HLIO - NYSE

Greetings, and welcome to the Helios Technologies Second Quarter 2024 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 for Helios. Thank you, Ms. Almond. You may begin.

Thank you operator, and good day everyone. Welcome to the Helios Technologies second quarter 2024 financial results conference call. We issued a press release announcing our results yesterday afternoon. If you do not have that release, it is available on our website at hlio.com. You will also find slides there that will accompany our conversation today. On the line with me is Sean Bagan, Interim President, Chief Executive Officer and Chief Financial Officer. Sean will review our second 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 have been provided in our 10-K filing as well as our upcoming 10- Q to be filed with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. I'll also point out that during today's call, we will discuss some non-GAAP financial measures which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP with non-GAAP measures in the tables that accompany today's slides. Please reference Slide 3 now. With that, it's my pleasure to turn the call over to Sean.

Thanks, Tania, and thank you all for joining us as I provide an update on Helio's second quarter results and outlook for the remainder of fiscal 2024. Given recent events. I am currently serving as Interim President and CEO, in addition to my CFO responsibilities. As we announced last week, the change in leadership was a result of an internal investigation and subsequent findings of that investigation. I am humbled and energized to be leading the Helios team during this period of transition. I am fortunate to have a talented management team alongside me, including our Presidents, Matteo Arduini, our EMEA Hydraulics Leader; Rick Martich, our Americas Hydraulics Leader along with leading Global Operations and System Sales, and Lee Wichlacz, our Electronics Segment leader. In addition to the presidents, I have a strong team working with me at the corporate level, who have all been invaluable. As a leadership team we are unified and focused on what we need to accomplish. We are supported by our Board of Directors, including Philippe Lemaitre with his expanded role from Chairman to Executive Chairman of the Board. With the situation now behind us, I am really pleased with how the Helios team has responded by maintaining their focus on executing our plans, serving our customers, and supporting employee development. While a search for a permanent CEO gets underway, we remain committed to our strategy as an integrated operating enterprise, delivering value and differentiation through our highly engineered mission critical hydraulics and electronics products, services and system solutions. Foremost, we are staying incredibly close to our customers. Our relationships are built around the engineering expertise we bring to help them solve their most complex problems, including increased efficiency, energy savings, higher productivity and/or electrification, along with achieving smaller fit and form factors. Regardless of where we are in a market cycle, the fact that we are sitting at the intersection of hydraulics and electronics enables us to help customers do more with less, always adding value for them. Our strategy to organize ourselves and serve in the region, for the region also allows us to efficiently satisfy customer demands globally. It is also worth highlighting that we are encouraged by the early interest of our Cygnus Reach software solution providing remote support for IoT smart devices. With its patented protection, it can be a market disruptor and differentiator for those customers that are looking for that first-mover advantage. Our results in the second quarter validate the strength of the Helios team and model. Consistent with the first quarter results, our Balboa Water Group recovery outpaced our sales expectations, which resulted in beating our second quarter sales guidance with our other businesses executing in line with our expectations. As we have talked about in the past, while very healthy, the Balboa business operates at a lower than company average margin level. Their outperformance therefore impacts mix. Though we were still able to generate a second quarter sequential step up in our adjusted EBITDA margins due to our incrementals from favorable volume. During the second quarter, we amended our credit agreement with our debt market lenders. The syndication process yielded a $100 million oversubscribed position, indicative of the strong support and relationship we have with our bank partners. I am grateful to the existing lenders that are choosing to grow with us, including our lead left arranger, PNC Bank, who executed our refinancing flawlessly. The other existing banks all received named agented roles and stepped up their commit and hold levels. Additionally, we targeted adding specific new lenders to round out what is now a stronger and deeper bank group that optimizes our capital structure in the near-term, but more importantly is strategically aligned to support the growth we are aspiring to achieve. In addition to upsizing our revolver by $100 million, we also extended debt maturities out to June 2029 and reduced our borrowing spreads. These enhancements equate to improved earnings, cash flow and available liquidity as compared to our refinanced credit agreement. We are fortunate to have assembled a formidable lender group and we value their support immensely. We are operating through the uncertain timing of when markets will rebound with actions to focus on the controllables in response to sustained macroeconomic and industry headwinds. These headwinds include compounding inflation, lowered PMI readings, and the well-documented agriculture cycle weakness. In addition, a prolonged cycle with elevated interest rates has contributed to weakening consumer confidence, especially for larger discretionary purchases. As a result, the industries we supply have seen lower demand in several of our end markets. All of our largest public company customers across various industries are projecting fiscal year sales contractions implied in their own fiscal year guidance. While the second quarter started off strong, we saw declines in demand in the latter part of the quarter, leading into