Greetings, and welcome to the Helios Technologies Second Quarter 2023 Financial Results Conference Call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions].

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 second quarter 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 are Josef Matosevic, our President, and Chief Executive Officer; and Tricia Fulton, Executive Vice President, and Chief Financial Officer.

They will spend the next several minutes reviewing our second quarter results, discussing our progress with our augmented strategy, reviewing our updated outlook for the second half of 2023, and then we will open the call to your questions. If you turn to slide two, 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 where we are today.

These risks and uncertainties and other factors have been provided in our latest 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 three, four and five now. With that, it's my pleasure to turn the call over to Josef..

Tania, thank you, and thanks to everyone joining us. Our global team has stepped up to the plate and delivered. We had strong sequential growth in the quarter with revenue up 7%, including 6% organic growth over Q1.

Operating margin increased 140 basis points, while we continued investing to integrate our acquisitions and expand our capacity to meet growing customer demand. This translated to our bottom line increasing 21%. Thank you, once again to our global team for their great performance.

We have methodically invested over the last three years to develop or acquire new technologies, close product gaps, fill in geographic white spaces, and drive opportunities for growth by expanding our addressable end markets. All this work is on the verge of bearing fruit.

Currently, we are in our next phase preparing for another growth cycle, and we are accelerating this transition. Our customers’ appetite for our new offerings is rapidly building. We want to be ready to address the indicated interest.

As such, we are pulling forward investments and project timelines to enable this new capacity to take on step change growth starting in 2024. Our innovation and engineering excellence is the lifeblood of this organization.

In the quarter we closed our acquisition of I3 and we are already far along with the integration of I3’s remote field service platform into Helios solutions. As a result, recurring revenue could start to show up in our P&L as early as next year.

Helios continues driving technological breakthroughs and we are well positioned to capitalize on many megatrends with our solutions. These include electrification, reducing emissions, and creating more energy-efficient solutions while continuously improving user interface. Our long-term outlook at Helios is very bright.

In the short-term, we are faced with some near-term challenges for the second half of 2023. We are seeing a slower-than-expected recovery in APAC. About 40% of our CVT hydraulics volume goes through APAC with two of our largest distributors located there.

In North America, the distributor inventory levels have been trending in the right direction since the end of last year, but also a bit slower than expected. Additionally, our hydraulics colleagues in Europe, dealt with a plant fire in the second quarter. Then in July they had to endure a tornado, hailstorm, and flooding.

I am grateful to report all our teammates are safe which is most important. These macro issues combined with the natural disasters is pressuring our top-line for the second half. As a result, our near-term visibility is in fact less clear than our longer-term outlook.

We are adjusting to current conditions while continuing to prepare for what we believe will be a very healthy 2024. Before I turn it over to Tricia to review the financials, I would like to wish her well on retirement. Tricia has been a cornerstone for our company during her 26 years of service, 17 of which serving as the CFO.

On behalf of the board and the entire company, I would like to express our gratitude for her significant contributions. We wish her the best in her next chapter of life. Starting tomorrow, Tricia passes the baton off to our new CFO Sean Bagan. Sean joins us most recently from a 23-year career with Polaris.

He has a proven track record of building, growing, and transforming global businesses into highly productive and profitable operations. We are excited to welcome Sean to the Helios family. I will now turn the call over to Tricia to review our financial results for a final time. She will then hand it back to me for closing comments. Tricia, please..

Thank you, Josef and hello, everyone. On Slides six through 10, I will review our second quarter 2023 consolidated results. We continued to deliver solid sequential improvements with revenue up 7%. Profitability also improved sequentially with operating income and net income up 19% and 21%, respectively.

Adjusted EBITDA expanded 170 basis points and free cash flow was up $15 million or 475%. We were able to deliver these results even as we drive investments in our future. By market, Australian mining began a recovery and grew significantly in the quarter both sequentially and year-over-year.

Encouragingly, Health & Wellness increased more than 20% over the first quarter continuing to build off the floor we hit in the fourth quarter last year. Agriculture, a large end market for Helios, saw robust growth in the quarter over the year-ago period and modestly improved sequentially.

Recreational sales had a solid quarter with high single-digit annual growth and double-digit sequential growth. There were mixed results within the Mobile market - with specialty vehicles and construction being the top performers sequentially. As you might imagine, we can have variability from quarter-to-quarter within our markets.

