydraulics team made it through without injury. Operations were shut down for 18 cumulative shifts throughout these storms. One of our three manufacturing facilities in Sarasota requires some additional repair before it is 100% operational. All things considered, we pulled through relatively well. Additionally, many of our people had to deal with the destruction the hurricanes caused to their homes and families. Our global Helios team stepped up wholeheartedly and contributed much-needed supplies and support for us and our community. Their physical and emotional support touched everyone here, and we cannot thank them enough. It is a testament to the incredible people that we have in our organization and the shared values that we all live by every day. While I am encouraged by the progress the team is making to improve the underlying fundamentals of the business, given extended weakness in key end markets, combined with the operational impacts of the storms, we are updating our guidance for the remainder of the year. I'll turn now to discuss our results for the quarter in further detail on Slides 5 through 8. Sales were $195 million, near the midpoint of our quarterly guidance and down 3% compared with last year. Strong sales in health and wellness over the year-ago period partially offset the continued weakness in the agriculture, industrial, and recreational markets. The third quarter contains our typical patterns, which generally tend to be lighter than our second quarter, especially in Europe with the summer holiday shutdowns and maintenance work. The extended market weakness that we are seeing is reflected in the declines in both Hydraulics and Electronics sales year-over-year. By region, sales in APAC were the relative bright spot as there were declines in EMEA and the Americas when comparing with last year. During this time, we remain focused on bringing our best effort to customers with respect to quality, service levels, and responsiveness. We are reducing our lead times, continuing to invest in product innovation, and staying very close to our customers. Our Sun Hydraulics past due backlog is at a 12-month low as we have stabilized from the post-Daman acquisition integration period, particularly as it relates to supply bottlenecks created from our manifold centers of excellence. The team is actively accelerating delivery dates and driving order commitment improvements. Our gross margin expanded 150 basis points over last year despite $7 million in lower sales and the mix weighting of our Balboa business. Concerted efforts to reduce overhead costs as well as lower material costs have benefited gross profit. We believe we will continue to make progress toward our goal of returning to the mid- to high 30% range for gross margin over time from a combination of enhanced cost controls, productivity improvements, and most importantly, growing volume. This includes the optimization of our manufacturing operations. For example, we have had line transitions from Tulsa to Tijuana, stood up our two hydraulic centers of excellence in the Americas last year, and we are aligning manufacturing processes regionally in EMEA and APAC for improved efficiencies. Operating margin of 11.4% was up 450 basis points from last year. Non-GAAP adjusted operating margin of 16.6% was up 290 basis points from last year. We have steadily improved operating margin through the year even as depressed sales from challenging end market conditions. Adjusted EBITDA margin expanded 320 basis points over the prior year period. These favorable variances reflect gross margin improvement, cost control measures, and the previously mentioned expected cost adjustment. Our effective tax rate in the third quarter was 14% and was primarily due to an overall increase in discrete tax benefits driven by the officer transition in July 2024. We now expect our effective tax rate for the full year of 2024 to be in the range of 20% to 21%. Diluted EPS was $0.34 in the quarter, up 209% over last year. Diluted non-GAAP EPS was $0.59 in the quarter, up 34% over last year. Starting on Slide 9, I'll give more color by segment. Hydraulics sales declined 2% over the prior year period with gross profit dollars flat. The 2% sales decline was driven by declines in agriculture, partially offset by growth in the industrial and mobile end markets. Foreign exchange had a $600,000 favorable impact on segment sales. Power and Motion recently published statistics from the National Fluid Power Association, reflecting the continued industry decline in total fluid power shipments of 14.9% in August 2024 compared to the previous year, as shown in our supplemental slides. We also just received the September data, and it reflects a 13.9% annual decline. The Ag Economy Barometer published by Purdue University along with the AEM Ag Tractor and Combine Report continue to reflect the U.S. agricultural market remains in decline. We are seeing these trends reflected in our hydraulic sales. We have maintained investments in new products, and we'll continue to protect this investment as it's the lifeblood of Helios. This quarter, Sun Hydraulics announced a High Capacity Electro-Proportional Flow Control Valve solution. The FPJP valve takes full advantage of Sun's XMD series valve driver co-developed in partnership with Helios' operating company Enovation Controls, demonstrating the power of our integrated strategy. Sun also commercialized ENERGEN in the quarter, and we have multiple pilot customers currently working to bring this into production. In addition, the Hydraulics team has a handful of new product launches planned before year-end with a robust product pipeline that will continue to expand. Gross profit was relatively unchanged year-over-year, while gross margin expanded 50 basis points on lower overhead. Operating income grew 32%, driven by targeted cost controls in the current demand environment, along with previously mentioned allocation of expected cost adjustments. Run rate SEA expenses declined over last year, displaying our work to adjust to changing market conditions and customer order timings. Turning to Slide 10, I'll now discuss the Electronics segment. Year-over-year, Electronics sales declined 6%, continued strength in health and wellness partially offset declines in recreational, industrial, and mobile markets. In the quarter, Balboa launched a new Compact Clim8zone II Heat Pump, along with new touchpads and advanced controllers, which have been integrated into several customers' cold plunge products. We also released a new SpaTouch4 display with upgraded software and light controllers that