Helios Technologies, Inc.

Greetings and welcome to the Helios Technologies first quarter 2025 financial results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tanya Allman, Vice President of Investor Relations and Corporate Communications. Thank you. You may begin.

Thank you, Operator, and good day, everyone. Welcome to the Helios Technologies First 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 first quarter, then hand it over to Jeremy to review our first quarter financial results in detail. Sean will then conclude our prepared remarks with our latest thoughts on our 2025 outlook, our current thinking on potential tariff impacts on our business, financial and operational priorities, and key focus areas. We will then open the call to your questions. If you turn to slide two, 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 and will be provided as well in 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 three and four now. With that, it's my pleasure to turn the call over to Sean.

Thanks, Tanya, and welcome, everyone. We appreciate you joining us today. Since being appointed permanent CEO in the first quarter, I have nearly completed my listening tour with the Helios team to get deeper internal insights and have also engaged with our business partners, customers, and shareholders to get the outside and external impressions of Helios. With that feedback, we have already begun to refocus the organization. The changes and decisions being made are centered on our customers with the objective of driving business success to create prosperity for our customers, employees, and investors. The ultimate sign of success is organizational longevity while generating superior shareholder returns over the long term. I see an amazingly bright future for Helios, leveraging all our assets. As I look back on the first quarter, we fortified the management team and are reallocating resources towards growing our go-to-market initiatives. We continue to evaluate our facility footprint, operating structure, and portfolio of companies. We believe we are in a solid position by building an optionality to our plans that respond quickly to the ever-evolving macro environment. As we'll discuss further, our response to the tariff landscape highlights how our size enables us to remain nimble and act decisively, both to mitigate the impact on our business and to capitalize on emerging opportunities because of the shifting tariff backdrop. We remain concerned about the downstream effects of a prolonged tariff escalation, particularly rising costs, pricing pressures, and potential impact on end market demand. We are committed to making long-term strategic decisions as we navigate near-term volatility. We had a better start to 2025 than expected as we overdrove our first quarter estimates. Sales of $195 million exceeded the top end of our guidance range but remains below prior year sales levels on continuous end market weakness. That said, our early wins from our go-to-market focus are promising and we'll share more details during the call. The additional first quarter sales volume resulted in better than expected adjusted EBITDA dollars while delivering a margin rate of 17.3%, showing the expected incremental flow through. We generated $19 million in cash from operations, a 7% increase over last year's first quarter, despite the sales contraction. The actions taken by the team to improve our working capital efficiency over the last year are showing in our results, including an 11% inventory reduction as compared to the prior year. We manage our cost of goods sold to align with the lower sales and realize savings and SEA expenses year over year. We are being judicious with all our spending, including capital expenditure outflow, which will be used for only the most impactful projects with quick payback periods. Additionally, we improved our financial profile further by paying down $4 million in debt throughout the first quarter, down 15% over last year, and have now consistently reduced our debt for seven consecutive quarters. We have a stronger balance sheet, a stronger cash engine, and nearly $400 million in liquidity. This provides a firm footing for us to operate from. As is materializing, we expected our first half year-over-year comparables would be challenging, though we are pleased with the progress made against our plans to start the year. While the majority of our end markets remain persistently weak, we are starting to see some positive trends forming in the order intake over the last several months. In our largest business, Sun Hydraulics, distributors' orders are typically lumpy, but we did see their inventories continue to decline in the first quarter, which is a healthy sign. We do estimate there was a small amount of advance purchasing from distributors at the end of the quarter in response to tariffs, though not material. Looking at our end markets, as I noted, we continue to see persistent weakness in most of them. However, our health and wellness and recreational end market sales did experience growth over the year-ago period. It was good to see our electronic segments stabilize. However, given the recent consumer sentiment readings and that the forecasted interest rate cuts have not materialized, we remain cautious. For our industrial, mobile, and agriculture markets, improving manufacturing PMI data earlier in the year had been encouraging, although it remains inconsistent and not showing definitive positive trends yet. We are gradually gaining traction with our invigorated customer-centric go-to-market initiatives. Our more targeted sales focus is resulting in growing our sales