Q4 2023 Helios Technologies Inc Earnings Call

Participants

Tania Almond; Investor Relations; Helios Technologies Inc

Josef Matosevic; President, Chief Executive Officer, Director; Helios Technologies Inc

Sean Bagan; Chief Financial Officer; Helios Technologies Inc

Chris Moore; Analyst; CJS Securities, Inc.

Mircea Dobre; Analyst; Robert W. Baird & Co. Incorporated

David Tarantino; Analyst; KeyBanc Capital Markets Inc.

Nathan Jones; Analyst; Stifel, Nicolaus & Company, Incorporated

Presentation

Operator

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.

Tania Almond

Thank you, operator, and good day, everyone. Welcome to the Helios Technologies fourth-quarter 2023 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 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 slide 3 through 6 now.
With that, it's my pleasure to turn the call over to Josef.

Josef Matosevic

And yes, thank you, and welcome, everyone. We delivered as recently committed for the fourth quarter 2023 is now in our rearview 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 Dawn and emerged as a more united and determined team.
We continued to advance our strategy by remaining centered on three key elements. First, one of our major priorities were the investments we have constantly made in our manufacturing strategy. We expect 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 risks as well as expand low-cost regional manufacturing in India and Mexico.
Our two North American hydraulics Center of Excellence was fully operational starting in the fourth quarter and we just opened our new electronics facility in Q1. We are finishing up the process to expand our capacity in Italy. We are faster just to reach a record sales levels for the full year 2023. All these investments were critical for our future, even as it somewhat impacted and 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 field product and solution gaps, diversify revenues and to build out our talent pool with acquisitions with the addition of shortages and three, to add to our string of flywheels, we have assembled a collection of premium capabilities to make us incredibly tough to follow.
Third, we continue our efforts to further diversify our markets and deepened our reach into existing ones. Even in the face of significant macro headwinds who 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 recognized the decision to continue to invest in the business in the mind of disruption from standing up. The center of excellence also contributed strong, both talk more about the results as well as our financial priorities and our outlook for 2024.
John, I will turn it over to you now, please.

Sean Bagan

Thank you, Joseph, 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 A-Pac, which continued to be driven by softness in China.
As we said 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 2022, granted the comp is off the low watermark. 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 base 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 margin erosion was the $2.5 million or 7% decline of SEA expenses compared with the trailing third quarter. The $35.2 million of quarterly SG&A 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 or those that can be deferred without impacting our strategic imperatives. Year over year, the SG&A expense was only modestly higher despite acquisitions.
Adjusted EBITDA in the quarter of $32.3 million or 16.7 percentage 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 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 that I 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 is level back to a more normalized range. We do not plan to continue to break out 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 cost. 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 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 US sales concentration, foreign currency has nominal effects for this segment currently. Year over year, electronic 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, underabsorption, 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 flows.
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 three 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 for 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 3.01 times. We are prioritizing debt reduction in 2024 and moving below 2.5 times. Ultimately, as we get closer to the lower end of our two to three times targeted range, we have the ability to flex up for acquisitions and other investments.
Turning to slide 16 to 18, we are providing our initial expectations for 2024. Our estimates do not include the large system 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 midpoint 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 nonrecurrence 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%.
Flipping to slide 19, I want to review with you our financial priorities for 2024 that Joseph 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 2020 for one, execute on our profitable sales growth plan by realizing operating leverage inherent in our business while fully instilling investments and cost discipline to shorten our cash conversion cycle through sustainable working capital improvement initiatives and three reduced 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 Joseph for some closing remarks.

Josef Matosevic

Thank you much, Sean. We appreciate the financial structure and discipline you embedding into the organization. I am very encouraged about 2024 and our future. It is about keeping our focus with tenacity and 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, which 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. They provide improved productivity and efficiencies with lower lifecycle cost 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 up the lines for Q&A, please.

Question and Answer Session

Operator

(Operator Instructions) Thank you.
Chris Moore, CJS Securities.

Chris Moore

Good morning, guys. Thanks for taking a couple of questions, extra income, good morning. Start maybe on on kind of this from an end market perspective, just trying to understand which end markets still have the lowest visibility and kind of how you're how you're looking at any potential improvement throughout the year and in other markets?
Hey, Chris morning.

Sean Bagan

Thanks for the question is Sean.
As we got into the fourth quarter, a lot of the same market trends that we cited on the third quarter call persistent as we get into the new year, we're seeing pockets of recovery. So it's kind of break it 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 the wrap products for marine are the ones that persisted most heavily, but really encouragingly has been the health and wellness turnaround and start to see those sequential gains in year-over-year uptick that we saw in the fourth quarter for the first time from them post-pandemic, low watermark.
Got it.