Our strong revenue growth over Q1, ‘23 was driven by the Electronics segment which was up 15% while the Hydraulics segment was up 3%. Year-over-year, Hydraulics was up 7% and, if you exclude Health & Wellness, Electronics increased 5% over last year’s second quarter.

Geographically, we saw growth across all regions sequentially, led by the Americas at 10%, EMEA with 4% growth and APAC at 3%. Compared with last year, revenue decreased both in EMEA and in the Americas by 5% each and by 10% in APAC reflecting macroeconomic conditions.

Overall, we had nominal unfavorable FX impact on revenue of $0.3 million in the quarter. Sequentially, gross profit grew 7% and gross margin was unchanged over the first quarter. As we would expect, on a year-over-year basis the lower volumes impacted our gross profit.

The benefits of pricing net of material cost increases, acquisitions and improved direct labor efficiency on gross profit were offset primarily by lower volume. Our SEA expenses sequentially were down slightly, but up $5.5 million, or 17% compared with the second quarter of 2022.

As we have discussed, we are investing heavily in our growth plans and incremental SEA related to acquisitions, integration, growth, and new product development which are driving the year-over-year increases.

As I mentioned, Adjusted EBITDA increased 16% sequentially and Adjusted EBITDA margin of 22% was up 170 basis points over the first quarter level. Even as we make growth investments, we deliver top tier EBITDA margins as an industrial technology company.

Our effective tax rate in the second quarter was 22.9% up slightly from the prior year based on the mix of earnings in various jurisdictions. Diluted non-GAAP cash EPS of $0.81 in the quarter reflects the impacts I’ve discussed as well as a $0.09 impact from higher interest expenses compared with last year.

Slides nine and 10 provide visual trends on overall key metrics for the past several quarters. We estimate that supply chain constraints delayed $14.2 million in sales at quarter end, up sequentially from $12.4 million and down from $15.1 million in the year-ago period.

On Slide 11, you will find the highlights for our second quarter Hydraulics segment. Sales grew 7% over the prior year period. Acquisitions added $15.2 million. Sequentially, this segment grew 3% over Q1, 23. Gross profit increased modestly driven by price, efficiency, and acquisitions, partially offset by rising material costs.

Gross margin this quarter decreased 210 basis points compared with Q2, 22, primarily due to rising material costs and margin profile of acquisitions. SEA expenses increased by $4.3 million, or 23%, year-over-year. The increases were driven by acquisitions as well as growth investments. Please turn to Slide 12 for a review of our Electronics segment.

This segment is more concentrated in the U.S., so foreign currency usually does not have much of an impact. Sequentially, as mentioned, we had 15% growth in this segment. Annually, Electronics sales decreased by 24% to $75.2 million as demand across all regions declined primarily related to the softness in the health and wellness market.

Excluding health and wellness, electronics grew 5% over last year driven by recreational, mobile, and agriculture markets. The Electronics’ gross profit of $26 million grew 24% sequentially and gross margin expanded 260 basis points. Year-over-year, lower gross profit reflects the slowdown in the health and wellness market.

Gross margin increased 150 basis points over Q2, 22 due to favorable sales mix and material costs. SEA expenses increased sequentially 4% over the Q1 23 level. Please turn to Slide 13 for a review of our cash flow. We had strong cash generation in the quarter with $28.8 million in adjusted cash from operations.

Cash and cash equivalents were $37.5 million, providing us sufficient liquidity. CapEx of $10.5 million was 5% of sales for the quarter, at the upper end of our expected range to support our growth and expansion plans.

Adjusted free cash flow was $68.8 million on a trailing twelve-month basis with a conversion rate of 100% compared with 79% for the full year 2022. You can see on Slide 14 that we have a solid balance sheet and financial flexibility to execute our strategy for growth. Total liquidity at the end of the quarter was $221 million.

Our net debt to adjusted EBITDA leverage ratio was 2.7x ending the quarter. As we have a well-established track record of managing our leverage ratio as we execute on our acquisition strategy.

As we increased above our target level for recent acquisitions, we have been able to quickly de-lever back to or below our target leverage ratio of two times based on our cash generation.

Before I hand it back over to Josef for a review of the outlook and closing comments, I would like to express my gratitude to each and every member of Helios, past and present for their role in what has been a rewarding career for me.