funnels, and we are starting to get some new business wins across the finish line. We have had two recent wins leveraging our acquisition of NEM and their leading parts and body hydraulics technology. Both wins are in the construction end market with major OEMs. We also had a new win in our sun hydraulics business in the aerial work platform end market with a global OEM. Our teams at Damon and Son are also making headway on their win back strategy stemming from the backlog issues we created when we were building out and integrating our manifold center of excellence in Indiana over a year and a half ago. Our win rate on Damon custom manifold quotes is improving with the ability to expedite quick turn prototype manifolds within three weeks, which is a great benefit for our customers. We've been driving active customer outreach to highlight our improved manifold and integrated package lead times, delivery, and quick turn prototypes. Significant progress has been achieved with notable successes from these efforts year to day. On the electronic side, the Innovation Controls team celebrated their 15-year partnership with IDEXX Fire and Safety. This is a great example of selling system solutions and evolving with our customers' needs over time. Innovation also had new business winds selling recently introduced displays, including the S35 and the P70, into the recreational, off-road, and commercial vehicle markets. Also within the electronics segment, Balboa had first quarter new business winds in the bath space and cold plunge markets. We have also recently announced several new product launches, reflecting our accelerated pace of bringing new innovations to market driven by customer feedback. By deepening customer relationships and advancing our product portfolio, we believe we are well positioned to navigate near-term volatility and capitalize on opportunities as market conditions improve. With that, let me turn the call over to Jeremy to cover the details of our first quarter financial results, and then I will come back to discuss how we are addressing the tariffs and our outlook during this highly unsettled macro environment.

Thanks, Sean, and good morning, everyone. As I review our first quarter results, please reference slides five through eight. Sales in the quarter were $195 million, exceeding the top end of our guidance range, which was $190 million. We estimate the impact of customers pulling orders ahead as a result of announced tariffs to be approximately 2 to 3 million. Please also note that foreign exchange unfavorably impacted sales by $2.3 million compared to the year-ago period as we get forecasted. Sales declined in all regions compared with last year. One green shoot to highlight was our Asia-Pacific sales in our electronics segment, which were up 24% year-over-year as the health and wellness end market has returned to growth. While 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 110 basis points over last year. The decline in labor and overhead costs partially offset lower volume and higher material costs, primarily as a reflection of the higher mix of electronic sales. Sequentially, gross margin expanded 50 basis points on higher volume in both segments. We continue to prioritize operational efficiency and believe our focus on safety, quality, delivery, and cost will continue to come through with improved margin rates as markets stabilize and volume returns. Operating income in the first quarter was down just $3.3 million, as $7.3 million reduction of gross profit on lower volume was somewhat offset by a $4.4 million reduction in SEA expenses. Operating margin declined 90 basis points to 8.7%. On an adjusted basis, operating margin was 13.4%, down 110 basis points, and adjusted EBITDA margin declined 90 basis points compared to the prior year period. Our effective tax rate in the first quarter was 23.5%, reflecting the income mix in the various tax jurisdictions. Diluted EPS was 22 cents in the quarter, down 21% over last year, primarily as a result of the lost leverage from the 8% decline in sales. Diluted non-GAAP EPS was 44 cents in the quarter, down 17% over last year, but importantly, up 33% over the fourth quarter. Starting on slide nine, I'll give more color by segment. Hydraulic sales declined 11% over the prior year period. This decline reflected weakness in agriculture, mobile, and industrial end markets. Foreign exchange had an unfavorable $2.2 million impact on the segment compared with the prior year period. Hydraulics gross profit and gross margin contracted year-over-year 16% and 170 basis points, respectively, reflecting loss leverage on lower volume. Material and variable costs declined year-over-year and were relatively flat as a percentage of sales, aligning with the lower demand environment. SEA expenses were down 12% compared with the prior year period, demonstrating cost savings realized. Operating income was down 4.4 million, reflecting the contraction in sales partially offset by the SEA savings. Please turn to slide 10, and we'll discuss the electronic segment. Year over year, electronic sales remained relatively unchanged. Higher sales in health and wellness and recreational helped counter ongoing declines in industrial and mobile end markets compared with the same period last year. Electronics gross profit declined slightly, while gross margin held steady, reflecting holding cost in line with volume. SEA expenses were down 7% year-over-year due to realized cost savings. Operating income improved by 13%, and margin expanded 140 basis points, attributable to quantifiable decreases in SEA costs. Slide 11 shows our heavy focus on cash management continues to pay off with a trailing 12-month free cash flow conversion rate of 258%. We generated cash from operations of $19 million in the quarter, a 7% improvement over the first quarter last year despite lower sales. This included a $4.8 million insurance reimbursement related to the 2023 fire and weather-related incidents at Bastard. We use part of that cash to reduce debt further and strengthen our financial flexibility. The first quarter has historically been the lightest quarter of the year from a cash generation perspective, and optimizing cash flow will remain a focus for 2025. We reduced inventory in the last 12 months by 24 million, or 11%, which contributed to lower working capital and growing cash. Capital expenditures in the quarter were 6.1 million, or 3% of sales. 