HLIO - NYSE

Ladies and gentlemen, greetings, and welcome to the Helios Technologies Second Quarter 2025 Financial Results Conference Call. [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, operator, and good day everyone. Welcome to the Helios Technologies seconds 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 at hlio.com. You will also find the slides that will accompany our conversation today as well as our prepared remarks. Here with me is Sean Bagan, President, Chief Executive Officer and Chief Financial Officer. While the search process for a new CFO is ongoing, please welcome back our Vice President, Corporate Controller, Jeremy Evans as well. Sean will start the call with highlights from the second quarter as well as comments on our CFP divestiture announcement then hand it over to Jeremy to review our second quarter financial results in detail and our current thinking on the latest tariff impacts on our business. Sean will then conclude our prepared remarks with our latest thoughts on our 2025 outlook, financial and operational priorities and key focus areas. 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 can be found in our annual report on Form 10-K for 2024 along with our upcoming 10- Q to be filed with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. I'll also point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP with non-GAAP measures in the tables that accompany today's slides. Please reference Slides 3 and 4 now. With that, it's my pleasure to turn the call over to Sean.

Thanks, Tania, and welcome, everyone. We appreciate you joining us today. Before we walk through our second quarter results, I'd like to take a moment to recognize a special milestone in our company's journey. This year marks the 55th anniversary of Helios Technologies, a moment of gratitude and celebration. I had the privilege of celebrating a meaningful milestone with the Sun Hydraulics team on Saturday evening, a perfect mid-summer outing in the local community at the Bradenton Marauders game, the minor-league affiliate of the Pittsburgh Pirates. With two outs and two runners on base in the bottom of the 9th, the Marauders were down by two runs. Then, in a thrilling finish, Tony Blanco Jr. launched a walk-off home run to seal a dramatic 6-to-5 comeback win. The symbolism couldn’t be more fitting for the Sun Hydraulics and Helios teams as we look ahead with renewed energy and determination to make a strong comeback in the second half of the year. We would not be here today without the vision, determination, and relentless spirit of those who came before us, specifically from our largest operating company, Sun Hydraulics. From our founders Bob Koski and John Allen, who laid the groundwork with bold ideas and a pioneering mindset, to the generations of employees and partners who helped build and sustain this company through decades of change and growth, this milestone belongs to all of them. To every individual who has contributed to our story over the past 55 years, thank you. Your commitment, your belief in our purpose and your dedication to excellence have shaped who we are today. As we honor that legacy, we remain firmly focused on the future, committed to innovation, to our customers, and to creating long-term value for our shareholders. Now, let's turn to the highlights of our second quarter performance. We are pleased to have delivered second quarter results that surpassed our internal expectations, demonstrating resilience and disciplined execution in a continued dynamic environment with challenged end markets. While sales and earnings declined in the quarter compared to the prior year, the performance reflects solid progress against our 2025 key focus areas and financial priorities, which positions us extremely well for the second half of the year. Sales in the quarter were $212 million exceeding our outlook on stronger than expected Hydraulics segment sales, also aided by foreign exchange. Adjusted EBITDA margin of 18.6% was also above our outlook even while somewhat dampened by unfavorable product mix and tariff impacts. In addition to stronger than expected second quarter sales, margins and earnings, we also generated near-record cash from operations of $37 million and used that to further strengthen our balance sheet. We continued to reduce debt which is lower by $67 million from the year ago period, improving our net debt to adjusted EBITDA leverage ratio to 2.6x. We are targeting a sub-2x leverage ratio that will give us flexibility from a capital allocation perspective. We initiated our previously announced share repurchase authorization by repurchasing 200,000 shares of common stock at an average price of $32 per share in the quarter. We believe that to be an excellent use of our capital especially as we consider the opportunities before us to deliver organic growth and return adjusted EBITDA margins to the 20% plus range. Also recently announced, we have signed a definitive agreement to sell Custom Fluidpower, our Australian-based hydraulic fluid power and service provider business to Questas Group for AUD 83 million or approximately $54 million equivalent at current foreign exchange rates. On a standalone basis, the Custom Fluidpower business, also referred to as CFP, has been a remarkable growth company under the Helios umbrella. Since purchasing the business in 2018, CFP's sales have expanded every year, growing to AUD 92 million or $61 million equivalent for fiscal year 2024. More impressive, earnings have more than doubled over that same comparable period, including adjusted EBITDA USD equivalent growing from approximately $4 million to $8 million. As we are refocusing our go-to-market strategy and prioritizing our capital allocation to improve our ROIC, it became clear Helios and CFP would be better served as strategic partners versus related parties. Headquartered in Sydney, Questas is one of Australia's leading providers of hydraulic solutions and currently has approximately 850 employees across 37 locations. We believe Questas is the ideal owner for CFP. Importantly, we have solidified our long-term relationship with Questas through an exclusive distribution agreement between them and Sun Hydraulics for that region. This fosters a partnership where each party's success contributes to the other's advancement. Our plan is to use the cash proceeds from the transaction primarily for further debt reduction as well as investment into our core manufacturing and innovation. While the divestiture will reduce our sales and earnings run rates, it will improve margin rates within our Hydraulics segment and at a consolidated Helios level. In the quarter, we also made progress aligning our business to better serve our customers by structuring our people and processes around our products and brands within our Hydraulics and Electronics segments. This structure enables our go-to-market strategy and improves accountability for performance. This approach keeps the operating teams closer to our customers to better understand their needs. In addition, we have simplified the business. As mentioned last quarter, we have eliminated fixed cost and reallocated personnel resources from the Helios Center of Engineering Excellence in San Antonio, Texas. This has enabled us to concentrate our talent within our brands and drive accountability with the engineering teams for the products we bring to market. We're taking decisive steps to refocus the organization in order to drive better outcomes. We are working hard to make Helios a better business through relentless commitment to customer needs, cost discipline, refined capital allocation and operational efficiency. From a governance perspective, this quarter, we also fortified our Board of Directors through the appointment of Ian Walsh. Ian is currently the CEO of FDH Aero. His strong leadership experience in manufacturing, commercial aerospace and defense industries illustrates the very relevant operational and strategic expertise he brings. This returns the board to seven total members. I will now turn the call over to Jeremy to cover the details of our second quarter financial results and then I will come back to discuss our outlook and highlight the innovations we are advancing in our markets.