have been adopted by several spa OEMs. We also continue to invest in new display and control platforms from innovation controls with electronic subsystem solutions launches planned in Q4 and early 2025. We are encouraged by the early customer reception of recent display product launches cutting across multiple industries, including the 12-inch and 15-inch ultimate series, the 7-inch Pro series, and the 10.25-inch custom display in the recreational space. Electronics gross profit was up $1 million, while gross margin expanded 330 basis points over last year, reflecting the concerted focus on operational efficiencies and facility footprint optimizations. Operating income grew 62% from gross profit benefits along with previously mentioned allocation of expected cost adjustments. Run rate SEA expenses in this segment also declined over last year, displaying our work to adjust to changing market conditions and customer order timings. Slide 11 clearly presents how effective our cash management efforts have been with a free cash flow conversion rate of 244%. We generated cash from operations of $34.8 million in the quarter, up nearly three times over the third quarter of last year. We continue to reduce inventory, which is now down 7% since the end of last year. This is a meaningful part of our efforts to improve our liquidity profile as we finish out 2024. Capital expenditures in the quarter were $6 million or 3% of sales. Spending is focused on strategic investments in operational improvement and productivity, including machines, tooling, and footprint optimization. Based on the investments we have made over the last couple of years, our capital expenditure needs will be driven primarily by maintenance and opportunistic investments for the foreseeable future. Turning to Slide 12. At the end of the third quarter, cash and cash equivalents were $47 million, and we had $325 million available on our expanded revolver. Despite year-to-date sales contraction, total debt was down 8% or $41 million from the end of fiscal year 2023 and has shown steady declines over the last five quarters bringing our net debt to adjusted EBITDA leverage ratio down to 2.8 times. We have a solid balance sheet and financial flexibility to continue to pay down debt and invest organically in innovation and productivity. Importantly, our strong cash-generating capabilities support our over 27 years of consistent dividend payments or 111 consecutive quarters. Turning to Slide 13. As I mentioned earlier, we are adjusting our full-year outlook to reflect the weakened end markets combined with the impact from the storms. As referenced in the beginning, the cumulative impact of the 18 lost manufacturing shifts equates to approximately $10 million in revenue. In addition, we estimate approximately $3 million in recovery expenses. The remaining reduction in revenue is due to markets in EMEA and the Americas continuing to decline with customers pushing out delivery dates as well as a weakened order book. We are adjusting our full-year sales range to $800 million to $805 million. This implies revenue for 2024 down approximately 4% at the midpoint compared with 2023. We expect our adjusted EBITDA margin to be in the range of 19.0% to 19.6% and adjusted diluted non-GAAP earnings per share to be in the range of $2.10 to $2.20. Even with this updated outlook, we still expect to pay down debt in the fourth quarter while reducing our net debt to adjusted EBITDA leverage ratio further by the end of the year. You can find the other modeling line items in the supplemental slides. Slide 14 provides some additional understanding of where we see our market and operational drivers by segment, along with updated full-year sales projections. Turning to Slide 15. I believe our results this quarter and year-to-date show that we are making progress against our financial priorities. We have been demonstrating our ability to elevate the business even with the tough backdrop of weakening end markets and managing through multiple hurricanes. This is our third quarter in a row that we have expanded our operating margins. The changes we have made are yielding positive outcomes. This is the fourth quarter in a row that we have delivered on the forward quarter financial outlook that we have provided. While we acknowledge we have had to make full-year adjustments and there is room for us to keep improving our forecasting abilities, this highlights the short-cycle order patterns and lead times we have across our businesses. For five quarters in a row, we have been able to reduce our debt balance and improve our leverage ratio, further strengthening our balance sheet. Through 2024, we have kept our foot on the gas from a product development perspective and continue to innovate and bring products to market. We are poised to capitalize on growth as and when markets turn. Our underlying business is more diversified than it has been historically. And this, combined with the benefits of our focused efforts on continuous improvement will become more apparent in our results as market conditions improve. As we approach the end of 2024 and commence planning for 2025, we are starting to form our views of the year ahead. We are cautiously optimistic that our end markets will start to exit their cycle troughs as they lap softer comps, especially come the back half of 2025. We plan to provide our modeling expectations when we report our fourth-quarter results. Global GDP is forecasted for growth in 2025. Interest rates are expected to come down further. Industry data is pointing towards end market recoveries to begin at staggered timings in 2025 and our preliminary internal plans considering current customer demand forecasts are reflecting annual growth. Based on the investments we have made over the last several years, combined with our ability to continue to strengthen our financial profile, I could not be more excited about the prospect of shifting gears into growth mode by capitalizing on the opportunities that lie before us. In closing, I want to once again thank our global Helios team who has demonstrated that through adversity, we can continue to unite the resilience, dedication, and energy that is undeniable across the Helios team. It is driven by a connectedness and engagement that is more powerful than it has ever been during my first 15 months with the company. There are no bounds to our potential as we continue to transform the business. With that, let's open the lines for Q&A, please.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. The first question comes from Mig Dobre with Baird. Please go ahead.

