HLIO - NYSE

Greetings, and welcome to the Helios Technologies Fourth Quarter 2023 Financial Results. [Operator Instructions] 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. Thank you. You may begin.

Thank you, operator, and good day, everyone. Welcome to the Helios Technologies Fourth Quarter 2023 financial results conference call. We issued a press 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 are Josef Matosevic, our President and Chief Executive Officer, and Sean Bagan, our Chief Financial Officer. They will review our fourth quarter results along with our outlook for 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 will be provided in 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. 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 through 6 now. With that, it's my pleasure to turn the call over to Josef.

Tania, thank you, and welcome everyone. We delivered as recently committed for the fourth quarter. 2023 is now in our rear-view mirror. As many of you know, we started this journey to transform our business into an integrated operating company several years ago. As I reflect on 2023, it was a year of solid progress along with several macroeconomic challenges and geopolitical events. We kept our focus through it all and emerged as a more united and determined team. We continued to advance our strategy by remaining centered on 3 key elements. First, one of our major priorities were the investments we consciously made in our manufacturing strategy. We expect they will drive operational excellence and position Helios for the growth opportunities we see before us. We invested in our Centers of Excellence by consolidating workflows and expanding capacity to address new business and broaden capabilities. As part of these activities, we relocated various operations and functions. The outcomes will increase efficiencies, provide the backup capability needed to further manage risk, as well as expand lower cost regional manufacturing in India and Mexico. Our 2 North American Hydraulics Centers of Excellence were fully operational starting in the fourth quarter and we just opened our new Electronics facility in Tijuana. We are finishing up the process to expand our capacity in Italy, where Faster just reached record sales levels for full year 2023. All these investments were critical for our future, even as it somewhat impacted on our financial results for the year. We believe over the long-term this strategy will maximize shareholder value. Second, we executed on our strategy to fill product and solution gaps, diversify revenues, and to build out our talent pool with acquisitions. With the addition of Schultes and i3 to add to our string of flywheels, we have assembled a collection of premium capabilities that make us incredibly tough to follow. Third, we continued our efforts to further diversify our markets and deepen our reach into existing ones. Even in the face of significant macro headwinds, we've made the necessary investments in innovation and product development. We are solving customers’ most difficult design and production problems increasingly with integrated system solutions. We are well positioned to serve these opportunities which we expect can be significant growth contributors and will help define our future. Our transformation is nearly complete at this point. Now it's all about execution as we continue to elevate into a global integrated operating company. Realizing the market challenges we faced in the second half of the year, we took necessary actions to help protect the business. Lower volume clearly had the largest impact on our margins. We recognize the decision to continue to invest in the business and the minor disruption from standing up the Centers of Excellence also contributed. Sean will talk more about our results as well as our financial priorities and our outlook for 2024. Sean, I will turn it over to you now, please.