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 12, at the end of the first quarter, cash and cash equivalents were 46 million. We had 353 million available on our revolving credit facility. Despite sales softening and unfavorable foreign exchange impact on our Euro-denominated debt, we paid down debt for the seventh consecutive quarter. We reduced that by 15% or 76 million over the last 12 months. Our net debt to adjusted EBITDA leverage ratio is down to 2.7 times from 3.1 times a year ago. Our capital priorities remain focused on further reducing debt, generating organic growth, and paying our longstanding dividend as we have consistently done for over 28 years. We also have the option to utilize our recently established share repurchase program that we announced earlier this year. We will continue to focus on what we can control and look to maximize shareholder value from all facets by focusing on our customers, developing innovative products to maintain and expand our leading market positions for mission-critical applications and solutions, while remaining agile as we navigate the continually evolving macro landscape. I will now turn the call back over to Sean.

Thanks, Jeremy. Turning to slides 13 and 14, I will frame the current tariff landscape for Helios, which has created more uncertainty as we step through fiscal year 2025. This is not unique to Helios, and we believe we are well prepared and positioned to manage through this unprecedented period. We have estimated the various potential cost impacts in the second half of 2025 to be $15 million if we took no tariff risk mitigation action, as the impacts on the first half of 2025 are limited due to inventory capitalization accounting methods. These estimates do not try to anticipate how global demand could be impacted and the potential downstream effects, as we believe that is too wide of a range of scenarios to predict all plausible outcomes. As of today, our analysis indicates that we are relatively insulated from the impacts due to our in-the-region, for-the-region strategy, which we have been executing over the last few years with the aim of servicing our geographic revenue streams more efficiently for our customers. This has proven to be very helpful as it provides optionality to contend with the current tariff dynamics. I would also point out that nearly all the products we produce and ship from our Tijuana, Mexico facility to the U.S., are USMCA compliant, which is a positive for us and a competitive opportunity. When you look at our direct tariff exposure by country, raw material imports from China and exports to China from the US carry the largest tariff burden. Based on the variety of components we are using across our different operating companies, we estimate China-related tariffs to be approximately $13 million of the total $15 million direct tariff cost exposure in the second half of 2025. Within China, we already have electronics manufacturing capabilities from our acquisition of Joyanwei, plus other hydraulics manufacturing facilities that we have had in China and the APAC region for many years. We intend to leverage these facilities to help mitigate the tariff impact for our China customers. We also analyzed and projected our second half tariff exposure at the segment level. When you add up the gross tariff expense of approximately $15 million, roughly $9 million would be in our hydraulic segment with about $6 million in our electronic segment. Again, to reiterate, this would be the gross impact before any mitigation efforts. Another potential risk for Helios, if current imposed tariffs remain, relates to our U.S. export sales to China-based customers. For the second half of 2025, approximately $20 million in sales for China-based customers would have traditionally been exported from the U.S., which is currently subject to punitive retaliatory tariffs. We are in the process of transferring manufacturing and assembly into the region to mitigate that risk as best we can. It is also worth noting we see an opportunity for more sales of the products we manufacture in the U.S. for our U.S. customers. For example, competitors that rely on their Chinese-manufactured product exported to the U.S. have now become sales conquest opportunities due to the punitive tariffs, which allows us to play offense with early wins already occurring. To contend with the cost and demand pressures from tariffs, as well as to capitalize on the opportunities they present, we have a continuous assessment of mitigation work streams across our businesses. We are responding to developments and have deployed various mitigation tools, including pricing actions, alternative sourcing, use of bonded warehouses, leveraging our global manufacturing footprint, and identifying ways to creatively leverage our strengths to play offense and win business. Turning to slides 15 and 16, we