Yes. Good morning. Thank you for taking my question. Sean, maybe we can start with the cost side of the equation. At least to me, when I looked at your report here, what stood out was the SG&A and if I'm looking at SG&A in Hydraulics in particular, quite a significant year-over-year decline. So I guess two questions. The first one is, can we sort of separate out what was unique in the quarter in terms of benefits, whether it's like bonus accruals that reversed or something of the sort versus what might be kind of sustainable as we think about savings into the fourth quarter and maybe even into 2025.

Hi, good morning. Thank you for joining and for your question. Let me clarify a few things. The main change was a reversal of a stock-based compensation accrual in the third quarter related to the officer transition. There are two accounting methods for this: one involves an estimated basis with a forfeiture rate assumed over the expense periods, while the other is on a cash basis when forfeiture occurs. We chose the first method, benefiting from a one-time adjustment. Year-to-date, this resulted in a $2.7 million increase in expenses after costs, and for the third quarter alone, it was $5.5 million. Excluding this adjustment for the third quarter, we were still down $2.1 million compared to last year. As you noted, we previously anticipated growth in the second half of the year, which required additional costs to support that growth. However, as we did not see this growth starting in the second quarter, we decided to slow down and adapt our costs to align with current demand. There are specific measures we took, particularly around headcount. We’re not filling all positions quickly and are cutting back on discretionary expenses like travel unless necessary for customer-facing activities. We are also reducing corporate expenses and being cautious with consultants, but we are not cutting investment in sales, marketing, or engineering, as we see this as a temporary setback. We want to be well-positioned when the market recovers and are actively working on product development to support growth once the market improves.