Thank you, Josef and hello, everyone. Before I discuss our financial priorities for 2024, let me start with a review of fourth quarter results talking to Slides 7 through 13. I believe the slides speak for themselves and provide quite a bit of detail, so I plan on hitting on some key points and providing additional color. Sales came in at the higher end of our most recent expectations for the quarter and the year due to stronger results from Balboa and a quicker catch up on our Hydraulics backlog. Compared with last year’s fourth quarter, we had a 4% improvement in the Americas, a 10% decline in EMEA, and a 5% decline in APAC, which continued to be driven by softness in China. As we cited on our last earnings call, the swift shifts we saw across several markets persisted although we did see year over year growth in health and wellness in the fourth quarter for the first time since Q1 '22, granted the comp is off the low-water mark. As a reminder, that market had a correction from its pandemic highs and contracted year-over-year during the first three quarters of 2023. Our industrial, marine, and recreational-based markets had some rapid shifts in the third quarter of 2023, also impacting the fourth quarter. Sequentially, while Hydraulics was modestly improved, Electronics declined across several categories. As expected, lower volume in the quarter heavily impacted gross profit and margin year-over-year and sequentially due to underabsorption. Gross profit declined $7.9 million and gross margin contracted 360 basis points year-over-year to 28.6%. A testament to our efforts to contain margins erosion was the $2.5 million, or 7% decline of SEA expenses compared with the trailing third quarter. The $35.2 million of quarterly SEA expenses was our lowest level in the year despite the run-rate addition of the two acquisitions in the first half. Our focus was on looking at what I define as flexible expenses for those that can be deferred, without impacting our strategic imperatives. Year-over-year, the SEA expense was only modestly higher despite acquisitions. Adjusted EBITDA in the quarter of $32.3 million, or 16.7% of sales, reflects the impact of lower volume and investments offset by our cost reduction initiatives. Volume is significant for the business as our decremental margins are being [ exasperated ] where we have expanded capacity. As volume starts to return the positive operating leverage will show up. Our effective tax rate in the fourth quarter was 23.3% and 23.8% for the full year. This is driven by the regional mix of different tax jurisdictions. Diluted non-GAAP EPS of $0.38 in the quarter reflects the impacts I’ve discussed. It also includes an $0.08 impact from increased interest expense from higher interest rates and average debt balances compared with last year. Briefly by segment, on Slide 12, you will find the fourth quarter review of our Hydraulics segment. Sales were down 5% over the prior year period. Sales were down across several end markets as we cited the swift shifts we saw in the third quarter. We also saw channel inventory data take a small step up from the declines we had been seeing. We estimate about $4.2 million in sales were delayed due to supply chain shortages, improving again sequentially, which has leveled back to a more normalized range. We do not plan to continue to breakout this metric going into 2024 unless it becomes more impactful again. We had a $1.6 million favorable foreign exchange impact to the segment compared to the prior-year period. Sequentially, Hydraulics modestly improved by $1.7 million. Gross profit declined $7.4 million year-over-year resulting in gross margin contraction of 390 basis points as acquisitions and pricing did not fully offset lower volume, restructuring costs, and higher wage and benefit costs. Sequentially, gross profit modestly increased, while gross margin contracted 30 basis points. SEA expenses declined sequentially $1.5 million or 7% compared with the third quarter. Our cost containment measures helped to overcome the run-rate impacts of the acquisitions, as well as inflation with labor and operating costs, while maintaining our investments in R&D. Please turn to Slide 13 and we'll discuss the Electronics segment. Given its U.S. sales concentration, foreign currency has nominal effects for this segment currently. Year-over-year, electronics sales improved by $3.9 million, or 7%, including $2.3 million in revenue from acquisitions. Approximately $3.2 million in sales were delayed due to the supply chain, which also declined in this segment sequentially. As we cited last quarter, several markets had rapid shifts in order timings that impacted fourth quarter with sales down 14% sequentially, though health and wellness was up double digits year-over-year. We have been encouraged by the trends we have been seeing in health and wellness so far this year. We expect to have now lapped the tougher comps and are planning to deliver growth once again in that end market. Material costs, under absorption, and sales volume and mix impacted gross profit, which was down $500,000 year-over-year, resulting in gross margin contraction of 260 basis points. SEA expenses were down 6% compared with last year and down 9% compared with the trailing third quarter. As noted with Hydraulics, we are executing a disciplined focus on cost containment efforts, while maintaining R&D investments. Please turn to Slide 14 for a review of our cash flow. Given the macro challenges we have been managing through, we are pleased with the free cash flow that was generated during the quarter. We will look to build upon this momentum in 2024. We generated cash from operations of $33.7 million, our highest level of the year on the lowest top line quarter. This demonstrates disciplined working capital management and strong cash conversion. We had free cash flow of $25 million in the quarter, measurably improved over the prior three quarters in 2023. Capital expenditures of $8.8 million was 4.6% of sales for the quarter. This marks near completion of this round of investments in our footprint realignments, capacity and capability upgrades. For the year, capital expenditures was 4% of sales, or $34.3 million. For 2023, adjusted free cash flow was $52.3 million with a conversion rate of 139%, the highest it’s been in the last 3 years. Turning to Slide 15. Our balance sheet was stable in the fourth quarter with continued financial flexibility. At year end, cash and cash equivalents were $32.4 million and we had $200.1 million available on our revolving lines of credit, providing us ample liquidity as we entered fiscal 2024. While we spent $34.3 million in capital expenditures and $114 million for acquisitions, or about $148 million in investments during 2023, our debt at year end was up just $79 million. Further, we paid down approximately $20 million of debt during the fourth quarter. At year end, our net debt to adjusted EBITDA leverage ratio was 3.01x. We are prioritizing debt reduction in 2024 and moving below 2.5x. Ultimately, as we get closer to the lower end of our 2 to 3 times targeted range, we have the ability to flex up for acquisitions and other investments. Turning to Slides 16 to 18, we are providing our initial expectations for 2024. Our estimates do not include the large systems sales projects we have talked about. Once those orders are secured and production schedules are agreed upon, we will update accordingly. For 2024, we expect revenue in the range of $840 million to $860 million. This represents moderate growth of just over 2% at the midpoint of the range. We expect adjusted EBITDA for the year of about $163 million to $180 million for low-single to double-digit growth. This represents an adjusted EBITDA margin slightly over 20% at the mid-point of the range. As the markets recover and our volumes grow, our newly expanded capacity utilization will improve resulting in our incrementals driving our adjusted EBITDA margins to scale over time. Additionally, as we get specked into new system solutions, including recurring software opportunities, these will be very sticky in nature and enable additional accretive margin growth. With the cost measures we have taken, paired with the non-recurrence of certain items, we expect our net income to improve measurably to a range of $50 million to $63 million, strong double-digit increases on modest low-single-digit, top-line growth. We expect the first half of 2024 to be tougher on a comparable basis while the back half of the year to increasingly grow on a year-over-year basis. For the first quarter, we expect sequential top and bottom-line improvement with revenues likely in the range of $205 million to $210 million, with adjusted EBITDA margins sequentially improving to approximately 17% to 18%. Looking to Slide 19, I want to review with you our financial priorities for 2024 that Josef mentioned. This year is all about execution and driving performance that establishes the underlying financial discipline and structure to deliver returns on our investments. We have clear financial priorities in 2024: one, execute on our profitable sales growth plan by realizing operating leverage inherent in our business, while fully instilling investment and cost discipline; two, shorten our cash conversion cycle through sustainable working capital improvement initiatives; and three, reduce debt utilizing the free cash flow conversion proceeds. We know execution is critical in delivering our commitments this year as we strive for more predictable results in 2024. We expect this renewed financial focus will in turn elevate Helios to be the scalable, integrated operating company into which we are evolving. With these priorities we expect to deliver continually improving earnings that will drive returns that exceed our cost of capital on the investments we have made. So let me turn it back to Josef for some closing remarks.