Thanks, Sean, and good morning, everyone. As I review our second quarter results, please reference Slides 5 through 9. As Sean mentioned, sales in the quarter were $212 million exceeding the top end of our outlook range which was $206 million. Note, foreign exchange contributed to the over achievement, favorably impacting sales by about $3 million dollars compared with our outlook assumptions. We estimate the impact of customers pulling orders ahead because of the announced tariffs was minimal in the quarter. Regionally, EMEA grew 5% this quarter over last year, while sales declined in the Americas and APAC. Though, APAC sales in our Electronics segment were up 27% year-over-year driven by the health and wellness end market. The EMEA growth was driven by returning demand for Faster products within our Hydraulics segment. While consolidated year-over-year sales comparables are still negative, the profitability flow through on our sequential sales step-up validates the leverage we can quickly see in our model with volume growth. For the quarter, gross margin contracted 30 basis points over last year. The decline in labor and overhead costs partially offset lower volume, higher material costs, and net tariff impacts. Sequentially, gross margin expanded 120 basis points on higher volume primarily in the Hydraulics segment. We continue to prioritize operational efficiency. We believe our focus on safety, quality, delivery and cost fosters creating a culture of accountability and customer-centricity that aligns with our shared values. Operating income in the second quarter was down $4.1 million, reflecting the $3.1 million decrease of gross profit on lower volume, $0.6 million increase in SEA expenses primarily due to the leadership change in the Electronics segment and an additional $0.4 million increase in amortization as a result of our HCEE restructuring previously mentioned. Operating margin declined 150 basis points to 10.3% and adjusted EBITDA margin declined 150 basis points compared to the prior year period. Our effective tax rate in the second quarter was 23.8%, reflecting the income mix in the various tax jurisdictions. Diluted EPS was $0.34 in the quarter, down 17% over last year. Diluted non-GAAP EPS was $0.59 in the quarter, down 8% over last year primarily as a result of the lost leverage from the 3% decline in sales, but importantly, up 34% over the first quarter. Looking to Slide 10, I'll give more color by segment. Hydraulics sales declined 3% over the prior year period. This decline reflected weakness in industrial and mobile end markets, while agriculture started to show signs of stabilizing for the first time in 8 quarters. Foreign exchange had a favorable $1.5 million impact on the segment compared with the prior year period. Hydraulics' gross profit and gross margin grew year over year, 4% and 220 basis points respectively, primarily due to lower material and direct labor costs partially offset by lost leverage on lower volume and net tariff impacts. Operating income was up $1.1 million or 5% compared with the prior year period reflecting the growth in gross profit, partially offset by a modest operating expense increase. SEA expenses were up 2% mainly due to higher labor and benefit costs and increased R&D investment. Please turn to Slide 11 and we'll discuss the Electronics segment. Year-over-year, Electronics sales were down 4%. Sales across most end markets declined, most significantly from the recreational market this quarter. We see end markets with shorter lead times still under pressure, such as the more consumer-facing markets. Though, OEMs are focusing on platform development which could lead to potential growth going into next year. The 18% decline in Electronics' gross profit and 530 basis point decline in gross margin was primarily the result of higher freight and duties costs, including a $2.4 million expense related to a product import classification change, higher material costs and a heaver mix of Balboa sales which has lower average margins. SEA expenses were down 2% year-over-year, primarily due to realized cost savings from the HCEE restructuring previously mentioned. Operating income declined by $4.4 million despite the cost savings reflecting the decline in gross profit. Operating margin for the segment was 8.2%, or 11.6% less the classification true up. Slide 12 shows our focus on cash management continues to pay off with a trailing 12 month free cash flow conversion rate of 291%. As Sean mentioned, we generated cash from operations of $37 million in the quarter, a 10% improvement over the second quarter last year even on lower sales, as a result of good management of working capital with our cash conversion cycle the lowest it has been since the first half of 2022. Inventory increased 4% from the prior year period reflecting preparation for sequential sales growth. Capital expenditures in the quarter were $5.4 million or 2.5% of sales. As we have noted previously, our capital expenditure plans for 2025 will be prioritized with a focus on maintenance and productivity enhancements that demonstrate evident returns on investment. Turning to Slide 13. At the end of the second quarter, cash and cash equivalents were $53 million and we had $359 million available on our revolving lines of credit. We paid down debt for the eighth consecutive quarter. We have reduced debt by 13% or $66.5 million over the last 12 months. Our net debt to adjusted EBITDA leverage ratio is down to 2.6x from 3x a year ago. Our capital priorities remain focused on further reducing debt, generating organic growth, opportunistically repurchasing shares and paying our long-standing dividend, as we have consistently done for over 28 years. Turning to Slide 14, let me provide an update on the tariff situation and the current expected impact to Helios. As a result of changes in the tariff levels since our last earnings call, the total estimated impact of direct tariff cost to the second half of 2025 has been reduced to about $8 million. We continue to expect that we can ultimately offset a large portion of these impacts through our mitigation efforts and use the competitive positioning here in the U.S. to our advantage. As we have discussed before, we believe our in the region, for the region strategy continues to work in our favor. Slide 15 provides the mitigation efforts we have been working on. Some updates on our progress from the last quarter include: finding alternative non-China based suppliers for LCDs and certain metals used in our Electronics products; reducing the number of our products manufactured in our Tijuana, Mexico facility that are not USMCA compliant; transferring a significant portion of our previously exported sales to China from the U.S. to be fulfilled through our APAC facilities; and Implementing very targeted surcharges on the products most impacted by tariffs. With that, I will now turn the call back over to Sean.