I see. That's helpful. Thank you. You referenced gross margin several times in your prepared remarks, talking about getting back to a more normalized level. But if we're looking at hydraulics specifically, you're running; call it, 31%-ish gross margin. Looking back this business just a couple of years ago, was it 35%, 36%. At a point in time, it's even higher than that at 37%. Now there's been some volume compression. We recognize that over the past couple of years. But I'm, kind of, curious as to how you think about this business going forward. At what point in time do you guys have to make some decisions around the existing capacity, the cost structure fundamentally in here to try to boost margins? Is this a story that is just dependent on volume? We just have to wait for volume to get better whenever later in 2025 or 2026, or is there something that you can proactively do to get margins closer to what you would consider to be a more normalized level?

Yeah. Great question. And specific to hydraulics, recognize the gross margin contraction, but 100% would point first and foremost, to the volume, and you've seen that contract. And keep in mind, too, during this period of contraction there's also been new acquisitions that have been added at the hydraulics segment, specifically Schultes and Daman, and so you factor in that incremental growth as well. And then that highlights that the Sun and Faster businesses have had more contraction. Those acquisitions didn't come with the same gross margin profile that we enjoy at Faster and Sun, and so they've been dilutive at the gross profit level. But from an EBITDA perspective, pretty strong given that you have lower cost structures. The other thing I'd maybe highlight just within the segment of hydraulics is that mix segment, like particularly this year, we've been more impacted by the Ag down cycle, which the Faster business is more indexed towards, and the Sun business is actually holding pretty flat year-over-year from the cartridge valve and the manifolds, and from a margin perspective, that Faster business typically runs a little higher. And so within the segment, you got a little bit of a bad guide developed there as well. But overall, with the volumes, that's the number one factor. And as we return those, we will expect and we will show and demonstrate that. I think you would have seen that too in the first half of the year, looking at it sequentially to the back half of last year and now we're in this constrained environment right now, but we would expect to grow that. Last thing I'll point to is there was numerous centers of excellence, repositioning of product manufacturing plants, not only here in the Americas, but also what we're working on in Europe and in Asia, positioned really well. The Asian market continues to be a bright spot for us. So as and when the volume returns and you have that fixed cost structure already in our actual results, we're going to naturally get more leverage out of that.

So it sounds to me that we just have to wait for higher volumes. If that's the case, what volume do you think is required here, given all the changes that you talked about in order to get back to 35%, 36% gross margin, is that target even achievable or tangible at this point? Or should we have set our sights a little bit lower?

No. I think it's levels that we've achieved as a company before. It's the $225 million type quarters where we expect to be in the mid-30s at that point. And as we can push towards that $1 billion run rate of $250 million quarters and beyond, that's when we see our ability to surpass the 35% and be marching towards the upper-30s.

Last question for me. It sounds in the way you've described the setup for 2025, it's likely going to be a year with sort of, a tale of two halves, right? You're starting slow in your Hydraulics business, probably down year-over-year, maybe things get better in the back half. And I recognize that I already kind of asked this question, but how do you plan on running the business to sort of address that slow start to 2025? Is there something else that you can do from a temporary cost standpoint? Or should we basically think about modeling average or above-average decremental margins to start the year? Thank you.

Thank you, Mig. That's a crucial question, and we want to ensure we don't make cuts too deep, which could leave us unprepared when the markets rebound. Our focus remains on managing discretionary expenses. We have completed our strategic and long-range planning and are currently in the budget planning phase. There are still mixed signals in the market. However, we believe the duration of these downturns cannot last much longer, as they have been sustained for too long. We will proceed with caution and maintain our operational approach. Our guidance for the fourth quarter implies year-over-year reductions in operating expenses, and we will keep that momentum. When we observe an uptick in orders and positive macro indicators, we will be ready to invest more. Additionally, we will have a strategy in place for further cost reductions if conditions worsen. While we still have options available, our decisions will heavily rely on macroeconomic factors.

