Helios Technologies returns to growth with 13% sales increase and 20% adjusted EBITDA margin, signaling strategic progress and positive future outlook.

OPERATOR - (00:00:00)

If anyone should require operator assistance during the conference, please press Star0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tanya Allman, Vice President of Investor Relations and Corporate Communications. Thank you. You may begin.

Tanya Allman - Vice President of Investor Relations and Corporate Communications - (00:00:19)

Thank you, operator. And good day everyone. Welcome to The Helios Technologies Third Quarter 2025 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@hlio.com you will also find the slides that will accompany our conversation today as well as our prepared remarks. Here with me today are Sean Baggen, President and Chief Executive Officer, Michael Conaway, our Chief Financial Officer and Jeremy Evans, our Chief Accounting Officer. Please join us in welcoming Michael for his first earnings call with Helios. He joined the Helios team just three weeks ago. Shawn will start the call with highlights from the third quarter, then hand it over to Michael for a brief introduction. Jeremy will then review our third quarter financial results in detail. Shawn will conclude our prepared remarks with expectations for the remainder of 2025. 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 and 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 can be found in our annual report on Form 10K for 2024 along with upcoming 10Q to be filed with the securities and Exchange Commission. You can find these documents on our website or@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 and four now with that, it's my pleasure to turn the call over to Shawn.

Sean Baggen - President and Chief Executive Officer - (00:02:44)

Thanks Tanya and welcome everyone. We appreciate you joining us today. Our third quarter delivered positive, measurable results analogous to the current changing autumn season. Since I joined Helios nine quarters ago, our business have persevered through various market down cycles. I am pleased to finally report that the third quarter was a harvest season for Helios as we returned to growth and delivered above 20% adjusted EBITDA margin. After planting strategic initiatives and weathering challenges, we're now seeing results in the same way that farmers do. After spending months planting, nurturing and waiting, often through unpredictable weather, before finally harvesting in the fall. Helios Technologies is evolving through restructuring, innovating and expanding and the core remains incredibly strong. Growth often requires visible change and now the progress is coming through on our financial results. We believe the third quarter marks a turning point for Helios. We delivered a 13% sales increase with growth across all three of our regions and both business segments. This growth was driven by a strong performance from our electronics business. In fact, it was a record quarter for innovation controls with strong demand returning in the recreational industry. That's not to discount the growth in hydraulics which was achieved in what continues to be a soft marketplace. Our focus on our go to market strategy and accelerated pace of innovation is winning back customers and taking market share of note over the last five months, our weekly average order volume has outperformed the same periods in the last three years. Our customer centricity and high level of customer engagement is capturing new business wins and growing our sales funnel. Our new products across both segments have had great reception where we have been showcasing them at major trade shows such as Ibex Utility Expo, the Battery Show, IVT Expo, Bama Con Expo India and the International Pool Spa Patio Expo. In addition to our customer focus initiatives, our teams also dedicated time to strengthening our culture and