the start of the third quarter. We have moderated our outlook accordingly. While we still could achieve some growth at the upper end of our range, we have adjusted our sales guidance for the second half of the year. There were several factors that contributed to our decision. Our end markets, specifically agriculture and recreational have been most impacted. This has directly affected our Faster fluid conveyance technologies business and our Enovation Controls displays and controllers business. Both Faster and Enovation mix higher towards OEM direct sales. When these OEMs are experiencing their own declining sales and pushing out production schedules, this tests our ability to grow. Notably though, our diversification into niche applications and newer markets outside of our core portfolio has been helping to offset some of the pressure we are seeing in our base business. Despite the challenging macro environment, the operational improvements we have made in the business are helping to mitigate the unabsorbed overhead from volume reductions. With the systems and processes we've implemented over the past year, we've improved our forecasting and visibility. This allows us to identify early indicators, adjust costs more quickly, and ultimately deliver more consistently on our financial guidance. We have the business positioned to still drive margin improvement over last year, partially because of these enhancements. Let me switch gears here to review our financials in greater detail, starting with our second quarter results that can be found on Slides 4 through 8. Sales came in at $220 million, exceeding our expectations as health and wellness experienced growth while industrial and mobile were relatively flat and agriculture and recreational had continued sequential weakness. Net-net, both of our operating segments were up sequentially with Electronics leading the way. From a geographic perspective, we were up sequentially in APAC 10% and the Americas up 3% while relatively unchanged in EMEA. Compared with last year, we experienced nice growth in APAC of 12% against a softer comparable, with a decline of 11% in EMEA and down 5% in the Americas, reflecting challenging end market conditions in those two regions. Gross margin expanded 40 basis points compared with the first quarter. The realignments made last year in our Centers of Excellence have started hitting their rhythm. They have positioned us well as we expect to sustain our margin improvements even during a pressured sales environment. Year-over-year, gross profit declined $5.2 million and gross margin contracted 120 basis points to 32.1%. We are working to return to the mid to high-30% range for gross margin over time. As you know, volume is a major contributor for us that increases fixed cost utilization. Non-GAAP adjusted operating margin of 16.4% in the quarter was nearly 200 basis points above the trailing quarter. While we still have a way to go, the sequential operating leverage clearly demonstrates how our SEA cost control efforts, combined with expanded gross margin translate directly to earnings improvement. The 190-basis point sequential improvement in adjusted EBITDA gets us back into the 20-percentile margin range and reflects the impact of our focused efforts to deliver profitable sequential sales growth with disciplined spending. Year-over-year, we are comping up against last year's best quarter. Our effective tax rate in the second quarter was 23% and is the result of regional mix within different tax jurisdictions. Diluted EPS was $0.41 and diluted non-GAAP EPS was $0.64 in the quarter and compared with the first quarter they grew 46% and 21%, respectively. Starting on Slide 9, I'll give more color by segment. Hydraulics financial results improved over the trailing period demonstrating positive operating leverage. While sales were up 2% over the trailing period, operating income grew 10%. Compared with the prior year, sales were down 4% with softness across several end markets and against a challenging comparable. Sales declined in agriculture, mobile, and industrial end markets. Foreign exchange had an $800,000 unfavorable impact on segment sales. Sequentially, gross profit increased $400,000, or 1%, and gross margin contracted 50 basis points reflecting mix. Gross profit declined $4.8 million year-over-year resulting in gross margin contraction of 180 basis points primarily due to fixed cost absorption on lower volume and higher labor costs. SEA expenses were down $1.7 million or 7% compared with the prior year period. We saw favorable results in the quarter due to lower labor and benefit costs. We have also targeted SEA cost control initiatives to better match the current demand environment and help streamline our businesses. Please turn to Slide 10, and we'll discuss the Electronics segment. Sequentially, the Electronics segment expanded $4.6 million, or 7%, driven by strong double-digit growth in health and wellness, consistent with the first quarter performance. Year-over-year, Electronics sales declined by $1 million, or 1%. Continued strength in health and wellness mostly offset the declines in industrial, mobile and recreational markets. Acquisitions contributed $1.2 million in sales in the second quarter. Foreign exchange was a $100,000 negative impact. Sequentially, Electronics gross profit took a nice step up by $3 million, or 13%, and gross margin expanded 200 basis points driven primarily by volume growth, operational focus on efficiencies and facility footprint optimizations. Gross margin was 34.6% and only declined by 10 basis points year-over-year. The sequential sales and gross profit growth drove solid operating leverage in the segment. Compared with the first quarter of 2024, operating income grew $3.2 million or 45% and margin expanded 370 basis points. This further demonstrates the incrementals that can flow through our business model as the volume returns. SEA expenses were down 1% compared with the trailing first quarter and up 9% with last year. We did not close the i3PD acquisition until the end of May, so the year ago period did not have it fully loaded into the compare. Please turn to Slide 11 for a review of our cash flow. We have continued to improve our cash conversion cycle. We generated cash from operations of $33.8 million, up 30% over the second quarter of