Thank you much, Sean. We appreciate the financial structure and discipline we are embedding into the organization. I am very encouraged about 2024 and our future. It is about keeping our focus with tenacity on our goals. We are executing our plan and advancing the organization to an integrated operating company that can deliver top-tier margins, cash flow and growth. What we have done over the last several years has created the foundation from which we can now elevate. It is thanks to the dedicated, talented people that work for Helios Technologies and its family of companies that we are so well positioned. We are creating sticky, critical, integrated solutions that provide improved productivity and efficiencies with lower life cycle costs for our customers. We are ready and I believe as markets recover, the next few years look very good for Helios. With that, let's open the lines for Q&A, please.

[Operator Instructions] Our first question comes from the line of Chris Moore with CJS Securities.

Start maybe -- from an end market perspective, just trying to understand which end markets still have the lowest visibility and kind of how you're looking at any potential improvement throughout the year in the markets?

Chris, thanks for the question. This is Sean. As we got into the fourth quarter, a lot of the same market trends that we cited on the third quarter call persisted. As we get into the new year, we're seeing pockets of recovery. So it's kind of breaking between the Hydraulics and Electronics segment. Certainly within Hydraulics, the construction area and industrial area have been mixed. And then as you go over to the Electronics segment, certainly, direct products, the marine are the ones that persisted most heavily. But really encouragingly has been the health and wellness turnaround and starting to see those sequential gains and year-over-year uptick that we saw in the fourth quarter for the first time from that post-pandemic low-water mark.

Got it. I appreciate that. Maybe we could switch gears a little bit. Can you talk a little bit about the mix of OEM and distributors in '23 and the expectation in 2024? Is that going to -- you expect that to change much?

Yes. So we did continue to trend more towards OEM in 2023. And a part of that is just us getting closer to the customer, kind of being in the extension of their existing engineering team to help them with new product development. Within year-over-year, we saw that go up about 5 points. So in 2022, the OEMs were about 55% of our sales; 2023, just over 60%. And if anything, we think that trend to continue, again as we get closer to our customers.

Awesome. That's very helpful. And maybe just the last one. Cash flow. Obviously, very strong quarter despite relatively low revenue. Maybe talk a little bit more about cash flow expectations for '24 and kind of capital allocation thoughts at this point?