giving back to the communities in which we work. We are doing this work with purpose as we strive to be the employer of choice in the communities we live. It is getting noticed with numerous external awards and accolades. Among other examples, we continued our annual sponsorship of the Clyde Nixon Business Leadership Award named after a former Sun Hydraulics Chairman and CEO. This award is presented at the Sarasota County's Economic Development Corporation's annual meeting and honors a Sarasota county business leader who exemplifies the personal integrity, business excellence and community commitment of the late Clyde Nixon. Additionally, during our recent Helios Leadership Summit, our team prepared books filled with inspirational messages for the children served by Easterseals Southwest Florida Chapter. These servant leadership qualities go back to our founders, specifically Bob Koski's unique approach to his infamous horizontal management style and his philanthropic mindset moving to our results. As expected, our higher sales in the third quarter contributed to margin expansion. This shows through on our operating model when you look at the sequential sales step up from 2Q25 to 3Q25 of 8 million and the associated Incremental margins at the gross profit line all the way through to the adjusted EBITDA and earnings per share. We are continuing to invest in engineering resources to drive our future product pipeline and are upgrading production capabilities which will have a productivity payoff in the future. We also continue to generate positive cash flow and reduce debt. After our ninth consecutive quarter of paying down debt, our net debt to adjusted EBITDA leverage ratio has improved to 2.4 times. During the quarter we closed the sale of Custom Fluid Power and recorded a gain of $21 million. We are excited to have CFP remain in the sun family as a continued hydraulics distributor in Australia under an exclusive distribution agreement for the region. This followed the action to close our HC operation and put engineering resources back into our core businesses. Another example of our evaluation of the footprint realignment. This is a continuous focus as we evaluate how best we optimize our operations to serve our customers where we can command strong market positions. Also, as part of our ongoing portfolio evaluation this quarter we wrote down 25.9 million of goodwill related to i3 product development, a company we acquired in May 2023. We have refocused i3 PD engineers on projects aligned with Helios core business and strategic goals including including the no Roads and Cygnus Reach software platforms. Supported by a leadership change that has added more software sales expertise, we have reforecast sales for i3pd and adjusted our expectations for the rate of adoption of new software capabilities. Overall for Helios, we remain focused on profitably growing the business, driving EBITDA margins back into the 20s and improving our return on invested capital. Our capital priorities remain to invest in organic growth, reduce debt, maintain our long dividend history and opportunistically repurchase shares. With continued margin expansion, we expect to lower our leverage ratio to around 2 times by year end with the fourth quarter cash flow generated from operations combined with utilizing the cash received on October 1st from the sale of CFP. As we continue to strengthen our balance sheet, we will have more optionality to make strategic investments as we advance into 2026. Finally, I would like to take this opportunity to welcome Michael Conaway as our new cfo. Our employees, partners and shareholders will find his insightfulness, strong grasp of finance and breadth of experience a nice addition for Helios. We now have our full leadership team in place to harness our collective energy and create the momentum to drive us forward. Let me turn the call over to Michael now to introduce himself.