last year and up 90% compared with the first quarter of this year. We continued to reduce inventory which is down 4% since the beginning of the year. This is a meaningful part of our efforts to improve our cash conversion cycle as we step through the balance of the year. Capital expenditures in the quarter were $8.1 million, or 3.7% of sales. Spending is focused on investments in machines, tooling and the EMEA footprint optimization. Turning to Slide 12, at the end of the second quarter, cash and cash equivalents were $45 million, and we had $308 million available on our expanded revolver. Total debt was down 4% or $22 million, from the end of 2023 and has shown steady declines over the last four quarters, bringing our net debt leverage ratio down to three times. I already covered our refinancing which gives us confidence in our financial position. We are driving our teams to accelerate our cash generation efforts and ultimately reduce debt further. We are proud of our 27 year record of dividend payments that we will continue to prioritize from a capital allocation perspective. Turning to Slides 13 to 14, as I mentioned, given the macro conditions resulting in lower order demand our perspective on the second half of the year is more cautious and we are adjusting our outlook for 2024 accordingly. In addition, our revised guidance reflects the operational actions we have undertaken to streamline our operating costs. The top line adjustments reflect a more challenging environment than we, or some of our industries, expected this year. I am pleased with the teams' ability to identify actions to offset the margin impact of the volume pressure and still have line of sight to potential top line growth at the upper end of our range in this environment. As shown, we are now moderating second half sales expectations which implies flat to up 3% compared to the prior year period. This equates to a full year sales range of down 1% to up 1%, or $825 to $840 million. Despite the sales moderation, we are maintaining our adjusted EBITDA margin guidance, which is in the range of 19.5% to 21.0%. We have adjusted diluted non-GAAP earnings per share to be in the range of $2.25 to $2.45, with the potential growth over last year at the higher end of the range. We are basing our sales adjustments on many inputs. Our external resources, whether our own OEM customer's production and sales expectations or industry market associations including NFPA, all point toward the softening order demand we are experiencing. This is causing us to moderate sales expectations for the Hydraulics segment. We are not able to offset the Hydraulics segment weakness with additional growth in Electronics as the OEMs there are signaling softness due to sustained higher interest rates, limiting consumer demand for spas, boats, and recreational products. We have calibrated CapEx projects, and will continue to drive working capital efficiencies to improve our cash generation during the balance of the year. Given the change in volume expectations, it has, and will take us time to flush through working capital. We still expect our leverage ratio to come down in the second half of the year as we strengthen our returns and realize the benefits of our working capital initiatives. Our third quarter estimate for sales is in the range of $192 million to $200 million. Even with a sequential step down in sales, we expect our efforts to improve efficiencies combined with cost adjustments will enable us to deliver adjusted EBITDA margin in the range of 20% to 21% for the third quarter. You can find the other modeling line items in the supplemental slides. Slide 14 provides some understanding of where we see our market and operational drivers by segment. Looking to Slide 15, I will speak to the progress we are making against the financial priorities we laid out at the beginning of the year for 2024. As we entered the year, we committed to driving sequential improvement in the first half, followed by second half year-over-year profitable sales growth. We feel very good about what the team has accomplished to-date, focused on execution and driving consistent and predictable performance. The second quarter's sequential top line growth, expanding margins, and disciplined working capital management validate the adjustments we have made in the business are yielding positive outcomes. For the third consecutive quarter, the Helios team delivered financial results that met or slightly beat our guidance. For the fourth consecutive quarter we applied cash generated from operations and reduced our debt. We are strengthening the underlying financial discipline and structure of Helios. Our goal is to elevate the returns on our investments over time and build on the positive momentum we have delivered over the past several quarters. As we embark on the second half of the year, we are confident we can continue navigating the choppy markets thanks to our diversification across geographies, end markets, and customers. As a reminder, we do not have a single customer that comprises more than 5% of our total company sales volume. We will continue to closely manage our controllables as we have made great strides in streamlining operations and preserving important R&D investments. We know that staying on the gas with innovation is key to emerging as a stronger company when our end markets stabilize. We will emerge from this market cycle stronger with great earnings power and a healthy balance sheet, positioning Helios to deliver stronger shareholder returns. In conclusion, I want to extend a heartfelt thank you to the thousands of dedicated employees worldwide who are tirelessly committed to serving our customers day in and day out. They are the lifeblood of our culture and organization. I am incredibly honored and committed to leading the ongoing execution of our strategy while building upon the positive momentum we are generating throughout our organization. The future is bright for Helios, and we are excited to deliver on our second half commitments. Lastly, thank you to all our customers, suppliers, shareholders and other stakeholders. Your partnership and support fuels our journey and drives our enthusiasm as we execute our transformation into a value creating, integrated operating company. With that, let's open the lines for Q&A please.