Chris Moore

Appreciate that. Maybe switch gears a little bit. Can you talk a little bit about the mix of OEM and distributors in 23 and an expectation in 20 for second half 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 an extension of their existing engineering team to help them with new product development.

Sean Bagan

I would then year over year we saw that go about up about five points.
So in 2022, the OEM.s are about 55% of our sales, 2023, just over 60%. And if anything, we think that trend to continue as again as we get closer to our customers.

Chris Moore

It was very helpful. And maybe just the last one on cash flow. Obviously very strong quarter despite relatively low revenue. Maybe talk a little bit more about cash flow expectations for for 24 and what kind of capital allocation allocation thoughts at this point?

Mircea Dobre

Wondering, Chris, on so in terms of the capital allocation here. You know, as previously communicated, you know, our investments were focused in three planned areas. One, the manufacturing operations piece on Intel will allow us to clearly avoid some duplication in cost and materials and logistics. As we have developed a center of excellence, it will also provide us a better cost structure. The proper leverage, improved efficiencies a much better customer experience and lead times. And as we continue to see the market recover, it will clearly and improve our gross margins back to more historical levels. What they call it in gives us better pricing power and purchasing power to we don't have duplication in supply chain selling into three 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 that the third piece was our investment in additional capacity to support a step level growth with subsystem and system sales and new end markets. So all three combined in terms of capital allocation is pretty much wrapped up besides our first location and our expectation will be the difference. Formation was really important to position us not only to grow but to grow profitably was strong margins over time, very sticky solution and a highly flexible balance sheet. So that's in terms of capital allocation where we stand today.

Chris Moore

Terrific. I will leave it there. I really appreciate it guys.

Tania Almond

Thanks, Chris.
Thanks, Chris.

Operator

Jeff Hammond, KeyBanc Capital Markets.

David Tarantino

Hey, good morning, everyone. This is David Tarantino on for Jeff. David, 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 channel inventory step-up in Hydraulics in 4Q. So just kind of wanted to see if we still have some destocking headwinds moving into 2024, how that's expected to progress?
Yes. So I would wouldn't characterize the small uptick in the in the hydraulics distributor inventory, not that 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 in 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 wrap product, where we continue to see challenges from an ag perspective, it's a little bit more of a push-out or a delay in orders, not so much a 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 distributors step up in the fourth quarter can be a little seasonal, just some building kind of going into the new year or so we've seen that historically as well.

Sean Bagan

Okay. Great.

David Tarantino

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

Mircea Dobre

Yes, David, clearly, volume was the biggest biggest driver behind the headwinds on the margins, coupled by finishing and tempering off those investments we have made. So that's pretty much the to Curis.
And David, I don't know if you want to add something to Nirvana as one particular manufacturer.
The only other note on it it did.
But I'm just going to highlight again, is highlighted with that health and wellness segment coming back. It's 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 add a little bit of headwind and all the capacity we're bringing on certainly add some fixed costs that we historically haven't had, but we're going to need as we get into the next year.

David Tarantino

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 in the margin guide, just particularly how you balance kind of those longer-term investments we've been making versus kind of controlling costs and markets remain a little bit weaker?

Sean Bagan

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 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 on layering in costs. So we don't get ahead of ourselves.
Great.

David Tarantino

Thanks guys.

Tania Almond

Thanks, David.

Operator

Nathan Jones, Stifel.
The morning, everyone in North America.

Nathan Jones

I guess question on the guidance on the I'll start with this 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, does a lot of disruption at the moment, but maybe you can provide a little more color on 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 four times to five would get you that eight, 20 and four times to denigrate it a 40, which is only just below where the full year guidance is. So any commentary you can give us on on what kind of model underlying market demand improvement you're baking into into that full year guidance?

Mircea Dobre

Thanks, Jonathan. So let me maybe start with, you know, 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 wanted to take a very realistic approach to our guidance. And so we feel comfortable with what we have guided the Street to. That's number one and number two. In terms of your first question, I think at Q4 step up to Q one with the low watermark and some improved visibility in the health and wellness drives that growth.
Yes.
The only other color I'd add there, Nish, is in just reference the low watermark. 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 Q. one, both greater, but obviously, we're almost two 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 on that range for the first quarter with our prepared remarks.
But it's not isolated to one segment. Both segments expected to grow stepping up from Q4 to Q1. And as you highlight as we get into the other quarters, doing that kind of two, 10 run rate math behind that Study 40, so on not levels that the Company hasn't delivered in the past. And so we've got some confidence there that we can deliver those.