So in terms of the capital allocation here, as previously communicated, our investments were focused in 3 planned areas, one in the manufacturing operations piece, and that will allow us to clearly avoid duplication in costs in materials and logistics as we have developed the Center of Excellence that will also provide us a better cost structure and the proper leverage, improved efficiencies, a much better customer experience and lead times. And then as we continue to see the market recover, it will clearly improve our gross margins back to more historical levels. What I call it, it gives us better pricing power and purchasing power too, as we don't have duplication in supply chain sitting in 2 or 3 facilities. The second investment area was in new product development, consistent with our strategy to protect our business and integrate the new acquired company and to gain additional momentum on the sticky solutions we have been communicating. And the third piece was investment in additional capacity to support the step level growth with subsystem and system sales and new end markets. So all 3 combined in terms of capital allocation is pretty much wrapped up besides our Faster location. And our expectation will be that this transformation was really important to position us not only to grow, but to grow profitably with stronger margins over time, very sticky solution and a highly flexible balance sheet. So that's in terms of capital allocation where we stand today.

[Operator Instructions] Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

This is David Tarantino on for Jeff. Maybe could you give us an update on what you're seeing from an underlying demand perspective, kind of across the businesses? What was destocking versus kind of real underlying slowing in the quarter? I just wanted to dig into the comment that you saw a channel inventory step up in Hydraulics in 4Q. So I just kind of want to see, if we still have some destocking headwinds moving into 2024 or how that's expected to progress?

Yes. So I would characterize a small uptick in the Hydraulics distributor inventory, not anything significant movement there. I think from a more of an end market and a demand perspective, how that's translating into orders for us, clearly seeing an uptick and partially why we're guiding up for next year. And it's truly across most of our businesses and markets with the exception of that marine rep product, where we continue to see challenges. From an ag perspective, it's a little bit more of a pushout or a delay in orders, not so much too much drop in demand there. And then as we highlighted, that health and wellness segment continues to grow both sequentially and year-over-year very nicely, and we expect within that Hydraulics segment that distributor inventory to be supportive of growth year-over-year.

And David, I would just add a little color that sometimes that distributor step-up in the fourth quarter can be a little seasonal, just building kind of going into the new year. So we've seen that historically as well.

Okay. Great. That makes sense. And then maybe could you give us a better understanding of the moving parts in the margins between the businesses in the quarter, just maybe particularly relative to some of the operational headwinds experienced last quarter? It sounds like maybe those have abated, so maybe was this quarter mostly just on lower volume? Maybe just kind of give some color there.

Yes, David. Clearly, volume was the biggest driver and the headwinds on the margins coupled by finishing and tempering of those investments we have made. So that's pretty much the 2 key reasons, David. I don't know if you want to add something to that or just respond. Go ahead.

David, I was just going to highlight again, as we've highlighted with that health and wellness segment coming back. It's off a very low base. And so just from a mix perspective, the margins aren't there that support the Electronics segment margin or even Hydraulics. And so just from an overall company mix perspective, that had a little bit of a headwind. And all the capacity we're bringing on certainly had some fixed costs that we historically haven't had, but we're going to need it as we get into the next year.

Okay. Great. And maybe if I could sneak one more in, just on that, just -- could you give us some color on the moving parts on the margin guide, just particularly how you balance kind of those longer-term investments we've been making versus kind of controlling costs as end markets remain a little bit weaker?

Yes. So our expectation is we're going to grow our gross profit margins. We also are -- we talked a lot about our cost management efforts and measures we took throughout the second half of the year, when we saw some top line market weakness materializing. Certainly, we expect to continue to invest in the business. We will expand our R&D expenditures and just be very measured on layering in costs, so we don't get ahead of ourselves.

Our next question comes from the line of Nathan Jones with Stifel.

I guess question on the guidance on the -- I'll start with the step-up from 4Q to 1Q. It's a pretty nice sequential step-up, which I don't think is really seasonally typical for you guys. Obviously, there's a lot of disruption at the moment. So maybe you can provide a little more color on what's driving that sequential step-up from 4Q to 1Q. And then, if you kind of run rate that through the rest of the year, it doesn't seem like you've got a very heroic ramp up in revenue to get to the full year guidance, like 4x $205 million would get you to $820 million and 4x $210 million to get you to $840 million, which is only just below where the full year guidance is. So any commentary you can give us on what kind of underlying market demand improvement you're baking into that full year guidance?