Thanks, Jeremy. Turning to Slides 16 and 17. We have delivered a better than expected first half of 2025. This was capped off with the month of June delivering positive sales growth over the prior year period for the first time in 2025. We expect year-over-year growth every month for the balance of the year and are off to a good start in July. This is encouraging after 12 consecutive quarters of sales declines. Our consolidated Helios order backlog has grown every month so far this year. We have not seen this trend since the beginning of 2021. We originally established a full year 2025 outlook when we reported year end results for 2024 on February 24. Last quarter, with all of the tariff uncertainty we said we were not withdrawing our full year outlook, but we were shifting our guidance to focus on just the next forward quarter. This is where we have the highest visibility and have established a track record with meeting our commitments over the last seven quarters. We have more confidence now based on our first half performance that we will grow 2025 annual sales above 2024 levels. Depending on the exact timing of closing the CFP transaction, we see a possible outcome of delivering full year sales above the high-end of our initial estimate of $825 million. We will further refine this on our third quarter earnings call. Looking forward, we are encouraged by the relative stabilization we have seen occurring over the past few months in our agriculture, mobile, European construction and health and wellness markets. Our EMEA regional sales are strengthening for the first time in approximately 2 years. We also have the advantage of softer comparables as we enter the second half of the year. Although we have experienced continued persistent weakness in the broader industrial and recreational markets, we are calling for a stabilization of industrial and an acceleration of recreational markets based on our orders from our customers in those markets. PMI readings have been choppy, but have shown some pockets of strength relevant to the regions we serve. Last week's better than expected U.S. GDP reading has economists reducing their expectations regarding a potential recession in the near term. Overall, our distributor inventories have declined to a level that would suggest we could be near a restocking threshold. We are cautiously optimistic, but acknowledge there is still a good deal of external noise, including changing tariff headlines and stagnant interest rates, equating to a dynamic and often unpredictable macro environment. We are excited about the longer term growth prospects with the strength of our team and changes recently made intended to spark our momentum. We anticipate third quarter sales to be in the range of $208 million to $215 million, up about 9% over the prior year period at the midpoint of the range. This includes the contribution from CFP as we expect to close that transaction in about 60 to 90 days. We anticipate fourth quarter sales growth rate to accelerate further beyond third quarter growth rates, again anchored back to our strengthening order book, anticipated end market performance and year ago comparables. We are projecting adjusted EBITDA margin to be in the range of 19.5% to 20.5% in the third quarter, remaining a bit depressed compared with last year due to segment mix and tariffs, but likely continuing to show sequential improvement. As a reminder, in the third quarter last year there was a favorable stock-based compensation adjustment of $5.5 million as a result of the prior CEO's termination. Diluted non-GAAP earnings per share are expected to be in the range of $0.60 to $0.68 cents, reflecting continued advancement of the bottom line. Turning to Slides 18 to 21. The key to our success will be grounded in our organic growth driven by innovation across the organization. New products are being launched at a faster pace, as seen here by the numerous value-add solutions that we have brought to market in 2025. I am very proud of how the team has kept their foot on the gas and accelerated our cycle times to market for new products, many in white spaces providing incremental sales opportunities while not cannibalizing existing sales. This is a great example of how we are controlling what we can control in this dynamic operating environment. A central pillar of our go-to-market strategy is to drive growth by deepening relationships with existing customers and expanding into new markets where we have a strong right to win. Let me conclude by saying how encouraged I am about the progress we have made as an organization in a relatively short time. Customer engagement has improved, the team's excitement about our future is elevated and the change in our operating structure has allowed for greater innovation and accountability. We continue to build the business and are creating a platform that can leverage our strengths and return the company to a premium margin profile. The sale of CFP is a demonstration of our willingness to improve our margin profile, even if it means temporarily shrinking our sales. This move will afford us greater flexibility to make more aggressive capital deployment decisions to fuel our future growth. We remain focused on improving our margins across the board and will continue to evaluate all opportunities within our product portfolio to drive efficiency and generate higher profits. I remain confident in our ability to continue executing on our commitments. I would like to thank each one of the Helios employees across the globe for all their daily efforts as they are building the pathway to a very bright future for our collective company. As we celebrate our 55th anniversary, we stand on the shoulders of the remarkable CEOs who paved the way for Sun Hydraulics in its earlier days, including Bob Koski, Al Carlson and Clyde Nixon. We honor their vision, leadership and dedication. We also recognize the legacy of the companies that have become part of the Helios family. Their decades of innovation and expertise now enrich the vibrant, unified organization we are building together. 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 lines for Q&A, please.