Michael Conaway - Chief Financial Officer - (00:08:42)

Thanks Sean. These are certainly exciting times at Helios and I'm very excited and honored to be here. I joined Helios because I see great potential for this business. I know that we have businesses that have strong cores with well respected histories, great market positions with global brand recognition, deep customer relationships and quality products that serve critical needs within the applications they are used. With the progress under Shawn's leadership, it is evident there is tremendous value that we can create going forward. I believe that my experience can be well applied here and look forward to contributing to company growth, driving cash and earnings improvements and helping the team create increasing shareholder value over time. With that, let me pass it over to Jeremy to cover the details of the solid third quarter results.

Jeremy Evans - Chief Accounting Officer - (00:09:39)

Thanks Michael. It's great to have you join us and good morning everyone. As I review our third quarter results, please reference slides 5 through 8. Sales in the quarter were 220 million, up 13% year over year and exceeding the top end of our guidance range which was 215 million. This reflects strong performance in the electronics segment which grew 21% while hydraulics increased 9%. Encouragingly, we saw the mobile, recreational and agriculture markets turn green this quarter relative to year over year comparables. There were some orders from the fourth quarter that customers pulled forward, a contribution to the outperformance. Sequentially, sales were up 4% or 8 million, as demand continued to improve across multiple end markets. Regionally, year over year, sales increased double digits across all three geographies. Sequentially we had 10% growth in APAC and 6% growth in the Americas, offsetting the typical seasonal decline in EMEA which was down 6%. Note, foreign exchange favorably impacted sales by $1.8 million compared with the year ago period. Gross profit increased 21% year over year to 73 million with gross margin expanding 200 basis points to 33.1%, driven primarily by better capacity utilization from higher volumes, favorable mix and operational efficiency improvements which more than offset tariff headwinds. Sequentially, Gross margin improved 130 basis points, reflecting incremental leverage from higher volume, primarily in the electronics segment. We continue to look for ways to improve gross margin through efficiency and capacity utilization while focusing on our core business. Our initiatives to restructure HCEE Leverage, our low cost Tijuana Facility Divest cfp and Refocus i3pd resources are examples of decisions taken in the past year. Operating income was down in the quarter compared to the prior year, primarily due to goodwill impairment related to i3pd. The CFP divestiture gains mostly offset the goodwill charge on an adjusted basis. Operating margin came in at 16.6% the third quarter in a row of expansion while adjusted EBITDA margin declined 40 basis points year over year. Last year's operating profit had a 5.5 million benefit due to stock compensation reversal from the CEO termination. Our effective tax rate in the third quarter was 19.8% compared with 14.2% in the year ago period, reflecting the mix of business and applicable statutory tax rates and the impact of both the goodwill impairment charge and the gain on the sale of CFP. The 2024 period included an overall increase in discrete tax benefits driven by the CEO termination in July of 2024. Diluted EPS was $0.31 in the quarter, down 9% over last year. Diluted non GAAP EPS was $0.72 in the quarter, up 22% over last year, primarily from the sales growth and business improvements we have discussed. The sequential increase demonstrates the strong operating leverage of the business. Turning to slide 9 hydraulics delivered 9% higher sales year over year supported by improving demand from our customers in the mobile end market and early signs of improvement in agriculture. Foreign exchange had a favorable 1.8 million impact on the segment compared with the prior year period. Hydraulics gross profit and gross margin grew year over year, 12% and 90 basis points respectively, supported by operational efficiencies from improving lead times and continued volume strength at faster sea expenses were up 5 million or 30% over the prior year period mainly due to the 3.7 million reversal of unvested stock compensation in connection with the CEO termination in July 2024 in addition to higher wages and benefits reflecting investments made in our core operations. Moving to slide 10, electronics sales grew 21% year over year driven by record performance and innovation. We saw growth from our customers in the recreational, mobile and industrial end markets while our demand in the health and wellness market was relatively flat. Gross profit and gross margin expanded 38% and 420 basis points respectively from the prior year primarily due to higher volumes and more favorable mix. Operating income of negative $13.7 million reflects the i3pd goodwill impairment. Prior to the goodwill impairment charge, operating income as a percentage of sales increased to 15.3%, up 490 basis points compared to the prior year period due to the higher gross margin and lower SEA expenses as a percentage of sales. The prior year period included a $1.8 million reversal of unvested stock compensation in connection with the CEO termination. Slide 11 shows a trailing 12 month free cash flow conversion rate of 223%. We generated $18.5 million in free cash flow during the quarter down from $28.8 million in the prior year. This quarter's cash from operations was impacted by an increased accounts receivable balance as a result of the higher sales. Capex of 6.7 million or 3% of sales was consistent with our focus on maintenance and productivity enhancements that deliver clear and measurable returns on investment. Turning to Slide 12 at the end of the third quarter, cash and equivalents were 55 million which did not include all of the proceeds from the sale of CFP and we had 360 million available on our revolving lines of credit. Our balance sheet is strong and provides us with great flexibility. With that, I will now turn the call back over to Shawn.

Sean Baggen - President and Chief Executive Officer - (00:15:39)