I have had the honor and privilege to work with so many exceptionally talented and brilliant people through the years. I also want to thank all of you on this call as well for being with me on this great journey. Importantly I have great confidence in the future of Helios, the power of our strategy and the capabilities of the team to execute on them.

Please reference slides 15 to 17 as I hand it back to Josef..

Thank you much, Tricia. Again, we truly appreciate your dedicated service first to Sun Hydraulics and then to Helios over so many years. We are moderating our outlook for the second half of the year, given the factors I mentioned that have reduced near-term visibility.

We now expect revenue in the range of $880 to $900 million, implying the second half will be similar to the first half. We expect more weighting in the fourth quarter versus the third. As a result of the accelerated capacity expansion, we are investing over $10 million.

With these revenue and investment expectations, we are moderating our adjusted EBITDA targets for this year to $187 to $196 million still a healthy 21% to 22%.

We intend to get to the mid-twenties and beyond on adjusted EBITDA margin over time, but we are downshifting our gears in the short-term to absorb the one-time and macro factors and build momentum to climb our next growth slope. There are clearly a lot of great things coming together at Helios.

We are executing against the pillars of our business system. The second quarter demonstrates our ability to protect our business and margins while investing for the future. As we think and act globally, we efficiently leverage our expanding footprint through our new regional Centers of Excellence.

We are diversifying our end markets and revenue through our new innovations and solutions to grow wallet share. While our team continuously demonstrates their dedication and tenacity to our shared purpose, we develop our talent by fostering a diverse and customer-centric learning organization.

We have our sights set on driving shareholder value far into the future. As I said earlier, our future is very bright. With that, let's open the lines for Q&A, please..

Thank you. We will now be conducting a question-and-answer session. [Operator questions]. Thank you. Our first question comes from line of Chris Moore with CJs Securities. Please proceed with your question..

Hey, good morning, guys. Thanks for taking a couple questions. It maybe start with Josef.

Josef maybe, just hoping you could talk a little bit more about what's transpiring this year? What have you seen so far, kind of what you expect for the rest of the year into ‘24 and beyond with the investments that you're making?.

Good morning, Chris. Certainly, let me break this down into maybe two parts. So, the first part of the just addressing the current state and the headwinds we are seeing and has been seen going into 2023 and then switching over to the more exciting part 2024 and beyond.

So, when we entered this year on the OEM side, we usually have pretty good visibility. And that is panning out to be exactly what we expected. On the distributor side, which is very heavily weighted on our Sun Hydraulic CVT business. In North America, we saw elevated inventory levels, but this started to come down pretty nicely.

So, the trends really showed month-over-month that the inventories are coming down into will be a reorder pattern back to somewhat of a normal.

And then we had substantial conversations with our distributors in Asia, specifically in China, and there was a pretty good sentiment that the recovery will sort of taking shape in Q1, ramping up into Q2, and continuing into Q3. So, we obviously baked this in the forecast. And clearly, we own this eye on this.

So, having gotten that customer feedback, we anticipated strong orders coming out of Asia, since 40%, of our hydraulic CVT revenue, goes into Asia, specifically into China didn't pan out that's on us beyond the following by our marine demand has been very stable, but tempering off slightly, not falling off the clip, but tempering off and in the bubble of business in the health and wellness, short, very strong sense of recovery in Q1 Going into Q2, and now kind of plateauing off at levels we saw in Q1 and Q2.

So, all in, that's what drove us to kind of be a little bit more conservative on the forecast just by not having enough visibility in the second half, and not knowing if China will really recover this year or not recover this year.

So that's kind of what intent naturally when you add those three factors between 40% of volume going into China, distributor inventories, still slightly higher than expected. We lose leverage on the top line. And then, to add a little bit more flavor to the story.

To our current state, we have a very unfortunate situation in Europe, where we literally lost 10 production days of manufacturing, following by mother nature kicking in and adding a few more days of loss. So, all in that's what drove our pullback in terms of off top line.

So, to kind of summarize, Chris, I hope your first question of, of the current state, going into 2024 and beyond. We've been saying now for a year and a half a couple of years, we have methodically worked with some customers. Some, one, is current customer, to our new customer to us, but more importantly, it's also very new market to us.

And, we went through the initial RFQ stage to an RFP stage and the appetite got much stronger as the customer needs to make certain strategic decisions before year end. And still accelerated, obviously, our investment portfolio.

And as part of the processes they want to see and review our operations and the lines and the equipment in place before we can hit the ground running so that that was the main reason why we are adding over 200,000 square feet of capacity to be able to absorb that new incoming business. There has been in play for the last year and a half.