Thank you. Good luck.

Thanks, Mig.

Thank you. The next question comes from Chris Moore with CJS Securities. Please go ahead.

Hey. Good morning, guys. Thanks for taking a couple. Yes. So you talked about total fluid power shipments down 14.9% in August, 13.9% annual decline. Is the expectation for kind of slow and steady improvement when it does begin? Or is there the opportunity for a quick turnaround in certain products or end markets?

Yes. Thanks, Chris. Good morning. I don't see it as a drastic move despite the market weakness that we highlighted and is well documented out there through the industry data. We feel actually pretty good from a Sun Hydraulics perspective. We're flattish this year and year-over-year. So implied that is we're gaining some market share. We certainly last year had our self-inflicted pain with our centers of excellence, if you recall, building the backlog with the Daman acquisition and quick expansion and moving all the manifold assembly up from Sarasota to Indiana. And so as these markets do recover, I would expect that we can outperform because, one, we're doing that now, and we would expect that to continue. But on top of that, we're pretty excited about the product pipeline. I referenced a couple of products in the prepared remarks. And I will tell you, I'm just as excited about what we haven't talked about yet that really will help accelerate. And then the final thing that's really important in that market is our ability to hit our commitments on delivery lead times. That backlog didn't help last year. I understand and I sure our customers on some of the delays that we had in fulfilling their orders but as we highlighted, we're in a way different spot right now with a 12-month low on that backlog and our commitment to not only hitting our delivery side but now moving to the next phase of improving them and getting back to what our legacy Sun customers are accustomed to with us. And so you put those factors together, and that's what gives us confidence that we can actually outperform there.

Got it. That's helpful. APAC looks like one of the bright spots, revenue growth, I think, both segments for Q2 and Q3. Maybe talk a little bit more about what you're seeing there. Just trying to remind us how far below peak revenue are you there currently? And just how important is it to have local manufacturing there, especially in China?

Yes. There are two key stories regarding the APAC region. First, there's the Hydraulics and Electronics narrative. In response to your question, we're not yet at the pre-pandemic sales levels, and the APAC region was the first to feel the impact, resulting in a significant decline in our sales. Therefore, we still have the potential to recover and grow from those levels. When I visited the region in the second quarter, I noticed that our strategy focused on being in the region and serving the region is effective in enhancing our customer service and reducing lead times related to supply chain and deliveries. Recently, there was a trade show in China, and we observed a trend where local manufacturers, rather than large American and European OEMs, dominate the market. Notably, technology advancements were showcased, particularly in how we can capitalize on this trend from both Electronics and Hydraulics perspectives. For instance, we have a strong presence in China with our couplers, and our advanced products and system solutions fit well with the market's progression. Additionally, in Hydraulics, our business in Australia, known as CFP, is performing exceptionally well, outpacing both the regional and overall company growth. Although it's primarily a distribution business with ties to the mining industry, which impacts profitability due to the nature of the products sold, the revenue trend remains positive. In the electronics sector, we're observing a notable trend in health and wellness, particularly from Chinese manufacturers who are aggressively investing in manufacturing automation. Many spas are being produced in China for export to Europe, and while we anticipate this trend may extend to the U.S., several of our established OEM clients already have local supply chains here. Our health and wellness segment is currently seeing significant growth, largely thanks to the Joyonway acquisition we made in 2021, which has enhanced our manufacturing capabilities. Thus, our growth in Asia is strongly tied to our in-region, for-the-region strategy.

Got it. Very helpful. Maybe just one last quick one. Given the election results, just any thoughts from a tariff perspective?