Thanks Jeremy. Turning to slides 13 and 14, we have met our commitments over the last eight consecutive quarters as we have instilled a stronger financial discipline and processes for accountability and predictability. We have also outperformed our expectations for the first nine months of this fiscal year while navigating the tariff landscape and and expect to end 2025 well positioned for further growth carrying into 2026. As we mentioned last quarter, we expected an acceleration from recreational customers based on our order book and other market factors such as improved channel inventories with mobile also starting to show positive indicators. The broader macro and customer sentiment is turning upward, key industrial indicators are stabilizing and early cycle demand patterns are improving signals that support the beginning of an up cycle across some of our end markets. At the same time, Helios own self help initiatives are taking hold. We've strengthened our operating discipline, streamlined our portfolio and invested in capabilities that expand our addressable markets. Building on two years of disciplined strategic planning and execution, we are well positioned to capture the next phase of growth. We with greater agility and profitability with our streamlined operations. We expect fourth quarter sales to be in the range of 192 to 202 million, up 10% over the prior year period. At the midpoint of the range this would be a 20% growth rate. At the midpoint adjusting for 15.6 million in CFP sales in the prior year. Comparable period for the full year sales at the midpoint of the guidance adjusting for cfp we would be 4% growth over fiscal 2024. We expect fourth quarter adjusted EBITDA margin to be in the range of 20 to 21%, keeping us at the 20% plus level for the full year. We expect adjusted EBITDA margin to be in the range of 19.1% to 19.4% with the midpoint about 25 basis points above the midpoint of our original guidance range From February this year we expect fourth quarter diluted non GAAP earnings per share to be in the range of 67 to 74 cents, which more than doubles over last year at the midpoint. For the full year we expect diluted non GAAP EPS of $2.43 to $2.50 with the midpoint 12% above the high end of our original guidance from February. We entered the year with a clear plan and stronger discipline and today we're operating with greater precision, accountability and focus, defining a new standard for Helios, one we intend to keep refining and elevating with every step forward. I am incredibly proud of the progress made this year by the Healios team and we are committed to capitalizing on our momentum as we continue to stack up wins. Turning to Slide 15 to 17, we remain focused on organic growth driven by innovation. The team has done a great job launching new products this year that provide incremental sales streams and allow us to attack adjacent markets. Our focus on investing in R and D and innovation through the down cycle has positioned us well for when the cycle starts to turn. As you look at both our financial priorities as well as our key focus areas we established for the year, I am pleased with how we are performing. We returned to growth this quarter and expect to end the year with sales above 2024 levels with improved margins, a lower cash conversion cycle and reduced debt. With laying a strong foundation for 2026, we are targeting to host our next Investor Day on the morning of March 20, 2026 in Sarasota, Florida. There will be more information provided as we get closer to the event. As I conclude our prepared remarks, I want to revisit what I shared on last quarter's call our renewed energy and determination to deliver a strong comeback in the second half of the year. Today, I'm proud to say we are doing just that. Our execution and progress reflect the unwavering dedication of every Helios employee around the world. We are fortunate to have an extraordinary group of companies within the Helios family, many celebrating their own remarkable milestones alongside our founding company, Sun Hydraulics, as It marks its 55th anniversary in 2025. As we honor that legacy, our focus remains squarely on the future, driving innovation, serving our customers with excellence and creating lasting value for our shareholders. The actions we're taking today are designed to strengthen our foundation and amplify our momentum. I'm more confident than ever in my belief that the future is very bright for Healios. Thank you for being part of today's call and for your ongoing engagement with and support of Helios Technologies. With that, let's open the line for Q and A, please.

OPERATOR - (00:20:25)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Our first question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Chris Moore - Equity Analyst at CJS Securities - (00:21:01)

Good morning guys. Congrats on a nice quarter and the momentum. Maybe just talk about, you know, provide a little color on some of your recent commercial wins. You know how much visibility that gives you into 26.

Sean Baggen - President and Chief Executive Officer - (00:21:19)

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

Chris Moore - Equity Analyst at CJS Securities - (00:24:59)

Wow, good stuff. I appreciate that. Maybe just my follow up. Obviously margin progression is happening here. Fiscal 2021 was an unusual year driven by Balboa adjusted EBITDA was 24.6%. What would it take over the next two or three years to get back to that level?

Sean Baggen - President and Chief Executive Officer - (00:25:21)

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

Chris Moore - Equity Analyst at CJS Securities - (00:27:15)

Very helpful, I appreciate it Sean. I will jump back in line.

Sean Baggen - President and Chief Executive Officer - (00:27:19)

Thanks Chris.

OPERATOR - (00:27:22)

Our next question comes from the line of Jeff Hammond with Keybanc Capital Markets. Please proceed with your question.

Jeff Hammond - Equity Analyst at Keybanc Capital Markets - (00:27:28)

Hey, good morning guys.