It's finally around the corner. And we are gearing up for the journey. And we have invested year-to-date over $10 million additional dollars into that because we truly feel that is the right thing for Helios and that is the right thing for our shareholders. So that's kind of the two answers to a question, Chris..

Got it. And very helpful.

And what's the timing on the additional capacity is that first half of ’24? Or what do you see at this stage?.

Yeah, we our plans indicate. Currently our revised plans indicate that we will be completed by around Q1 of 2024. It’s broken down into different geographic territories, Chris. Obviously, a lot of them is in North America, between them and in CVT. There is significant expansion going on in Europe, at the festival location, there's two different phases.

Phase one, we're adding an additional 35,000 square feet to 40,000 square feet in 10 days, another face coming in 2024, when we will add another 100,000 square feet. So, fast, we'll go from 300,000 square feet to 600,000 square feet over time.

And then we are standing up a brand-new facility next door to our current one in Mexico, adding another 75,000 square feet. So, if you extrapolate this into potential future orders, we would never had capacity, we wouldn't feel comfortable, the demand is coming. So, the answer to your question is we should be complete with phase one in Q1. ‘22..

Got it. I appreciate that. I will leave it there. Thank you..

Thank you, for Chris..

Our next question comes from the line of Jeffrey Hammond with KeyBanc. Please proceed with your question..

Hi, good morning, everyone..

Good morning, Jeff..

Best of luck to you, Tricia..

Thank you..

So, I wanted to make sure I understand these accelerated costs. So, let's look at two million in 1Q. I want to know what the accelerated costs were in 2Q.

And I think he said 10 million and second half and just want to verify these, one what's, what do they entail in terms of, pulling it forward expansion? And just, to be clear that these are all kind of one-time and go away next year?.

Yeah, just certainly. So, year to date, we accelerated costs, around $10 million.

And those aspects cause meaning, certain equipment, expediting costs, frayed, extra contract as extra people turning up the manufacturing sales based on the agreement we have with our customers, where we have visual work aids where we have work instructions, ergonomic addressable items. Those type of cause is what drives a lot of dollars.

And in many cases, when we ordered the material for lead times, in terms of equipment was much, much longer than we could have waited. So, we had to pay a premium to get the equipment in. But once that is fully, fully paid. Jeff, the answer to your question is yes, those will be one-time costs.

And we certainly expect that to pay back with accelerated and better margins going forward..

Okay, so it's $10 million in first half $10 million and second half?.

$10 million in first half that's in the books. Not sure the $10 million will be exactly in the second half. Because we were going to watch it very closely here, Jeff. We had a, a couple of forecasting booths here when we anticipated strong orders, from the international markets. And we obviously own that. So, we want to be a little bit careful.

How much do we spend and still protect the margins, but there clearly will be additional one-time dollars in the second half in in the area of four to six, $4 to $8 million to ship does this sound? Right?.

Yeah. And, we still have a pretty big range on the top line of our guidance that, reflects the on some of the uncertainty that we have in the top line. So, at the lower revenue levels, we understand that we can lose a little bit of leverage. So, we've baked that into the assumption as well..

Okay, and then, you've been talking about this, obviously, you're pulling forward, $15 million of cost. So, I think you mentioned in the prepared remarks kind of step change, opportunity. So,’ I just want you to better frame the opportunity around, the, ‘24, and kind of the, the pull forward and all the all the capacity expansions..

Yeah, Jeff. So, what we'll be talking about here is a integrated systems package, that two of our customers have been working with us for north of a year and a half now. And one customer had that product for many different elements of the product in source. And now, they've decided to outsource this as an integrated package.

And we are viewed to submit final prototypes next Thursday. And the feedback has been very strong and very complimentary. To the customer is more on the commercial foodservice side, where we have worked very closely together and feel comfortable now that we are far along that that step change will start to occur in 2024.

From a monetary standpoint, or dollars, so to say, look, when you add 20,000 square feet globally, you're talking about a pretty nice size business, starting in 2024, through 2027. And we feel pretty good that this is going to happen..

Okay, thanks. I'll get back in queue..

Thanks, Jeff..

Our next question comes from a line of Mick Dobre with Baird. Please proceed with your question..

Thank you, good morning. And Trish, all the best to you. Working with you for the last 13, 14 years, I've always really appreciated your help and an insight. So, good luck..