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

So maybe to start, give us a sense, Sean, where you really think markets are inflecting more favorably and where you think maybe it's still mixed, but you're winning because of better customer engagement, the go-to-market approach or some of these new products?

Yes, Jeff, I would answer that kind of by our business. And where we've seen over the kind of the first half of this year growth was still in the health and wellness, and that's frankly a market recovery. It's still not at a healthy spot from an overall market perspective. So there's still more room to grow, but that's just on the easier comp. So for the first half of the year, that business was up. What evolved in the second quarter was with our Faster business in Europe. Our European region grew and that was heavily ag- driven, starting to see some clear signs of ag recovery after 4 years of prolonged downturn, at least in the U.S. market from a registration perspective. And I think that's just an indication of healthier dealer inventory levels in those channels and the OEMs get more confident. You see it in their results and stock prices and valuations and all that as well. So those were the emerging ones. But as we now kind of look ahead into the back half of the year, we actually believe all of our main businesses will grow. Sun Hydraulics, Faster, Enovation Controls and Balboa. There's a clear recovery coming in our Enovation Controls business in the recreational markets. And again, I would point that to a little bit like the ag cycle where it's been depressed and we're benefiting from the softer comps that we had last year, but we're seeing those channels starting to get refilled and that as us being a supplier into that, we feel that earlier and see that earlier. So those are some of the moving pieces we see, but we're really confident in the back half with the growth we're seeing.