Yeah. Obviously, we've been watching that closely. I think from the tariff perspective, not as concerning for us, and that goes back to the in the region for the region strategy. Most of our supply chain is localized. So I think it's more impactful for products that are end markets or if you have a strategy of sourcing from China for components into your production in the Americas. So that is not as impactful for us. But certainly, we are excited about the opportunity to reduce corporate tax rates. We think local manufacturing will be rewarded. We're proud to have manufacturing throughout the United States across both of our segments. And overall, I think it should be a net neutral or a net good for us from an EPS perspective.

Got it. I appreciate that. I'll jump back in line. Thanks, Sean.

Thanks, Chris.

Thank you. The next question comes from Nathan Jones with Stifel. Please go ahead.

Good morning, everyone.

Hey, Nathan.

Hi, Nathan.

I wanted to follow up on Nick's questions regarding returning to mid-30s gross margins in Hydraulics. You mentioned a $225 million quarterly run rate is needed to achieve that. Since you have increased your capacity significantly over the past couple of years when you were at that level, can you reach those historical gross margin levels at the historical volume levels? Or do you require additional volume to utilize the capacity that has been added recently?

To clarify, my $225 million estimate wasn't limited to Hydraulics; it refers to the entire company. We were in the mid-lower 30s during the first half of the year, approaching 34%, but we weren't quite at that $225 million level. The additional activities and investments we're making from a CapEx perspective are no longer focused on expanding capacity, as we believe we have sufficient capacity to support hundreds of millions in incremental sales across all our plants. With this volume, we don't need to increase fixed costs, which will help improve margins. I believe we can achieve those numbers with our existing cost structure and the $225 million target in the mid-30s margin range. Additionally, considering our performance in the first half of the year and the other challenges we've faced this year, particularly with electronics, there could be improvements as the market evolves, especially since growth in health and wellness tends to have lower margins compared to our more profitable Innovation Controls focused on recreation.

Thank you. I have a follow-up question. You adjusted the full year revenue guidance down by about $25 million, primarily affecting the fourth quarter. Based on my calculations regarding the $3 million in recovery costs for the fourth quarter and some expected incremental margins related to the revenue decline, it seems that the operating performance in the fourth quarter might be better than you initially anticipated. If there hadn't been these challenges, it appears that the margin would have exceeded expectations. Can you confirm or refute my calculations and discuss the business's operating performance aside from these disruptions?

Yes, we definitely expected the fourth quarter to show continued improvement based on prior trends. When we had to revise our expectations downward, it impacted our gross profit rate negatively. However, since we did not incur the expenses we initially planned earlier in the year, that has contributed positively, adding about 300 to 400 basis points. Could you remind me of the number you mentioned, Nathan? I missed it.

I think without the headwinds of lower revenue and the additional expenses for the hurricanes and things like that, that the EBITDA margins in the fourth quarter were probably looking at something in the low 20s before all of these adjustments around it would have been higher than was embedded in the prior guidance. It's just a question.

Agree. No, you're exactly. I'm aligned with this. Sorry, I just missed that first part of your question.

No worries. Okay. So maybe you could just talk about what's led to just better core operating performance in the business.

Sure. So the normalization of all of the activities from a back-end operational footprint certainly have helped from a specific activity perspective, I would refer to the centers of excellence. So one is our continued effort from the Tulsa to Tijuana facility. So we continue to ramp up production in Mexico. We expanded that facility last year. And as we get more leverage and fill that up, that certainly helps just from a lower cost perspective. I think in the region, for the region strategy is paying off. I mentioned the acquisition of Joyonway that has helped on the electronics side. But we continue to make other efforts on optimizing that footprint even within EMEA right now. We acquired NEM, as you know, more recently, in between the NEM and Faster, booking in Italy some optimization efforts there. So these efforts will ramp and continue to gain traction and improve, but we'll spend multiple quarters. And right now are subdued just because of the volumes. So those would be the ones I would point to that are having the most impact here in the near-term.

Awesome. Thanks very much for taking my questions.