Thank you. I appreciate that. It's been a pleasure..

I guess where I would like to start. I'm a little bit confused about on what's going on with capacity. There are a lot of numbers that are flying around there Faster, going from 300,000 square feet to 600,000 double or the facility in Mexico adding 75,000 square feet. Maybe we can we can sort of take a 30,000-foot view here.

And have you outlined for us what percentage increase in your square footage or capacity are you currently undergoing versus maybe where we were a year ago? And what exactly does that mean for the company's ability to support revenue? Or, essentially, what are you scaling your business up to?.

Yeah, good morning, Mick. I heard the first part of your question. I don't know if we had a technical issue here.

But I apologize I didn't get the second part?.

Yeah, so I can repeat the question. I'm trying to understand the changes in capacity here. Because there's been a lot of numbers that were kind of like floating around between Faster and double and so on.

So, can you can you maybe talk about what percentage of your existing capacity are relative to your existing capacity? Are you adding and what are you scaling this business up to what sort of annual revenue run rate will this capacity be able to support?.

Okay, so for an example, in Indiana, we are going initial walker here in terms of now becoming a center of excellence for our manifolds. We are going from 40% to pretty much 70% of capacity. Everywhere we are adding capacity make is based on percentage of volume increase.

And also our strategy of center of excellence to regional structure coming to play an entire region for the region.

So, as we look at the new incoming business with the step change, we are talking about, in the integrated package when we extract related our overall opportunity for the next three years to come and the volume associated with that, and how much we need per square foot. That's what drove the investment globally.

So, in so many words with the one particular customer we're working on, there will be absorbing or purchasing an integrated package that has different sizes of manifolds, sound cartridge valves, Vesper couplings, wire harnesses and innovation controls.

So, every business has a piece of the square footage assigned to the volume and data, we came up with the capacity and the hours needed to manufacture that product..

So, capacity is going up, what 20% 30%.

It's around 25%. Globally..

From a pure square footage perspective, but I think the opportunity really is how we can better utilize all of the square footage that we have with this additional space. And the way we're laying out the plants with the additional space. Hopefully getting more out of the 25% and 25% top line..

I appreciate that.

And what exactly is your guests here in terms of or your goals in terms of what this? What the business will be able to support? As far as total revenues are concerned? Are we talking $1.2, $1.3 billion or more?.

We're talking about an additional - I knew this question will come so. I'm going to learn a little bit here from the previous session, the previous forecasting assumptions we have made in particular, to my opening comments in Asia, but I would say it's around $300 million, in addition to our current guidance.

Understood, you're adding the capacity now the revenues coming in the future, are we to infer then that at least until this revenue starts to really materialize in reach, kind of like the full rate capacity, we should be thinking that there is going to be an under-absorption element from a cost standpoint, which is going to pressure margins into 2024..

Well, I think, our manufacturing strategy that we have laid out, and you guys understand really well offsets a significant piece of that made. And, we also have other levers that we are pulling as we speak, to really minimize that risk.

At the same time, what we don't want to do is, start cutting in the SGA, striction, SGA people, because we're going to need those people as the capacity has finished, was all good the trend, folks. So, I think we have the risk that offering based on our new revised guidance here. And feel we can maintain that.

And, with a little bit of a little bit of uptake in recovery in Asia. And, when you look at the distribution inventories, they are coming down, they are now around $64 million. And traditionally, when they dropped down to 61 60 million, you see a strong re-order pattern.

So, we feel, if the volume comes back just a little bit, we can absorb that those investments and hold on margins..

And Mick this goes back to the comments that we made the last few quarters about step level investments. This really is step level investment, and it'll take a little bit of time to absorb it. But when Josef talks about these new system opportunities in diversified market opportunities, we recognize that they could come in and in big chunks.

So, we need to be able to have the capacity available to be able to take on those orders and to fulfill that demand within those markets..

I see, want to ask a question about the guidance. So, you reduced revenue $35 million at the midpoint if my math is right, I'm curious to understand how your outlook has changed in hydraulics relative to electronics. And so, what are the moving pieces to that $35 million. And then on EBITDA, you cut EBITDA by about $30 million.

And here, I guess I can understand about $10 million of it, right coming from the lower revenue and volume, are we to infer that the remainder is all of it associated with these investments? So, I guess maybe I'm asking Jeff's question in a different way here? Or is there something else other than the investments that's kind of contributing to this EBITDA cut.