Okay, great. And then I think I understand that the Custom Fluidpower divestiture, just wondering if there's anything else you're considering from a non-core standpoint? And then I know you've gotten a lot of questions around all the capacity adds and how you're thinking about maintaining capacity or perhaps cutting it back. And just want an update there.

Yes. I'd just start on the CFP divestiture and highlighting what a remarkable business it has been and an asset it has been. It just doesn't fit strategically. And what I'd point to there is roughly 10% of CFP sales are actually Sun Hydraulics cartridge valves. The other 90% really doesn't have anything to do with our business. It's engineering services. It's selling other competitive products through their distribution channel. So we're remarkably excited by partnering with Questas Group for a long-term exclusive distribution for Sun Hydraulics. With their scale and reach, we expect that to be a top-performing market and significant new growth opportunities for us with that business. And by the way, for our shareholders, it has been a good investment. We've continued to grow the business, as we indicated in our prepared remarks, every year. We've owned that business. However, over the last 3 years, last 12 quarters, our Helios revenue has shrunk. And so from a mix perspective, with their EBITDA profile where it's at relative to the company, it's been fairly dilutive. And so we're excited about what the financial profile will look like going forward. As it relates to our other businesses, I would say, it's an ongoing assessment that we're always looking at our portfolio. Nothing imminent, nothing further planned at this point. But I'd point to the CFP decision coming out of our strategic planning process we did as an organization last year -- last summer at this time. And just a little more deal color in that. The recommendation to the Board was made in December to sell that CFP business. And it took a little bit of time, obviously. You got to find a willing buyer. And with Questas, we likely could have got the business sold earlier, but their private equity sponsor went through a transition midway through the process. And by the way, selling a business in Australia with the time differences isn't the easiest geography to do that with. So it took a little bit longer than we would have liked. That said, we're going through that same strategic planning process currently and we'll continue to look for opportunities to refine or improve the portfolio. But with this particular divestiture, it's going to provide us with a lot more flexibility moving forward as our debt gets to a much more manageable level as well. And then your last part on the capacity side, absolutely continue to look at that and our desire to run all of our plants efficiently is standard work and continuing to look at utilization and such. And given our back half plan, I've said this already on previous calls, we want to grow into that capacity. We want to show we can do that and get the leverage. And I think -- I mean, just looking at our Hydraulics performance over the last quarter from the first quarter to the second quarter, you see those incrementals come through strongly, almost $15 million more of revenue and significant expansion on the gross profit line. And implied in our guide, you'll see more of that in the back half of the year and why that gives us confidence to continue to grow into that capacity. And then the last thing on it is each one of those businesses -- it's the beauty of Helios from a diversification perspective and such, but each of those businesses comes with their own manufacturing plants. We don't have combined manufacturing between Enovation and Faster and Sun and Balboa and all the other acquisition companies we've acquired. And so it's not as easy as just selling off a big facility or selling off a portion of the facility. So we know that we're continuing to look at it. Plan A is to grow into it. But if we do not get that growth, we will be more aggressive from a capacity perspective.

Our next question comes from Mig Dobre with R.W. Baird.

This is Peter Kalemkerian on for Mig this morning. I guess, I'll start on margin. Is there any color you can provide for the second half by segment here? I'm trying to parse out what you expect for Hydraulics margin in the second half and what the moving pieces might be there?

