Earnings Call Transcript - HLIO Q2 2025

Operator, Operator

Ladies and gentlemen, greetings and welcome to the Helios Technologies Second Quarter 2025 Financial Results Conference Call. 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.

Tania Almond, Vice President of Investor Relations and Corporate Communications

Thank you, operator, and good day everyone. Welcome to the Helios Technologies second 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.

Sean Bagan, President, CEO and CFO

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.

Jeremy Evans, Vice President, Corporate Controller

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 overachievement, favorably impacting sales by about $3 million 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 heavier 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.

Sean Bagan, President, CEO and CFO

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, 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, Operator

Our first question comes from Jeff Hammond with KeyBanc Capital Markets.

Jeffrey David Hammond, Analyst

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?

Sean Bagan, President, CEO and CFO

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.

Jeffrey David Hammond, Analyst

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.

Sean Bagan, President, CEO and CFO

I’d like to start by discussing the divestiture of CFP and emphasize what an exceptional business it has been for us, although it doesn't align with our strategic goals. Approximately 10% of CFP's sales come from Sun Hydraulics cartridge valves, while the remaining 90% is primarily engineering services and other competing products sold through their distribution network. We are very excited to partner with Questas Group for an exclusive long-term distribution agreement for Sun Hydraulics. With their scale and distribution capabilities, we anticipate this will be a leading market and open significant growth opportunities for us. For our shareholders, this investment has been beneficial as we have seen consistent growth in the business each year. However, over the past three years, or the last 12 quarters, our Helios revenue has declined. Therefore, considering its EBITDA profile relative to the overall company, it has been somewhat dilutive. We are looking forward to understanding the improved financial profile ahead. Regarding our other businesses, we continuously assess our portfolio, but there are no immediate changes planned at this time. The decision to sell the CFP business was a result of our strategic planning process from the previous summer, and the official recommendation to the Board to proceed with the sale was made in December. It took some time to find a willing buyer. We could have sold to Questas sooner, but their private equity sponsor went through a transition mid-process, combined with the complexities of selling in Australia and the associated time zone challenges, which extended the timeline more than we would have preferred. Currently, we are actively engaged in a similar strategic planning process and will keep looking for ways to optimize or enhance our portfolio. This divestiture will afford us greater flexibility in the future as we reduce our debt to more manageable levels. On the capacity side, we are always focused on running our plants efficiently, looking closely at utilization levels. As I mentioned in previous calls, we aim to grow into our capacity and demonstrate our ability to achieve that while leveraging it. Recent performance in Hydraulics from the first to the second quarter showcased strong revenue increments, nearly an additional $15 million, along with significant gross profit expansion. Our guidance indicates we expect to see continued positive trends in the latter half of the year, reinforcing our confidence in growing into our capacity. Each of our businesses operates with its own manufacturing plants, meaning we do not consolidate manufacturing across our various acquisitions like Enovation, Faster, Sun, and Balboa. This structure complicates the process of selling a large facility or part of it. We are diligently exploring our options. Our primary goal is to grow into our capacity, but if we fall short of growth, we will take a more aggressive approach regarding capacity management.

Peter Alexander Kalemkerian, Analyst

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?

Sean Bagan, President, CEO and CFO

It’s great to hear from you, Peter. Thank you for your call. Regarding segment margins, we don't offer specific guidance, but I can provide a high-level overview. Historical performance is a good predictor for what we can expect in the future. In our guidance for the full year, particularly for the third quarter, we anticipate that Hydraulics will increase by 3% to 8% compared to the same quarter last year. This increase suggests continued revenue growth for the Hydraulics segment, potentially reaching the higher end of that range. You can see the margin improvement from Q1 to Q2, and if we can maintain that growth, we expect margins to continue rising. On the Electronics side, we expect significantly higher year-over-year growth in revenue. Much of this growth is expected to come from Enovation. While our overall Hydraulics-Electronics mix remains fairly stable at two-thirds Hydraulics and one-third Electronics, we have experienced less favorable mix profiles within both segments. The agricultural sector has struggled, affecting our Faster business, which typically yields higher returns compared to the Sun business. On the Electronics side, Enovation has a higher gross margin compared to our health and wellness sector at Balboa, which has been growing. We expect to see some improvement in our mix in the latter half of the year, which should lead to margin enhancement as well. 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.