Yes, Nathan, so let me maybe start with your second question here. When we built out the budget here and having received significant feedback from pretty much all of you guys, we felt as it stands right now and what we see right now, we want to take a very realistic approach to our guidance. And so we feel comfortable with what we have guided The Street to this, number one. And number two, in terms of your first question. I think Q4 step up to Q1 with the lower water mark and some improved visibility in the health and wellness drives the growth.

Yes. The only other color I'd add there, Nathan, is you've just referenced the low-water mark. I would suggest that our fourth quarter was way lower than what you would previously have seen in other fourth quarters and so the step-up to Q1 [ most ] greater. But obviously, we're almost 2 months into the quarter, so we have pretty good line of sight into that first quarter number. So we feel pretty good, and that's why we tried to be pretty specific on that range for the first quarter with our prepared remarks. But it's not isolated to one segment. Both segments expect them to grow, stepping up in Q4 to Q1. And as you highlight, as we get into the other quarters, doing that kind of $210 million run rate math, that's that $840 million. So not levels that the company hasn't delivered in the past. And so we've got some confidence there that we can deliver those.

And then the EBITDA margin guidance you've got 17% to 18% for the first quarter and the full year at slightly over 20%. So we should be expecting to exit the year at something more like 22%, 23% EBITDA margins, and that's the jumping off point as we go into 2025? And if there's not a huge ramp up in volume as we go through 2024, what drives that margin expansion up 400, 500 basis points as we go through the year?

Yes. So you're directionally -- yes. I think we can exit in that 22-ish range as we get into 2025 by the end of 2024. I think what stepped it up over time, so couple of things. First is our pricing effect that we typically do in the fourth quarter. A lot of that doesn't materialize until later in the first quarter and then into the second quarter. So that will help us. And then secondly, as we highlighted is the volume and our -- all the efforts we've done this year on the back-end investments that Josef referenced on our Centers of Excellence as we continue to push more volume through that -- leveraging that fixed cost base will help. And then finally, that Balboa recovery cannot be underestimated how quickly that dropped. If you think about the cost structure that we have for that operation with our Tijuana facility, it's lower cost than other places. And so as the volume increases, you get a bigger incremental drop than our other businesses.

And I'll just sneak one more in on the ag machinery system sales expectation. Is it still your expectation that that's going to go out on the 2025 model year? And if so, when would those orders need to be placed in order for you to supply to customer?

Nathan, I think this is another area that we've gotten a lot of feedback from everyone on the call. And I think we want to be cautious about trying to set a very specific expectation around any one customer and the deal, right? But I think what we'll kind of add just at a high level is, we've been very encouraged by the number of end markets that we're seeing increasing interest from related to system sales and potential conversations. And even -- I know we've talked about kind of commercial food service. We've talked about ag, we've talked about construction, industrial. There's even some expanded areas like white goods. Think about things like laundry, dishwashing, things like that, that -- since there's just more and more opportunities that seem to be popping up on the radar. I think there's a lot of opportunities for 2025 and beyond product cycles. And I think we want to stay focused on just keeping our nose to the grindstone, executing and then as soon as we get any of these across the finish line, we'll obviously let everybody know.

Our next question comes from the line of Mig Dobre with Baird.

Just a follow-up on the conversation with Nathan on the system sales point. You left it out of guidance for '24. But since you're calling it out specifically as being left out of guidance, are we just to sort of understand that there is a better than zero chance that you could actually have some benefit in 2024 from these system sales? Or is this more of a 2025 or 2026 potential benefit? I guess we're all asking the same question, trying to understand what the sales cycle would look like for these system sales.

Yes. Mig, I think you're opening with better than the zero chance, you are pretty accurate. Like Tania said, I want to reiterate this, there is and continues to be very heavy lifting on the subsystem and on the recurring revenue model that we have been communicating. We want to be good stewards here and get the feedback from our investors and analysts and the path continues. And we will communicate it as we get it through the finish line and have our production schedules fully identified and are actually able and capable to communicate the exact timing and volume.

Mig, it's Sean. I just wanted to give you a different lens too from my finance accounting perspective that ultimately, we're not in control when an OEM is going to place an order with us. But my leading indicator as to when and how soon we will get a system sale is ultimately driven by the conversations and discussions we have and ultimately, engineering service agreements we have. And so those commitments that OEMs are making to us, and we're codeveloping features, products with them would tell me they're not going to commit to those dollars and services agreements that we have in place and we've been working on. So it's not a matter of if these are going to come, it's when. And it's just -- we're ultimately not in control of placing that purchase order and getting it over the finish line. But there is a lot of activity and a lot of efforts throughout the entire Helios family of companies working on these. And so very confident they will come through.