Peter, nice to hear from you. Thanks for calling in. So with respect to the segment margins, we don't provide that level of guidance, but I will talk to it high level. And I think looking at past performance is a good indicator of future. And so when you look at our guidance that we put forward both for the full year and then more specifically to the segments for the third quarter, on our Hydraulics side, we plan to be up between 3% to 8% over the third quarter last year. And at those levels, that's going to indicate a nice continued revenue step-up for the Hydraulics segment potentially at the higher end. And so with that, you can see the Q1 to Q2 step-up in the margins. If we're able to continue to grow that, we expect that would grow. On the Electronics side, we will expect to see much higher growth rates year-over-year from a revenue perspective. And from a mix perspective, we -- as I kind of indicated to Jeff's response on which of the markets are growing, we really see a lot of that growth coming out of Enovation. And when you look at what has happened with our mix over the -- even in the first half of this year, going back into the late half of last year, we -- although our overall Hydraulics-Electronics mix has stayed pretty consistent, 2/3 Hydraulics, 1/3 Electronics, within both of the segments, we've had unfavorable mix profiles. We've talked about the ag weakness that's been -- hampered the Faster business that has generally a higher return profile than the Sun business. And then from an Electronics perspective, clearly, Enovation commands a higher gross margin profile than our health and wellness business at Balboa, and that's what had been growing. And so now we're going to see a little bit of that invert here in the back half of the year. And so we should get some nice margin uplift from that as well.

Awesome. Really helpful. Second part of my question here, sticking in Hydraulics, but thinking longer term, there's still excess capacity. And apologies if I missed this earlier on the call, but is there a way to quantify the excess capacity that you still have in the Hydraulics segment? And then zooming out, what would be your best guess on a timeline to get this business back to, call it, a 22%, 23% margin profile?

Yes. So I don't have a specific stat on the capacity utilization, but the way I'd answer it is we will not require any sort of capacity expansions for multiple years. So we're going to continue to grow into that and we see that growth profile not only just purely from having some of these markets recover, but also you've seen some of the new products we've launched and these are incremental revenue streams for us and some broader opportunities that we haven't announced yet that we're looking to bring to market as well. So that's how I'd answer that one.

Yes. In terms of the next question on when do we get to EBITDA plus 20% margins. As Sean said, we get a lot of leverage with the volume growth and sales have been down over the last several quarters. So we expect to see that growth in the second half. If that continues, we would expect to see continued margin improvement. The CFP divestiture will contribute some to that. That's about plus or minus 50 basis point uptick we would expect to see flow through to EBITDA. And then as we make other changes, I would highlight also the HCEE that we communicated a couple of quarters ago that we completed here in the second quarter. We did see some savings. We shut down the operation that was there in Texas that came through an acquisition. So we're looking at -- in addition to the overall portfolio optimization, looking at smaller changes we can make to drive the profitability.

Awesome. If I can just sneak in one more question here, more of a granular one, but is there any update on the commercial foodservice end market? I noticed that this is listed as a positive catalyst for you guys in the slide deck. I know it's a bit of a new market for Helios. So any color there? Is there a way to quantify how big this end market currently is for you guys?

Yes, Peter, this is a very exciting growth opportunity for us purely from the perspective that it's brand new. It's all incremental. We've had our first win with Cleveland. They're part of the Welbilt Ali Group and it's on one product. It's their steamer product. So engaging with them more deeply and looking for opportunities to take that technology, and it's an Enovation Controls electronics win, new business win from a display perspective and other things in the guts of the steamer, if you will, that not only provides value proposition for the OEMs to potentially take out cost and quantity and weight when you think about replacing dials and switches and lights and things with a nice modern display, but also provides training opportunities for operators. And then further beyond that, we're really excited about the Alto-Shaam relationship on the software side. We have rolled out the Cygnus Reach platform. That was a product we came to the Helios portfolio via the i3 PD acquisition. And what Cygnus Reach is it's effectively a remote diagnostic tool that clearly helps Alto-Shaam monitor equipment, helps remind their operators when things need to be serviced, kind of preventive type maintenance, early indicators of potential failures. And we see this, and it's a great example of one end market that we are early into that has lots of opportunities. But then you just -- as I described, say, the Cygnus Reach platform, where we could take that into, whether it's all of our existing markets or many others. So we're very excited about our software development and opportunities we have even beyond the Cygnus Reach platform.

Our next question comes from Nathan Jones with Stifel.

I'll start with a question on competitive positioning in the U.S. being an advantage, which was a comment you guys made during the call. Obviously, having manufacturing footprint in the U.S. is going to give you a cost advantage versus folks that are importing stuff from overseas. Can you talk about where in the business do you think you have that competitive advantage? How you plan to use it? Does it give you the opportunity to price to market to expand margins or price where you -- to cost where you can compete for additional share? How you plan to leverage that advantage?