Jeremy Evans, Vice President, Corporate Controller

Yes. Regarding the question on reaching EBITDA margins of 20%, we have significant leverage from our volume growth, and although sales have been declining over the past few quarters, we anticipate that growth will return in the second half. If this trend continues, we expect to see ongoing improvements in our margins. The divestiture of CFP will contribute about a 50 basis point increase to EBITDA. Additionally, the changes we've implemented, such as the HCEE, which we completed in the second quarter, have resulted in some cost savings, particularly from shutting down our Texas operation acquired previously. We are not only optimizing our overall portfolio but also exploring smaller changes to enhance profitability.

Sean Bagan, President, CEO and CFO

Yes, Peter, this is a very exciting growth opportunity for us because it's brand new and entirely incremental. We recently achieved our first success with Cleveland, a member of the Welbilt Ali Group, focusing on their steamer product. We're engaging more deeply with them to explore ways to leverage that technology, which represents a new business win for Enovation Controls electronics, particularly regarding the display and other components of the steamer. This not only offers a value proposition for OEMs by reducing costs, quantity, and weight through replacing dials, switches, and lights with a modern display but also enhances training for operators. Additionally, we are thrilled about our partnership with Alto-Shaam on the software front. We have launched the Cygnus Reach platform, which we acquired through the i3 PD acquisition. Cygnus Reach functions as a remote diagnostic tool that assists Alto-Shaam in monitoring equipment and alerts operators about necessary servicing, serving as a preventive maintenance tool and providing early warnings of potential failures. We see this as a prime example of an emerging market filled with opportunities, and we believe there are many avenues to explore with the Cygnus Reach platform across our existing markets and beyond. We are very excited about our software development and the opportunities that extend even further than the Cygnus Reach platform.

Nathan Hardie Jones, Analyst

I have a question about your competitive positioning in the U.S. and how it serves as an advantage, as mentioned during the call. Having a manufacturing presence in the U.S. likely provides a cost edge compared to competitors who import goods. Can you discuss where you see this competitive advantage within your business and your plans for utilizing it? Does it allow you to price competitively to increase margins or to cost effectively pursue additional market share? How do you intend to capitalize on this advantage?

Sean Bagan, President, CEO and CFO

Nathan, we previously discussed last quarter about an early success on the Hydraulics side with a coupler product line. We regained this business after actively pursuing it, even though we haven't seen a significant revenue increase yet. This could be partly due to the reduction in retaliatory tariffs. However, we still view this as a valuable opportunity and are working on it. When considering our Sun Hydraulics business, we deal through an independent distribution channel and are observing positive signals for growth in the latter half of the year. I believe there is progress being made at that level. On the Electronics side, our Enovation product's strength lies not in competing on price but in our unique offerings. We focus on differentiation instead of chasing low-margin, high-volume sales. We feel confident in our sustainable competitive edge over many Asian competitors. Our strategy is to continue innovating and to stay ahead of the competition, ensuring we are further advanced as others catch up to us.

Jeremy Evans, Vice President, Corporate Controller

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.

Nathan Hardie Jones, Analyst

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?

Sean Bagan, President, CEO and CFO

Thanks, Nathan. Yes, during our strategic planning process, it became clear that we needed to reorganize our daily operations. This involved defining our goals, our identity, and our company values. We decided to move away from the previous regional structure and refocus on our brands and products. The strength of Helios lies in our diversification, but this also added complexity with regional operations, particularly when marketing Hydraulics in Europe with our Faster team, who typically sell directly to OEMs and offer couplers rather than technical cartridge valves through distribution. Therefore, we aimed to have a single leader for each brand, supported by teams in human resources, finance, and IT, while enhancing our sales structure. The approach to market varies significantly for different products. For example, selling health and wellness electronics directly to OEMs is quite different from selling to recreational product manufacturers. We are progressing well in structuring the organization and placing the right people in key roles. We've also brought in new talent from outside the company. However, we're still in the initial stages of establishing our go-to-market processes. I hold monthly meetings with the sales team, where we focus on securing new business, which is our top priority. My key indicators include tracking the sales funnel and how many new wins we're achieving. While we may not discuss every success, I'm very pleased with our early progress. We have exceeded our expectations for the first quarter and half, and we are optimistic about our outlook for the second half based on market signals and order books. I find it particularly exciting to think about our product pipeline, both what we've launched this year and what's forthcoming. The products we presented earlier are all new revenue streams that do not cannibalize existing sales; rather, they enhance our current offerings. We’re enthusiastic about how everything is aligning, and while we acknowledge the challenges of having experienced 12 consecutive quarters of sales declines, we are confident in our ability to grow this business moving forward.