Sure. I guess, at least my challenge in thinking through this opportunity is that if I'm thinking of white goods or commercial food service versus agriculture equipment, just the product cycles are different and how you would end up being specked in as the solution provider would look different. So that's what I think we're all kind of trying to think through and figure out in terms of what the time line might look like. But I appreciate your comment. I guess one follow-up on Balboa or health and wellness as an end market. Can you maybe frame for us what 2023 looked like from a revenue standpoint in this vertical? My recollection is that Balboa prior to COVID was a business that was running right around $90 million or thereabout of revenue. Is this where this business reverted back in 2023? And what sort of visibility do you have here in terms of the recovery? Does this recovery have legs? And do you have visibility into that in '24?

Yes. So 2023, Mig, was around the $100 million water mark. 2024, we are seeing encouraging signs. Obviously, as Sean mentioned, we have a couple of months now in the bag in Q1 and the trend continues to be positive at this point. So Sean, I don't know if you want to comment anymore on 2024.

Yes. Well, I would say the only other data point I'd highlight is we're not recovering back to the pre-pandemic levels within our guidance. So we expect there's still more than 1 year of market recovery, not to mention some of the new products that we're bringing to market that we think will continue to drive the incremental growth, both what we've announced and what we have coming this year. So Certainly, as we look at our [ net ] implied guidance within the segments, more of the Electronics growth will be coming from Balboa than it will be innovation in 2024.

And Mig, the only other thing I'd add, just from a total Electronics segment perspective, the piece that doesn't really get disclosed externally is we've been moving a lot of operations, different product lines, wire harnessing, things like that from Tulsa to the Mexico location. And so it's really starting to run internally, operationally more and more as a total segment, and that's how we really think about it internally versus kind of breaking it out at kind of the separate company level. And so that's part of when we talk about the Center of Excellence and operational efficiencies and improvements in different areas of the lever that we're going to see in 2024 and beyond.

Okay. Final question for me on Hydraulics. And I know some of my peers already asked about end market trends, but when I'm sort of thinking about your OE exposure and I'm thinking about construction and agriculture specifically, I'm curious what you're hearing from your OE customers in terms of their production plans and how that sort of gels with your revenue outlook. It would seem to me based on what I've heard from them that they're contemplating pretty steep production cuts in 2024. So, yes. Maybe talk us through that and how we get to your revenue guidance in an environment in which maybe these production cuts are accelerating through 2024.

Mig, looking at the end market chart here sitting right in front, all of us and going by geography, everything that you are seeing in everything we have seen and heard from our customers has been baked into our guidance here for 2024. In particular, going to the product lines here, construction North America, ag North America looks pretty balanced. I -- we don't see that steep decline in our product offering. Europe in the ag market, that's where we see steeper declines. But again, we baked this into our guidance. European construction, as we have a color coded here in the yellowish, so very balanced. So overall, the industrial market, North America is kind of flattish to low growth, a steeper decline in Europe. And we really don't see any strong recovery coming out of the Asian market yet. And that just confirms what Sean said earlier, as we bake in all of our investments that we have made in 2023 and improve our cost structure and reposition everything for growth, as those markets recover, Mig. And not just the product lines, but also as Asia comes back, we should see those incremental margins go in our favor. Sean?

Yes. And I think all the things Josef just highlighted from that perspective, it just speaks to the overall diversification of our Hydraulics business. No one customer are we overly reliant upon. And from that perspective, within our guidance, we've been more aggressive in our CVT, Sun Hydraulics business that are Faster QRC business. So we would expect more of the growth to come from CVT and that goes back to some of the inventory levels we're seeing at the distributor level, where that's Sun Hydraulics business is more distribution based than OEM based. So more of that OEM direct weakness would come through that European Faster business. But overall, we feel good because of that overall diversification, not overly reliant on ag market. The construction and industrial are very important as well for us.

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

Great. Thank you so much, operator. And thanks, everybody on the line for joining us. Feel free to follow-up with me in the following days and weeks. So if you have any questions, we look forward to connecting with you, and we'll talk with you next quarter. Take care.