Thank you, Nathan.

Thank you, Nathan.

The next question comes from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Hey, good morning, everyone.

Hey, Jeff.

Hi, Jeff.

Maybe just give us an update on system win progress? You know, is the weaker markets kind of slowing that sales cycle? Or are you still seeing good progress on that?

Yes, absolutely. Thank you, Jeff. We remain fully committed to that strategy and are very excited about the progress we've made over the last quarter, particularly in advancing our system solution opportunities. In fact, we plan to issue a press release early next week regarding a new subsystem win in the Electronics segment. This will serve as a prime example of how we're getting closer to our customers and gaining more business from them by acting as an extension of their engineering teams. This particular case is significant, as I've noted before, because it comes from a space that takes time to develop. It’s crucial to engage early in the product development cycle, which can span multiple years. Specifically, this instance involved an existing customer where, three years ago, we collaborated closely with them from the early stages, right from the initial drawings and cardboard prototypes through to creating clay models, production builds, validation, and testing. This collaborative effort is an example of our commitment to improving our go-to-market strategies and further building our customer engagement pipeline. It’s worth noting that we only include these projects in our guidance once they are confirmed. We are still working on some larger opportunities, and once we have clarity on those, we will discuss them and incorporate them into our forecasts. We are cautious not to get ahead of ourselves. I'm as excited now as I’ve ever been during my time here, as there are very tangible opportunities that our team across both segments is pursuing. As we improve our efficiency, our aim is to operate the business at a leverage ratio between two and three times, which will be central to our M&A strategy for enhancing customer value and delivering more solutions that foster lasting partnerships. In many cases, we are replacing multiple suppliers with these projects, and once established, it becomes difficult to dislodge our services. Our responsibility lies in continuously innovating, heeding customer feedback, and partnering with them to develop solutions that fulfill their needs and ultimately impress their customers. I know this is a lengthy response, but we are genuinely excited about these developments.

No, that's helpful. Just on the $10 million revenue loss from the hurricane, I’m just wondering if there's a catch-up period in Q1 or first half 2025? Or is kind of the markets weakening make that less clear?

Well, not only less maybe yes, it's a little less clear, but also with that happening now in a period where markets are a little bit strained, it's actually an okay time for that. I think we do get the volume back, but we're running three shifts. So we've got three facilities here in Sarasota that make carpentry valves and they're running three shifts. So it's not like we can add additional production, but we also are experiencing 12-month high distributor inventory levels across the globe from a well perspective. Now, it's continued to increase each quarter. And so one thing that's important and the easy button for us would have been let's just continue to build and let's continue to grow our own inventory and to help preserve our margins. But we haven't done that. As we've talked about, we've taken inventory down $7 million. It's a big part of our working capital initiatives and debt reduction. And so I think it will be volume that can come back over time, but it will be more predicated on just the general markets improvements.

Okay. And then last one, it seems like maybe more markets got worse than better this quarter. But as we move into 2025, what do you think are some end markets that are maybe more clearly stabilizing or showing signs of maybe being the earlier to return to growth?

Yeah, you're right. I mean, certainly, we felt that, that more markets turned negatively than positively. And again, hence why we guided down a little bit lower. But again, some of the positions in the market cycles that these challenging markets are would tell us that they could be dropping and returning to growth next year. I'll point to the space that I came from. I mean, certainly the OEMs in the marine and powersports space have maintained really strict inventory and production discipline in response to their current market demand. And as a critical component supplier to them, when they're not producing or they're cutting their builds, that hurts us. But I do think with interest rates, one cut is not enough to move that market. But as further cuts develop, if they develop, that will bring those payment buyers back into that market, and that's going to be needed because a lot of that product is financed. And as that comes back in, I think that will help our innovation controls business. And I also highlight that we're operating off of relatively low comps and relatively low expectations for a sustained period that again, I think that gives us an opportunity to start growing whether or not our existing customers grow or all of those diversification efforts and going deeper with existing customers or getting old customers to return to us as well.