Sean Baggen - President and Chief Executive Officer - (00:27:30)

Morning Jeff.

Jeff Hammond - Equity Analyst at Keybanc Capital Markets - (00:27:34)

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

Sean Baggen - President and Chief Executive Officer - (00:28:01)

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

Jeff Hammond - Equity Analyst at Keybanc Capital Markets - (00:30:19)

Okay, great. So appreciate the cfp. Looks like a good divestiture. And on i3 moves. I think we understand. Any more portfolio reshaping you think needs to happen from here or is this kind of where we're set? And then you mentioned as you get leveraged down it should allow you to lean in on strategic investments. And I'm just wondering maybe how you're thinking the same or differently than the prior management team about, you know, about.

Sean Baggen - President and Chief Executive Officer - (00:30:52)

You know, M and A. Thanks. Yep, gotcha Jeff. So I would say from a portfolio perspective, nothing else imminent. I would say for me this is just standard work that we're always evaluating the portfolio and the performances of the different businesses. But at this point we're strongly committed to all of our businesses. It's no secret that our Balboa business has deteriorated from those Covid highs that certainly weren't sustainable. But we feel really good about the trajectory of that business and have a multi pronged approach plan to improve their profitability as that volume returns. Coming off of that recent show that I referenced in Vegas, we demonstrated in a kind of a side room. So we had our typical booth but we had a side room where we brought in all our key OEM customers to really show them our vision for our product pipeline. And I will tell you that we have more product coming in the next 18 months than we have launched in the last 10 years and we've started some of that. Peer zone is one example. So we're excited and believe that the existing portfolio is strong, but we're always going to evaluate that.

Jeremy Evans - Chief Accounting Officer - (00:32:13)

Yeah, and this is Jeremy. I'll touch on the M and A question. As we've said in prior calls, our focus has been on paying down debt. Our leverage ratio was down to 2.4 times at the end of Q3. We think we could get that around 2 by the end of the year. And when you look at our cash flow, free cash flow last 12 months, you know, very high, near record high cash flow. So we do expect as we get into 2026 that we will have maybe different priority around capital allocation. But as we said on prior call, M and A, it's not going to be driven at the corporate level. It needs to make sense with what we have down in our, in our operating segments and it needs to get the right return. So we will obviously be aware, be looking if there's an opportunistic opportunity, for sure we'll look at it. But it's got to make sense. It's got to fit the portfolio and it's got to have the right return.

Jeff Hammond - Equity Analyst at Keybanc Capital Markets - (00:33:16)

Great, thank you.

OPERATOR - (00:33:20)

Our next question comes from the line of Meg Dobre with Baird. Please proceed with your question.

Joe Grabowski - Equity Analyst at MIG - (00:33:26)

Hey, good morning guys. This is Joe Grabowski on from MIG this morning.

Sean Baggen - President and Chief Executive Officer - (00:33:30)

Hey Joe.

Joe Grabowski - Equity Analyst at MIG - (00:33:32)

Hey, good morning and welcome aboard, Michael.

Michael Conaway - Chief Financial Officer - (00:33:36)

Thank you.

Joe Grabowski - Equity Analyst at MIG - (00:33:38)

Okay, so I guess I'd start in electronics. And I know we've talked about it already, but you know, the sales there were the strongest in the last three years. As you mentioned, innovation control, it's had a record quarter. Maybe just talk about any unusual items in the quarter, any perhaps pull forwards into the quarter. And then I know there's seasonality. But how do you kind of think about the sequential sales progression in electronics from Q3 into Q4?

Sean Baggen - President and Chief Executive Officer - (00:34:08)

Yeah. So Joe, on the electronics performance in the third quarter, we had in our prepared remarks, there was a little bit of pull through from the fourth quarter and that really was concentrated to that, to the electronics segment. And it was more in that recreational marine space. I think absent that $3 million, we were just above the top end of our guide by about a point. Once you take that 3 million out. And when you look at the hydraulic segment, although I understand your questions, electronics related, it was a very similar trend. We're about a point above our top end of our guide with some things getting a little bit more favorably across both segments.