So, a lot there, both revenue and EBITDA? I’d appreciate that..

So, I'll start Mick and then just if you can add on, we were pretty specific in our guidance at the 925 mid-point, I don't really think we see a whole lot of difference on the electronic side, it’s still about where we thought it was going to be for the year.

On the innovation side, we're still up high single-digits in our forecasting, the down cider, the constraints really are coming more on the hydraulic side.

We're seeing it in the Sun business related to inventory that we've already talked about, as well as a little bit of a slowdown in the acquisition companies for Daman and Schultes, from our original estimates, which both are in the hydraulic segments.

So, that's really what's driving the majority of what you're seeing in the change in guidance is coming from the hydraulic side. If you look at the EBITDA, certainly, we have the investments that we originally thought they were going to curtail a little bit more in the back half of the year, but we expect to continue now.

So, that's, taking into the EBITDA a bit. But at the lower revenue levels, we're also losing leverage, we recognize that we're going to have to possibly adjust the cost basis as we go forward.

And if we're at the lower end of that range, but certainly is cutting at least on a short-term basis into profitability, recognizing that we need to make the investments so that we have 2024 setup well to take on this additional potential revenue that we're seeing from the system sale and diversified markets..

Okay, my final question. It sounds to me like you, you're saying that in the America's business, the primary headwind seems to be destocking. And if I understand you correctly, you're to the level of channel inventory now, we're best suggest that destocking runs its course. Please correct me if I'm wrong about that.

Are we to think then that revenues in the Americas improve sequentially in the back half relative to where you were in Q1? And also in Asia Pacific? How are things trending? As we're looking at the month of, July, August, I mean, has have things changed, either for the good or bad relative to what you've observed in in Q2? And that'll be it, thank you..

Yeah. So, in terms of channel inventory, Mick the data points have been trending in the right direction over the last three months. So, it started off at 78 million dropped down to 74 million. Now it's in the 60s.

So, if we would pull in that data point and put an assumption on it, you will comment around, could there be an improvement in the backend? Yes, they could as long as the trend goes in continuous in the right direction, but we are baking in certainly risk just learning from our first half and learning from the feedback we have gotten last year versus with the art here are, no actual basis.

In Asia it’s, how the orders trending right now pretty much the same that we have seen in the first half. There hasn't been any improvements yet. But look I mean -- we are looking at this as a near-term, short-term impact that market will turn. And then inventories are coming down.

And eventually this will work itself out of the system and we're going to get back to the leverage we usually get with -.

Okay, thank you..

Thank you, Mick..

Our next question comes from line of Nathan Jones with Stifel. Please proceed with your question..

Good morning, everyone..

Good morning, Nathan..

Good morning, Nathan..

Maybe I'll ask a question about the margin profile here. Typically, you guys will see new products come out at better margins.

Is that the case with these, large contract awards that you're looking at? Hopefully to get awarded here in the back half and ramp up into next year? Are you anticipating those to be accretive to gross margin profile? And any colleague could give us on how creative they might be?.

Yeah. Good morning, Nathan. Sorry for the disruption. The answer to your question is, the way we have quoted his business and we spend a lot of time on the pricing of the offering. And quite honestly didn't know exactly how to price it considering where the supply chain was, is in. And in some cases were probably maintained for a longer period of time.

So, the answer to your question is yes, it will be a healthy margin profile. At the same time, we have, as you saw the i3 acquisition brought significant value to our offering. With a service system components that's actually patented, and patent protected. And the adoption rate has started.

And that's kind of part of our journey as well, that will further improve our margin profiles starting in 2024, as i3 will contribute to the journey pretty nicely. And they will extrapolate over the next two, three years into something. Obviously, much larger. As we have said in the past, we want to create a recurring revenue arm for our offering..

Maybe a follow up on these potential new contracts, new awards here. I mean, we're obviously talking about very significant numbers.

And you've talked about I mean, the word you used in the prepared remarks for step function change in growth? Are these contracts, something that go from zero to 100 fairly quickly? Or do they ramp up over a period of quarters? Just any more kind of color you can give us on your expectation for how those layering over the next year or two?.

Yeah, so look, when you look at our customer base, Nathan, no customers really larger than 4% to 5%. In our offering, currently, one of those wins, one of those customer wins will drive that to be our largest customer. With one of the wins that we are targeting, so we certainly really look forward to that. That step-up journey, starting in 2024.