Nathan, I know we talked about this last quarter where we actually had a conquest an early win on the Hydraulics side. It was a coupler product line that we -- came to us because we had lost the business and we proactively went after it and won that back. Haven't seen significant amount come, but I think that's partially because of the de-escalation in the retaliatory tariffs and the tariffs. But we absolutely still see that as an opportunity and are pursuing it. And I believe some of it isn't fully coming through that when you think about our Sun Hydraulics business, we go to market through an independent distribution channel. And we're clearly seeing upticks signals for that in the back half of the year. And I believe there's likely some of that happening at that level. But also when I go to the Electronics side, our Enovation product doesn't compete on price. We're never chasing high-volume, low- margin product. We're winning business on our differentiation. And we feel very strongly that we already have that competitive positioning that's a sustainable advantage for us over a lot of our Asian competitors there. And for us, it's more so how do we continue to innovate and stay ahead so that as people are catching up with us, we're already that much further ahead.

Yes. Nate, I would just add to that outside the U.S., when we look at China and the health and wellness, because of some of the tariffs of products coming into the U.S. from China, we have seen the local manufacturing there pick up. And our facility that we have there within Balboa had a strong quarter in Q2 and we see that as a competitive advantage as well.

Follow-up question is on changes to the organizational structure that you talked about. I know you've talked fairly extensively about changes to the commercial organization. So want an update on how that's going and how far towards completion you think you are on that? And then are there any other changes that you're either contemplating or implementing in the organizational structure that you think will make Helios more efficient?

Thanks, Nathan. Yes. So we -- again, going back to the strategic planning process we went through that, to me, it became evident that we needed to reorganize and restructure how we do our daily work. And what that led to was, first, where do we want to go, who do we want to be, the values of the company? And then from the regional structure that was put in place, really unwinding that to go back to focusing on our brands and our products. The beauty of Helios, as I said earlier, is our diversification, but it also created complexity with the regional structure when we were trying to go to market, say, with Hydraulics in Europe with the team on the ground that's Faster that is typically selling direct to an OEM and selling a coupler versus through distribution and selling a technical cartridge valve. And so really going back to having one leader for each of the brands and then supporting those leaders from a human resources, finance, IT perspective and then building around the sales organization, because again, going to market for these different products is very different. It's very similar on the Electronics side where a health and wellness customer with a direct OEM relationship and also distribution is very different than selling to a recreational product manufacturer. So it's really focusing how we do that. I would say, we are well along in the structure side of it and having the people in the right seats and we've injected new talent from the outside into the organization as well. But we're still in the early innings of standing up the go-to-market processes and such. I just came off -- so every month now, I have a meeting with the entire sales team and it's really focused on new business wins. That's the #1 thing we're talking about. And so my indicators are how is the sales funnel looking? How many new business wins are we getting over the finish line? And not that we can always talk about many of them, but clearly, I think I couldn't be more pleased with the early progress we're having. And we have out-delivered our first quarter or first half expectations from a top line perspective and the back half, we're raising because of what we're seeing in the markets and the order books. And so I think those are all signs of that. But for me, what gets really exciting is to think about the product pipeline and whether that's what we've already launched this year or what we have coming. And we had a slide in our deck on the products. And I mean, you look at that slide and you look at the products along there, not one of them on there was one that we had in the portfolio last year. They are all brand-new incremental revenue streams and they're not cannibalizing existing sales. They're augmentation of our existing offerings or improvements. And so we're pretty excited how this is all coming together. And granted, we need to bend the curve because it's not lost on me. We've had 12 consecutive quarters of sales declines. And looking ahead, we feel very confident that we can grow this business.

Our next question comes from Chris Moore with CJS Securities.

This is Will on for Chris. Can you provide an update on the strategic agreement with WaterGuru? Where are you in integrating the technology into some of Balboa's products? And what is a reasonable expectation in terms of generating noticeable revenue?

Yes. Thanks, Chris. This is Jeremy. Yes, great question. We entered that strategic relationship last year to both design and manufacture the hardware for the spot market as well as cassettes that will sense the water quality. And all of that's tied into a mobile app that users can see. And we spent a lot of time developing that and coming up with the right manufacturing process, but also a very quality design as well as manufacturing -- I'm sorry, as well as packaging and consumer packaging. So we launched that in the second quarter and we expect that to pick up, but it's going to be a ramp. Obviously, we want to get the hardware units out. We've got a design that it can be set into the spa as a floating type. We're also working with OEMs to integrate that into the overall spa design and the new spa models. And the more of those that get out into the market, the higher the recurring revenue we would expect on the cassettes that last about 3 to 4 months before they need to be replaced. So really, really excited about that. The team did a great job launching that. We've got the app up and running. But again, we don't expect that to have a material impact on our sales and profits this year. But as we get into '26, we definitely expect that to ramp.