Jeremy Evans - Chief Accounting Officer - (00:34:48)

Just the numerics quick on that one. On the sequential, so you kind of alluded to some of the sales pull ins, but off of that 79 number in Q3, call it 3 or 4 mil. On sales pull ins driven by Customer ordering patterns. And then if you look at Q4 at the mid on electronics, which is 73, you would kind of add that back and you'd get a flat sequential on electronics. But embedded within that flat sequential is 2/4 in a row of 20% plus year over year bees. So the electronics segment in particular innovation is continuing to show really good sales progression.

Joe Grabowski - Equity Analyst at MIG - (00:35:35)

Great. Okay, great. That's very helpful. And then maybe my follow up switching to hydraulics. I thought it was interesting that you highlighted that AG was up for the first time in six quarters. Maybe kind of talk about where the growth is coming from there and maybe any geographical strength in AG for hydraulics.

Sean Baggen - President and Chief Executive Officer - (00:35:59)

Yes, the AG strength comes from our faster business, which is predominantly direct to oem. And AG is their largest market they serve. I'll acknowledge that the OEMs are not putting up really strong numbers who are large customers, whether that's Deere and agco, cnh. But even as you get into some of the European and Chinese OEMs or some of the kind of in between construction and ag and you think Kubotas and getting into hardcore construction with Caterpillar now, they had a more upbeat recent earnings release, but the rest of the AG is challenged. But that dynamic I shared on recreational products is exactly what we've seen playing out in AG as well, where retail demand actually in the US finally put up a positive number here last month in terms of registrations. But that's coming off four years of declines in registrations. And so the comps are easier. But what has changed is the dealer inventory and channel levels are at much healthier spots. And so we look at where kind of indications are signaling for 2026. All of the OEMs are suggesting things may begin to recover. But what we clearly see is in our incoming orders and indicative orders from them year over year. That's a positive increase. We're gonna feel that earlier as a supplier into them. So we're optimistic. That's two quarters in a row for our faster team that is growing year over year and continue to expect that to trend favorably in the fourth quarter and as we enter 2026.

Joe Grabowski - Equity Analyst at MIG - (00:37:39)

Got it. Okay. Very helpful. Thanks for taking my questions.

Sean Baggen - President and Chief Executive Officer - (00:37:43)

Thanks, Joe.

OPERATOR - (00:37:46)

As a reminder, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from line of Nathan Jones with Stifel. Please proceed with your question.

Nathan Jones - Equity Analyst at Stifel - (00:37:58)

Good morning, everyone. Good morning, Nathan. I'll follow up on some of these de stocking questions because I think it's, I mean it's probably an Important distinction to make because we get questions about this from investors on Helios. You guys don't actually need to see the John Deere's and the Caterpillars of the world selling more wheel loaders and tractors in order to see revenue growth for Helios in 2026. What you need is the first signal of the bottom of the cycle which is them stopping destocking inventory and actually producing more machines, even if they're not. Actually selling more machines. Correct?

Sean Baggen - President and Chief Executive Officer - (00:38:41)

That's fair. Yes.

Nathan Jones - Equity Analyst at Stifel - (00:38:44)

And so. And that's what you're seeing in the market you've talked about? I think, you know, I just want to make it clear for people in recreation, in mobile and in ag. That's the kind of market dynamics that you're saying, which is indicative of a bottoming cycle for you guys to begin with.

Sean Baggen - President and Chief Executive Officer - (00:38:59)

Yes, yes, I would agree. The only caveat I'm going to put because we talked deeply already about recreational and ag. When you go over to more of the end markets that sun's exposed to area work platforms type of, there's, there's big macro signs obviously with PMI that's been mixed but geographically it had been stronger and in China and Asia and we've seen that in our sales as well. But beyond that it's, it's the piece of us and our partnering from a go to market with our distributors to do that targeted account planning and you look at industrial production and the big beautiful bill and what that will create in terms of infrastructure, we feel well positioned. Despite that our NFPA data telling us these markets have been down and so with us now growing, we think we're taking share. But you're absolutely right on the egg and wreck.