And once again, as one customer we are talking about?.

And I'm going to question is, how would that kind of ramp up? Is it something where you would be expecting production to go, from you've talked about this being a new customer, or at least a couple of the main new customers? Are they something that would ramp up to, 10% of the contract value in the first year or 20% in the second year? Or does it go? Does it ramp up more quickly than that? How are you expecting that contract or those contracts to ramp up?.

Yeah, our expectation, and this is exactly why we are pulling this capacity ahead. To be able to answer this question, Nathan with factual data, we need a little bit more time but it's not going to start with, 50 million in 2024.

We got to finish our capacity that is so vital towards the -- we can commit to our customers as we want to go faster because we can actually absorb right now. So, if you wouldn't mind just allow us a little bit more time to be able to answer that question. Once we get our capacity closer to the -- to where it needs to be..

And just one last one..

Nathan, I was just going to add a little color there too, we would expect so your question just about how that comes into the P&L, typically it will face, over a period of time, it's not like it all comes in on day one. So, once you get that customer signed in the door, it will it will build over, potentially a multi-year period.

And as you get multiple customers in the door, you start having that layer, in effect, add to that step level function that we're talking about for ‘24..

And if you're talking about customers having to make strategic decisions for 2024? These are things that you should be able to announce to us or you should be, the customer should have to move on before the end of the year.

Is that right?.

Yeah, one particular customer have to start the change over by September of actually this -- I should say, sorry, one customer has to make a decision in September of this year, for production years 2024 through 2027 and beyond..

Great. Well, I look forward to hearing some announcements in the near term and, and for sure, just add my best wishes for the future..

Thank you, Nathan. I appreciate it..

Thank you, Nathan..

[Operator Instructions]. Our next question comes from line of Jon Braatz with Kansas City Capital. Please proceed with your question..

Good morning, everyone. And Trish, I do want to wish you the best of luck in your retirement. It was -- I enjoyed working with you. And congratulations..

Thank you very much, Jon. I appreciate it..

Just want to change the pace a little bit. The fire and the tornado.

And at the Faster operation how is that impacting the second half of the year?.

The second half should not be in terms of faster in specific and their expectations we have in place will stay intact as we were able to get some help with our integrated supply chain. But we are back up and running now.

We originally planned for fast, actually to manufacture more product within the hydraulic segment to offset some of the headwinds we've seen with the CVT business in particular to Asia, to China, and still some elevated inventory levels in North America.

So, they were not able to do that passivity, but certainly met all the expectations that we had on the Faster side. So, no impact to the second half..

Okay. Okay. And then secondly, I think in response to one of the questions -- one of the early questions about the accelerated investments. I think I heard you use the term phase one. To describe some of this.

Is there a phase two? Are there additional investments? Of course, there's always additional investments, but is there an additional heavy investment program following these investment decisions?.

So, the comment about phase one and phase two, Jon was related to Faster. There's a phase one that is adding in around 35,000-40,000 square feet, and then there will be a phase two that will add around 100,000 square feet.

And it's all driven based on upcoming demand organically generated through this product offering system sales and also a data science piece that we have been working with Faster and that hydraulics team to integrate with our customers..

Okay, and then one final question. After all, this investment is completed and the new programs began and so on. Would you -- is there a sense that your profitability will be elevated because of the investments and more so than maybe what you were thinking? Six months ago, a year-ago.

Are we going to -- what kind of return are we going to get on that investment?.

Yes, certainly. Look, I mean, our horizon hasn't changed.

Jon, I know this is a bold statement, but we truly as a team believe in that and when you couple all the manufacturing investments we have made prior to the capacity expansion here, creating the center of excellence, creating original structure, investing in new equipment, investing in supply chain, investing into new products and breakthrough technology.

Our horizon have been a 40% gross margin company, and a 30% EBITDA company is not changing..

Okay, so it's okay. Okay. All right. Thank you very much..

Thank you..

Thank you, Jon..

Mrs. Almond there are no further questions at this time. I would now like to turn the floor back over to you for closing comments..

Great. Thank you very much, operator and thanks, everyone, for joining us today. We appreciate your interest in Helios. And look forward to updating all of you on our third quarter results in November. Please feel free to reach out to me with any follow-up questions that you have. Have a great day..

Ladies and gentlemen, this does conclude today's tele-conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..