[Operator Instructions] Our first question comes from Jeff Hammond from KeyBanc Capital Markets. Please proceed.

Hi, good morning. This is David Tarantino on for Jeff.

Hi David.

David.

Maybe just to start out, could you share any updated thoughts on the CEO transition, including some color on the ongoing search process and what the expected timeframe is?

Sure. Hi David, good morning. Thanks for the question. So our Board will be conducting a search, as we disclosed, and utilizing a leading search firm. They will be considering both internal and external candidates. But certainly my focus right now is executing on the strategy of the business, keeping the business focused. As I highlighted in the prepared remarks, we've got a very talented management team supported by our Regional Presidents and corporate staff. So we're confident we'll get through this transition period and come out stronger on the backside.

Okay, great. And maybe, could you give us some color on what's informing the reiterated margin outlook, particularly what drives margins to be relatively unchanged in the second half versus the first, despite what is a seasonal drop in sales, and maybe kind of a softer than expected end market backdrop than a couple of months ago?

Yes, sure. So I think you've seen the sequential step up that we've experienced from the back half of last year, as a lot of the work we did last year, whether it was capital expenditure related expansions or focus on efficiencies come to fruition this year. We've seen those benefits in the first half. We talked about the disruption last year with our manifold center of Excellence in Daman, where we expanded that facility, nearly doubled it, and moved all that production from Sarasota up there, really starting to see that hit its run rate. And we -- some of the metrics we look at are kind of the past due backlog on orders and such. And we really worked that down to a normalized level and so gotten rid of a lot of the inefficiencies we experienced last year. As we get to the back half, certainly think some of the cost actions we have taken will continue to provide that benefit. We expect to maintain our margin profile on the gross profit margins and get more leverage out of our operating expenses. So overall, the mix should be a little bit favorable as well and continue just to focus on margin improvement quarter-in, quarter-out.

Okay, great. Thank you. I'll pass it on.

Thanks, David.

[Operator Instructions] Our next question comes from Nathan Jones from Stifel. Please proceed.

Good morning. This is Adam Farley for Nathan.

Hi Adam.

I wanted to follow up on your comments about having potential line of sight to the top end of your sales guidance. What areas could lead to the upper end of revenue guidance range?