Nathan Jones - Equity Analyst at Stifel - (00:39:55)

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

Sean Baggen - President and Chief Executive Officer - (00:40:19)

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

Nathan Jones - Equity Analyst at Stifel - (00:41:24)

Yeah, I think we're organic. You should get a little bit of a tailwind from to gross margins from the CFP divested GS, correct?

Sean Baggen - President and Chief Executive Officer - (00:41:32)

Yes, particularly well, obviously that's sat in our hydraulic segment, so it'll be more visible there, but certainly at the Helios level it helps as well.

Nathan Jones - Equity Analyst at Stifel - (00:41:44)

Great. Thanks very much for taking my questions. I'll leave it there.

Sean Baggen - President and Chief Executive Officer - (00:41:48)

Thank you, Nathan.

OPERATOR - (00:41:51)

Our next question comes from the line of John Braatz with Kansas City Capital. Please proceed with your question.

John Braatz - Equity Analyst at Kansas City Capital - (00:41:58)

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

Jeremy Evans - Chief Accounting Officer - (00:42:20)

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

Sean Baggen - President and Chief Executive Officer - (00:44:41)

And John, if I can just, if I can just accentuate because Jeremy explained that really well. But at the end of the day this is just an example of overpaying for an acquisition that was pre revenue and didn't scale. And at the end of the day then it's a mathematical equation based upon current business circumstances. But that said, I want to reiterate how important that the i3 team is to our overall strategy. We acquired, as Jeremy said, some very talented engineers that have been cornerstones in some of the new products we've announced already and released recently. But also further stuff in the pipeline. And at the end of the day I couldn't be more proud of those engineers and the way they are pumping out products. And our sales teams now with their go to market approach are kicking down doors. Our customer excitement is very high and in this fierce competitive world, our Healios team doesn't back down and we take on these challenges and we love being the underdog.

John Braatz - Equity Analyst at Kansas City Capital - (00:45:40)

Okay, thank you Sean. On looking forward at the new product pipeline. Obviously in the past there was some emphasis placed on big OEM wins. That would be quite sizable when you look at the lineup. Are there any singular new products that really move the needle or are they sort of one off in isolation?

Sean Baggen - President and Chief Executive Officer - (00:46:08)

Well, that's the plan is to always launch products that catch the attention of OEMs and they want to buy them. But we at the end of the day are truly an extension of many of those OEM customer bars. So we are designing and developing products years in advance with them. But even the most recent one, we announced the new multi faster from faster. And just a reminder, I mean that is a piece of equipment that goes on mini AG and construction vehicles to allow the operator to quickly attach and detach hydraulic applications. And at the end of the day, I'd like to highlight that multifaster is kind of a term in the industry that others have copied and tried to compete with us. But with our new multifaceter we bring out features like higher flow rates and more applications that it can go on or different deviations of that product. Like earlier in the year, the multi slide that went downstream in the market to the compact excavation equipment and such. And so we're always trying to innovate. But at the end of the day, the multifaceter is the multi connection that others have copied. I would say it's like the Kleenex. It's created its own brand that others have copied. Okay, thank you, Sean.

John Braatz - Equity Analyst at Kansas City Capital - (00:47:28)

Appreciate it.

Sean Baggen - President and Chief Executive Officer - (00:47:30)

Thanks John.

OPERATOR - (00:47:32)

Thank you. We have no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Tanya Allman - Vice President of Investor Relations and Corporate Communications - (00:47:40)

Great. Thank you very much everyone for joining us today. We will be attending some different conferences between now and the end of the year, both in person and virtually. So we look forward to catching up with you in person. And if you have any follow up questions, feel free to reach out to me directly. Thank you and have a great day.

OPERATOR - (00:47:58)

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