Okay. Thanks a lot.

Thank you. The next question comes from Jon Braatz with Kansas City Capital. Please go ahead.

Good morning, everyone. Sean, I'd like to return to Faster a little bit. And I'm curious how far out you can see the business, obviously, it's OEM related and how far out does the order book extend? And then secondly, the agricultural cycle at times has some legs and it takes a while before things to turn around. And should this cycle extend a little bit longer than maybe what you might think, do you have some levers to pull faster to improve the cost structure, maybe labor force reductions or something like that? Just curious how you might look at the business if the cycle continues to be soft for an extended period of time?

Yes, thanks for the question, John. Last year was a record year for Faster, the best it has ever been, even with some agricultural weakness in the market. I credit Matteo, Domini, and the team for their efforts to diversify by adding construction and mobile end markets, while also exploring adjacent markets that utilize couplers. During our Board's Strategy Session, we focused on how to penetrate these other markets, as there are many applications for couplers, and we are well-positioned to pursue them. Long-term, we believe we can maintain this momentum, although we do not expect improvement in the agriculture sector in the first half of next year; however, the latter part of the year could be different. In the near term, we are ramping up our diversification efforts, enhancing our sales funnel and go-to-market strategies. From a cost perspective, we are taking the opportunity to improve as we move through the European holidays and into the year's end. For example, our production facility will close every Friday for the rest of the year, and we are also extending this practice to our Faster business. We are being cautious with the expansion plans we discussed, pacing that development since we do not need extra capacity at this time. We want to avoid overcutting because when the market returns or we realize diversification opportunities, we need to grow that business aggressively. Additionally, we have integrated the Faster U.S. operations into our Sun Hydraulics and Damon facilities, which has also contributed to reducing costs.

Okay, Sean, thank you very much.

Thanks, John.

Thank you. The next question is from Mig Dobre with Baird. Please go ahead.

Yes, thanks for taking a follow-up. And this is really related to a question somebody asked earlier about the election and the outcomes here. I mean you mentioned your Tijuana facility several times and obviously, we know that you have good exposure there and there's obviously, tariffs from Mexico are on the table, NAFTA gets renegotiated in 2026. And I recognize it's a little bit early to have a definitive answer here, but in terms of how you think about managing the business, are we, sort of, to expect that you're going to be relocating maybe of your manufacturing if tariffs are being imposed back to Oklahoma or other US locations? Or is it that you're just going to try to manage through that with price increases and other cost savings or efficiencies that you might get but still maintain sort of the existing manufacturing strategy that you have in place?

It's an excellent question. While it's still speculative, we have noted the discussions in the news regarding the challenges that large agricultural OEMs are facing in Mexico. However, we are not planning to make any changes right now. We continually assess our manufacturing footprint to ensure it's optimized. In case of any negative impacts, we have the advantage of dual manufacturing capabilities. What we produce in Tijuana can also be done in our U.S. facilities and vice versa. We have benefited from moving some manufacturing from Tulsa to Tijuana, particularly in terms of cost efficiency. If new tariffs come into play or are renegotiated, we would certainly consider optimizing our footprint. I don’t anticipate completely shutting down any plants because, for example, when we acquired Balboa, we integrated the Mexican manufacturing operation, which is strategically important to us since many of our customers are located on the West Coast. We also have an additional facility in the U.S. for Balboa near the border in San Diego, which could help support operations too. It’s difficult to predict exactly what will happen at this moment, but we are certainly monitoring the situation closely.

Appreciate it. Thank you.

Thanks, Mig.

Thank you. As there are no further questions, I would now like to hand the conference over to Tania Almond for closing comments.

Great. Thank you, operator, and thanks, everyone, for joining us today. We published our upcoming conference schedule for the next few months this morning, and we look forward to seeing many of you on the road and virtually. Thank you so much, and have a great day.

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