So if I look at it by business, I'll just kind of go around our Hydraulics and Electronics segment. But from a Hydraulics perspective, what we keep an eye on, our largest business on Hydraulics is those distributor inventory levels, and we've seen them kind of operate in the same range for the last three quarters, not necessarily elevated, not necessarily low. So fairly consistent and that part of the Hydraulic segment drove significant increases year-over-year in the first half, and we expect that to continue in the back half. On the flip side, over in Europe, with our faster business heavily concentrated to ag, we have experienced year-over-year declines and expect that to continue into the back half as we have great line of sight with our large OEM customers that provide long range indicative orders that get locked as they get closer to the current quarter. But given the outlook there, that's what would lead us to drop in some of the Hydraulics guidance in the back half. On the Electronics side, you have the innovation controls business that's more indexed to that rec marine customer and similar to the faster OEMs, we get good indicative orders, but we've seen them continue to have weakness. On the Balboa side, the health and wellness seen a nice recovery there. We know we are comping up against a lower period coming out of COVID but continues to drive year-over-year growth. So what could change, to get to the answer to your question, I think with interest rates that certainly could help stimulate some end market demand that would help give OEMs more confidence to build and as they raise their production schedules, that would increase purchase orders by the end of the year for us. But as we took down our second-half guidance, we factored that in considering where our current order rates are at. So we think we're balanced with our updated guidance, but could have the opportunity. And then the last piece I would highlight is geographically, we're seeing real strength and recovery out of the APAC region. And so if that pace continues that could be another opportunity to get to that upper end.

All right, thank you. That's really helpful. And then I just wanted to shift gears related to capacity additions. Are all your capacity additions complete now? And what progress has been made on generating incremental wins to full capacity?

Sorry, can you repeat the end of that question, Adam?

Yes. Has there been any progress made on generating incremental wins to fill the capacity additions?

Got it. Incremental wins. Sorry, just didn't come through. So from an overall footprint perspective, nearly all are complete. I would say the remaining one would be over in Europe at our faster facility, it's less about adding significant amount of capacity, it's more about efficiency and optimizing our overall footprint within Europe. So the ones we undertook last year within the Americas, particularly here with the Daman addition, and then also with our Tijuana facility down in Mexico, are fully complete and running. So in terms of filling up that additional capacity, the teams are aggressively pursuing new markets, expanding with existing customers as we look for system solution opportunities, whether that's within a segment. So a subsystem solution within Electronics or a subsystem solution within Hydraulics, meaning we're bringing together existing products within the portfolio, or collectively bringing them all together for a full system solution. All of those opportunities are still in play, and we continue to increase that funnel of opportunities. From a diversification perspective, we've talked about commercial food services in the past. We do have incremental revenue that will be coming in, in the back half related to that market, that will be insignificant. But as we get into next year creates a significant growth opportunity for us, given the amount of potential customers we're working with on solutions there. And then finally, I would highlight some of the niche markets that we are in, provide a bit of a diversification for us and an opportunity to continue to grow, whether that's geographically for the markets or customers that we serve. And just to highlight a few of them, mining applications, forestry, pharmaceutical, dental, medical devices, aerospace and entertainment. So those are the ones that could potentially fill up some of that capacity.

That's great. Thank you for taking my questions.

Thanks, Adam.

Our next question comes from Chris Moore from CJS Securities. Please proceed.

Hi, good morning, guys. Thanks for taking a few questions. I hope I won't ask any that are asked already. I had some phone issues. Maybe just thank you for kind of giving the Q3 pieces in the guide. Can you just provide a little more detail on the flow between Q3 and Q4 and the biggest wildcards?

Hi, Chris. Sure. So yes, implied in our prepared remarks were a guidance range of $192 million to $200 million for Q3. We would expect that Q3 and Q4 could end up looking very similar. However, want to preserve the opportunity for those -- per the earlier question, some of the incremental opportunities. So we're trying to really, as we have been in the past couple quarters, be very specific in where we see it. And we have great line of sight in the current quarter. Many of our customers, as we've talked about, the large OEMs, give us long range forecasts. But then there are the other businesses where they're -- where they're shorter cycle from an order perspective, so we don't have as much visibility. So like with our health and wellness, that has been really strong in the first half and overachieved, our expectations, typically get kind of four to six week of firm orders there. And as we head into the back half of the year, we know seasonality wise that Balboa business typically trails off in the fourth quarter. But there could be an opportunity there for the current strength that we experienced in the first half to sustain. And then even with our largest business on Hydraulics, as you all know, our lead times are very strong. We did get a little behind past due through that Center of Excellence transition last year with Daman, but we really have worked through that entire backlog. And so that's one differentiation, competitive advantage we have is our ability to fulfill orders quicker. And so that will -- and we see that with the distributor inventory levels not carrying as much inventory. So that could provide a nice opportunity as well.