Nathan Jones

And then the 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 and something more like 20% to 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?
It fell 500 basis points as we go through the year.
Yes, so directionally, yes, I think we can exit net 22 ish range as we get into 2025 by the end of 2024, I think was what stepped it up over time. So a 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 that'll help us.
And then secondly, as we highlighted, the volume in our all the efforts we've done this year on the back end investments that Joseph referenced on our centers of excellence. As we continue to push more volume through that, leveraging that fixed cost base, it will help.
And then finally, that Balboa recovery cannot be underestimated. How quickly that dropped with you think about the cost structure that we have for that operation with our Tijuana facility. It's lower costs in other places and so as the volume increases, you get a bigger incremental drop than our other businesses.
And I'll just make one one, Lori, on the ag machinery excuse me, 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 the customer?
Nathan, I think you know, this is another area that we've gotten a lot of feedback from from, you know, everyone on the call and you know, 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, potential conversations. And even though I know we've talked about kind of commercial foodservice. We've talked about ag. We've talked about construction industrial. There's even some expanded areas like white goods. You think about things like laundry, dishwashing, things like that. That said, 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.
Fair enough.
Thanks for taking my questions.

Josef Matosevic

Thanks, Nathan transmitted from travels.

Operator

Mirc Dobre, Baird.

Sean Bagan

Yes, good morning.

Mircea Dobre

Just to follow up on the conversation with and on the system sales point, if you left it out of guidance for 24, but you know, since you're calling it out specifically as being left out of guidance, are we used to sort of to 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 what the sales cycle it would look like for the Saturday system sales.
Yes, good morning, Mig. I think you're opening with better than a zero chance you are pretty accurate. And, you know, like Tanya said, and I want to reiterate this is and continues to be a very heavy lifting and the subsystem system and 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 value again, John, I just wanted to give you a different lens to from my finance accounting perspective that ultimately we're not in control when any 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 were for and co-developing features products with them would tell me they're not going to commit to those dollars in services agreements that we have in place and we've been working them. So it's not a matter of, but if these are going to come, it's when and it's just were ultimately not a control question 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.

Chris Moore

Sure, Tom, I guess at least by my challenge in thinking through this opportunity, is that if I'm thinking of white goods or commercial foodservice versus ag equipment. Just the product cycles are different and how you would end up being specked in as a solution provider would look different. So that's what 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 on, I guess one follow up on down on Balboa or health and wellness as an end market. And can you maybe frame for us what 2023 look 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 has legs into you? Do you have visibility into that in 24?

Sean Bagan

Yes.

Mircea Dobre

In 2023, Meg was around 100 million watermark on 2024. We are seen encouraging signs. Obviously, as Phil mentioned, we have a couple of months now in the bag in Q1 and the trend continues to be positive at this point.
On to Shawn, I don't know if you want to covenant in one 2024?
Yes.
Well, I'd 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 one 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 of what we've announced and what we have coming this year. So certainly, as we look at our implied guidance within the segments, more of the electronics growth will come from Balboa than it will be innovation in 2020 for the.
And maybe any other thing I'd add, as you know, from a total electronics segment perspective, the piece that doesn't really get disclosed externally is we've been moving a lot of operations in 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, you know, at kind of a separate company level and Tom, you know. And so that's part of when we talk about just center of excellence and operational efficiencies and improvements in different areas, I'm a believer that we're going to see in 2024 and beyond.

Sean Bagan

Okay.

Chris Moore

My 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 ag specifically, I'm curious what you're hearing from from your OE customers in terms of their production plans and how that sort of jives with your revenue outlook, it would seem to me based on what I've heard from them that they're contemplating some pretty steep production cuts in 2024. So can you 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? Thank you.

Mircea Dobre

And make looking at the end market chart here, sitting right in front of us and going by geography and everything that you are seeing and everything we have seen and heard from our customers. It's been baked into our our guidance here for 2024, in particular, going to the product lines here, construction, North America, ag North America looks pretty balanced and we don't we don't see that steep decline in our product offering in Europe in the ag market. That's where we see steep declines. But again, we've baked this into our guidance. European construction is we have it color-coded here in the yellowish, so very balanced. So overall, 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.
So and just confirms, you know what Sean said earlier as we bake in all of our investments we have made in 2023 and improve up in improved our cost structure and reposition everything for growth as those markets recover.
Mig on and not just the product lines. But also as Asia comes back, we should see those decremental margins in our go in our favor, Sean?
Yes, I think of things just highlighted from that perspective, 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 we were aggressive in our RCBT. Sun Hydraulics business than our 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 levels where that's that Sun Hydraulics businesses, more distribution base than OEM-based. So more of that, but we have some direct weakness would come through that European fastener business. But overall, we feel good because of that overall diversification, not overly reliant on ag market construction and industrial are very important as well for us.

Sean Bagan

Okay.

Chris Moore

Thank you.

Tania Almond

You may now disconnect.

Operator

Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. One moment, please. While we poll for Quest.
There are no further questions at this time. I would like to turn the floor back over to Tania Almond for closing comments.

Tania Almond

Great. Thank you so much, operator, and thanks to 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.

Operator

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