Operator, Operator

Our next question comes from Chris Moore with CJS Securities.

Will, Analyst

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?

Jeremy Evans, Vice President, Corporate Controller

We established a strategic partnership last year to design and manufacture hardware for the spot market and cassettes that will monitor water quality. This is integrated into a mobile app for users. A lot of time has gone into developing the right manufacturing process and creating quality designs and packaging. We launched this in the second quarter, and while we anticipate growth, it will be gradual. Our goal is to distribute the hardware units, which can be designed to float in the spa, and we are also collaborating with OEMs to incorporate this into new spa models. The more units we market, the greater the recurring revenue we can expect from cassettes, which need replacement every 3 to 4 months. We are truly excited about this launch, and the team has done an excellent job. The app is operational, but we do not expect a significant impact on our sales and profits this year. However, we foresee a ramp-up as we move into 2026.

Will, Analyst

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?

Sean Bagan, President, CEO and CFO

Before I respond to that, I didn't have an opportunity to interject regarding the second question. I want to emphasize our relationship with WaterGuru; we are and will be manufacturing those products and cassettes. We have replaced the previous supplier based in China. Relating this back to Nathan's question, this represents a significant achievement and will enhance our return profile on these products due to our manufacturing capabilities. Regarding interest rates, I see them as a beneficial factor for us, especially in relation to our consumer discretionary exposures, which are more connected to our Electronics segment. This includes our towboats and valued customers like Nautique and MasterCraft, as well as the recreational product sector and health and wellness products that often require financing. Any decrease in rates could bring back more buyers who have been waiting on the sidelines. There are also similar implications in our Hydraulics segment regarding large financed equipment. Overall, we view potential interest rate reductions as very advantageous. However, we have been operating under the current conditions and anticipate growth in the latter half of the year, even though forecasts for reductions have yet to materialize. Should reductions occur, we would consider that a very positive development. Additionally, with our existing debt, lower rates would alleviate our interest expenses and cash outflow.

Jeffrey David Hammond, Analyst

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?

Sean Bagan, President, CEO and CFO

Thank you, Jeff. From an interest rate perspective, our full-year guidance reflects a significant decrease in interest expense. We have been focusing on debt repayment, and this marks the eighth consecutive quarter of reductions in that area, with hopes that falling rates may also assist us, though we haven't factored that in yet. We have included additional debt reduction in our plans. Notably, despite revenue challenges, the second quarter was our second-best cash flow quarter in the company's history, and we aim to maintain that momentum, which will decrease our payment obligations. Additionally, last year we refinanced our debt ahead of schedule to avoid a short-term maturity this October, successfully securing refinancing in June 2024 with renegotiated lower borrowing spreads. As we lower our leverage rate, those spreads will decrease further. A significant factor in the equation was the early termination of two in-the-money interest rate swaps related to our refinancing, which had to be recognized on the balance sheet. Consequently, you'll see an expected reduction of just over $5 million in our run rate due to that. Regarding the CFP, we are anticipating a 60 to 90-day timeline to close but aim to wrap it up sooner to facilitate quicker debt repayment with the proceeds, which would lower our ongoing expenses. Jeremy, could you provide insight into the revenue and EBITDA expectations from a quarterly standpoint?

Jeremy Evans, Vice President, Corporate Controller

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.

Tania Almond, Vice President of Investor Relations and Corporate Communications

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.

Operator, Operator

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