Got it. Very helpful. I didn't hear much talk in terms of the big system sales that you're working on with the OEMs. Just fair to say that those are still progressing nicely?

Yes, I would characterize it that any system sale we've ever alluded to or spoke to are still in play. It's just very long cycle. And me coming from that OEM space, there's various stages that they come in. And when we're pursuing a large one, that is displacing different suppliers. If you think across a manifold, a valve, a coupler, a controller, a display, even adding in our Cigna software on the backside, that's a pretty drastic change that you're displacing many different suppliers. So whether it's very upfront in the stage of product planning, product validation, working with engineers from the potential customer, to then getting into the bill of materials and productions and pre-productions, and validating to actually us getting a purchase order and then putting into production, that's a long cycle, multi years. But in addition to the ones we've spoken about, there are many new ones we are pursuing as well, and we are firmly committed. We think that's a significant value creator, a value proposition that we bring that no one else does from an electro hydraulics perspective, that really will help drive value and growth for us in the longer term.

Got it. Helpful. On that front I know there's kind of a fixed timeline to some of this stuff. But in terms of the current market environment, ag still saw off lots of economic uncertainty. Does that likely -- does the backdrop likely or potentially accelerate these system deals as they're looking at companies looking to further drive competitive positioning? Or does it more likely slow the process because of so much uncertainty?

Well, that's where we would like to believe and think, and that's why we try and bring these solutions to those customers even before these OEMs may even know the full capability of what we offer. And so potentially could accelerate it, typically our annual production launches, and you got to hit that cycle. And that obviously varies by industry, by market, but potentially could be something that would accelerate because it is a clear differentiator for those OEMs, the solution we provide.

Got it. I will leave it there. I appreciate it, guys.

Thanks, Chris.

Thanks, Chris.

Our next question comes from Jon Braatz from Oppenheimer. Please proceed.

Good morning, Sean. Tania.

Morning, Jon.

Hi, Jon.

Sean, are you making any labor force adjustments? And I'm thinking in particular, maybe at Faster, the ag cycle is down, and sometimes these ag cycles aren't one year phenomenon, they can be two, three year cycles. And so has there been any adjustments in the labor force, maybe beyond attrition? And is that something that would be contemplated?

Yes. So, Jon, thanks for the question. So with respect to Faster, not only are we focused on the labor and attrition, we haven't taken any significant layoff, but we are taking the opportunity, particularly through the summer holiday period and planning for the holiday period at the end of the year, to reduce production levels. The other lever we have with the Faster business is in-source versus outsourcing of different manufacturing processes. So we're bringing more of it in-house, which allows us to flex up and down, obviously our production levels and absorb our costs more efficiently, but also on the periods of upswings allows us to ramp quicker as well when we do outsource. So we've got a few things under our control. And what I would highlight is our Faster business, led by Matteo Arduino, does a remarkable job navigating those changes in end markets and those cycles, but he also has done a nice job to diversify away from being so reliant on ag. And so there are other pockets that are performing well for that Faster business and particularly our Faster business overseas from the EMEA perspective. So the Asia Pacific region, our Brazil business, our Americas business are actually performing pretty strong that are helping offset some of that weakness. So overall, the levers that they have and the automation that we've invested in over there has really helped maintain the margins.

Okay, thank you. And secondly, the health and well -- as you pointed out, the health and wellness market has been pretty good the first half of the year, and obviously it has exposure to the consumer. Are you surprised in regard to its strength and how do you see that unfolding as we go forward beyond maybe the seasonal decline that we typically see?

Yes, that's a great question because I would say no, I'm not surprised at where it's at. From a perspective -- to put it in perspective, where we're operating right now for the first half provided nice growth year-over-year, but the comparable is very soft. And even the first half run rate isn't back to kind of pre-acquisition levels. So it has opportunity to run. Now it ran significantly throughout COVID, more than doubled. So we're coming off of softer comps, but from a year-over-year, it's nice growth. Where I'm also encouraged is we had announced a strategic alliance with WaterGuru, which gets us into a new segment of product to distribute. And we already have our first OEM that's committed to that solution. And so just as a reminder, it's monitoring of chemicals and water temperature and such, and it's integrated into our Balboa app with our -- so customers can see and view all the key indicators for the performance of their spa. And over time, we'll get into the treatment and the chemical side. So it's a significant green shoot for us of a piece of that market that we have never played in before. So very confident that we'll continue to drive growth and get that back to a more normalized level.