Very helpful. And then just one more. If we get a 75 to 100 basis point reduction in interest rates over the next 6 months, would that have a meaningful impact on how you're thinking about '26 revenue? And what areas would be the most impacted?

Will, before I answer that, I didn't get a chance to jump in before that second question. I want to just also highlight with respect to the WaterGuru relationship, we will be manufacturing and are manufacturing those products and cassettes. And we've displaced the WaterGuru supplier that was China-based. And so almost parlaying back to Nathan's question, this is a bit of a conquest win and certainly will help improve our return profile on those products by having the manufacturing. With respect to interest rates, absolutely would see that as a helpful tailwind for us, particularly when you look at our consumer discretionary exposures, more indexed to our Electronics segment, I think towboats and our great customers there, Nautique, MasterCraft, the recreational product customers, also with the health and wellness space, a lot of those products are financed. And so any sort of reduction in rates will bring more of those coupon buyers back to the market that have been sitting on the sideline. Even further within our Hydraulics segment, there's a bit of that as well. You think about some of the big equipment that's financed. And so see all of that as very helpful if we see reductions. But that said, we've been operating in this current environment and we think we can grow without -- we haven't planned for that in the back half of the year, even though the pundits have continued to call for reductions that haven't materialized. So we'll see if we see that, we see that as a very helpful development. And also just with our current debt stack that we're carrying, it will help reduce our own interest expense and cash outflow as well.

[Operator Instructions] Our next question is a follow-up from Jeff Hammond with KeyBanc Capital Markets.

Yes. I just had a couple of housekeeping items. One, can you just explain the dip in interest expense? It looks pretty low for second half. And then just for the guide, what do you have for Custom Fluidpower? Is it closing the end of third quarter or is it in there for the full year

Sounds good, Jeff. Yes. So from an interest rate perspective, implied in our full year guide is a significant drop in interest expense. Obviously, we've been prioritizing our debt repayment and continue to do that. Actually, this is the 8th consecutive quarter that we've reduced that and with expectations. Hopefully rates do come down, that could also help us. Although we haven't built that in, we have built in further debt reduction. I'll highlight second quarter, despite our revenue being depressed, was our second best cash flow quarter from a cash flow from operations in our company's history. And so continuing to focus on that. We feel good we can continue that streak. And so obviously, that just reduces the amount that we have to pay. The other big mover, if you recall, last year, we refinanced our debt a little early. We would -- it would have matured in October of this year and we didn't want to bring that short term onto our balance sheet. And so we've kicked that off last spring and we're successful in refinancing that in June of 2024. And with that, renegotiated some lower rates in terms of our borrowing spreads. And as we continue to manage our leverage rate down, the spreads get even lower. So all of those things are very helpful. And then the biggest mover was due to the fact that when we refinanced our debt, we had 2 interest rate swaps outstanding that were both in the money. The accounting rules require you to put that on the balance sheet because we had to terminate them early because the bank didn't decide to continue to participate in our new debt facility. So we had to terminate the swaps. So you just hold that on your balance sheet and you recognize the gain in the period the swap would have expired or matured. And so that's in the fourth quarter this year. And so you'll see about just over a $5 million run rate reduction purely from that. And so that's what's baked in there. And then regarding the CFP, I mean, we don't know. I mean we're planning 60 to 90 days for a close just to give ourselves some room. So obviously, if we do that earlier, that will help us pay down more debt quicker because that's what we intend to do with those proceeds. Obviously, it would lower our run rates. Jeremy, you can speak to the revenue and EBITDA run rates and what we would expect there maybe from a quarterly perspective?

Yes. CFP has been about a $60 million business on an annual basis. We would expect, depending on the timing around $15 million that may come out of our Q4. As we said in our opening remarks on the EBITDA, it's probably about a $2 million EBITDA impact if it closes yet this quarter. So that's how we're looking at it in terms of the timing and potential impact to Q4.

As there are no further questions, I would now like to hand the conference over to Tania Almond for closing comments.

Great. Thank you so much for joining us today. We will be on the road in the coming weeks and months and look forward to connecting with you in person. In the meantime, we hope you enjoy the remaining bits of the summer season here in North America. Please reach out to me if you have any follow-up questions, and have a great day.