Okay, Sean, thank you very much.

Thanks, Jon.

Our next question comes from Mig Dobre from Baird. Please proceed.

Hi, good morning, Sean and Tania. It's Joe Grabowski on from Mig this morning.

Hi, Joe.

Hi, good morning. Most of my questions have been answered. I did maybe have just a few more cleanup questions. You know, I guess when you talked about the declines in demand in the latter part of the quarter leading into the start of the third quarter, can you maybe talk about that a little more? Was it kind of gradual at the end of the quarter into third quarter? Was it abrupt and does it feel like demand has leveled off here early August or are things still sort of choppy?

Yes, no, I would say it was gradual. It wasn't a significant cliff drop off, more so what we did experience that last year. I would also highlight that we had seen some of the weakness in longer term orders that weren't committed that as they get closer to the second half come into that lock period, and so concentrated though, to that ag market and the recreational market more specifically. And then just with that shorter lead time on Balboa and knowing we're getting into the lower seasonality side of that health and wellness, just want to be cautious and not over commit there, not assume that our over delivery in the first half for health and wellness would continue. And so I wouldn't call it necessarily a significant surprise. It was clearly leading indicators by our public company customers. Seven of our top 20 customers are public companies and kind of seeing what they have reported and their adjustments and all calling for declines year-over-year in their fiscal year sales. So didn't catch us by surprise. But again, we think our recalibrated back half expectation, full year expectation covers the most likely scenario that we have visibility to right now.

Got it. Okay. And then I know there's been a couple questions about the sales guidance and kind of the cadence of that guidance. I'm going to maybe take another shot at it. The midpoint of your Q3 sales guidance were sales down 3%, and then that would mean that the midpoint of your full year sales guidance, Q4 would be up 6%, and that would be the first top line growth in the last several quarters. So that Q4 kind of implied 6% growth, is that just kind of bumping into a couple of years of easier comparisons? Or is there anything maybe with the new capacity additions that would allow the Q4 growth to be in that range?

Yes, I do believe the compare plays into that. In addition, I would highlight that the capacity expenses, as I mentioned last year, are now at run rate. So we were impacted last year by building up that backlog from our manifold Center of Excellence. And so from that perspective, Q4 was a little bit impacted last year. So it makes for the easier comp this year. But we -- I agree with your observation that it would be the first quarter that would provide growth. And again, given our visibility into order demands and the way the markets are performing we're confident we can drive growth in the fourth quarter.

Got it. Okay, thank you. And then final question. I know we've talked about new customer wins, new end markets. I wanted to maybe ask specifically about food equipment. I know you guys had innovation, had a booth at the NRA show in Chicago in May, but I also know that Joseph had some connections to the food equipment end market. So maybe any updates you can give us around penetration into food equipment?

Yes, we're very excited about the opportunity food equipment presents. Certainly no one person is driving that. In fact, our President of our Electronics segment, Lee Wichlacz, that I referenced in the prepared remarks, spent a significant part of his career in that segment. And with his experience and the sales team's opportunities, what the funnel currently looks like for that, we're confident that's going to provide incremental growth as we get into next year. In fact, we'll generate a little bit of revenue in the back half of this year from that. So a lot of focus there. We think we bring a lot of value proposition to that marketplace, particularly on the electronic side with our displays and controls, and then weaving in our Cygnus software remote platform. So in addition to the show you referenced, we are also at the Vegas CES show and got significant interest, not only food service, but other markets. that that software could be very meaningful as we get into next year as well.

Got it. Okay. Thanks for taking my questions.

This concludes our question-and-answer session. I would like to turn the floor back over to Tania Almond for closing comments.

Great. Thank you, operator, and thanks to everyone for joining us today. Feel free to reach out to me if you have any follow-up questions. Enjoy the rest of your summer. It's disappearing quickly and we'll look forward to seeing you back on the road soon. Have a great day.