have two and a half more quarters in 2025 to navigate in this rather tenuous global trade environment with shifting geopolitical tensions. Tariffs have created more uncertainty in the second half of 2025. We are not withdrawing our four-year outlook, but we are shifting our guidance to focus on just the next forward quarter where we have the highest visibility and have established a track record with meeting our commitments over the last six quarters. We expect second quarter sales to be in the range of $198 to $206 million, a sequential step up from our first quarter sales. We also project adjusted EBITDA margin to improve over the first quarter to a range of 17.5% to 18.5%. The improving sequential margin profile reflects further operating leverage from the anticipated increased volume. While the second quarter sales are expected to be down compared with the year ago period, the implied sequential sales step up is in the range of plus one to plus 5% with strong flow through to the bottom line. Diluted non-gap earnings per share is expected to sequentially increase in the range of plus five to plus 23% or 46 cents to 54 cents, more than tripling the rate of sequential sales growth. Looking at the latter half of 2025, We still currently see a path for sales growth over 2024. Until we know with certainty what the final tariff rulings will be and how the demand environment could start to be impacted, we will keep our focus on delivering our near-term commitments and be ready to respond to the various demand outcomes. As a reminder, our second half sales comparable from last year was significantly depressed from the persistent end market weakness. With our go-to-market initiatives supporting growth and our planned acceleration of new product introductions, we feel well-positioned to capitalize on any market stabilizations. These are unprecedented times. We will stay focused on what we can control and communicate with you on the details as we have them with as much certainty as feasible. Turning to slide 17 and 18, I believe our results in the first quarter validate that the financial priorities we laid out at the beginning of the year remain sound. We are addressing our 2025 key focus areas to reenergize our go-to-market initiatives rooted in customer centricity. Returning to profitable sales growth is imperative, and we have a handful of green shoots being realized despite the challenged markets. We have increased the pace of new product launches so far in 2025. We have new revenue-generating incremental products launched in the first half across our four flagship brands, including Innovation Control's S35 display, as well as their CAN keypad, Sun Hydraulics' expanded line of electroproportional cartridge valves, Faster's Multi-Slide, and Balboa's PureZone water chemistry management solution. We have streamlined our organization to capitalize on customer relationships and industry know-how, and the exciting part is we have only just begun. I'll conclude our prepared remarks with where I started in that true organizational longevity goes beyond simply remaining in business. It involves building a sustainable, thriving organization that can adapt, innovate, and continue to contribute to its industry for the long term. In April, we surpassed 55 years of being in business, going back to the founding of Sun Hydraulics in 1970 by Bob Koski and John Allen. We have changed and evolved quite significantly over the past decade in particular. I remain incredibly excited about our future and 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. And thank you for being part of today's call and for your ongoing engagement in support of Helios Technologies. With that, let's open the lines for Q&A, please.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Hey, good morning, guys. Thanks for taking a couple. Maybe we'll start at a little bit higher level. Sean, you talked about, you know, finishing up your listening tour with the company. Maybe just a little bit more in terms of what specifically you're hearing and, you know, kind of the specific actions that came out of that, you know, those conversations that you're looking to take.

Hey, Chris. Good morning. Thanks for the question. So... When I got appointed CEO in January, obviously I had the benefit of operating the prior six months as the interim CEO, which afforded me the opportunity to work very closely with our board of directors and gain alignment on where we wanted to take the company in the future through an in-depth strategic planning process and allowed the board to see myself and our talented presidents and executive team operate. And I think Provided the confidence to remove that interim tag. And with that, it was important to me just to really step back at that point and solidify what were the internal impressions and the external impressions of the company. Obviously, I had formed that over my year and a half with the company. but really took the opportunity being new, allowing people in an unguarded way to really share strengths, weaknesses, opportunities, where we need to invest, but then also the external perspective with the customers and how they feel. And our investors, our analyst group, outside partners, And I really would boil it down to a couple key things that we're continuing to work on. You've certainly heard throughout our prepared remarks about the focus on go-to-market. I'd simply put that as we're no longer fishing, we're becoming hunters. We're being much more aggressive with our engagement with our customers, customer centricity, we've been to all of our product development, but also driving the accountability as well. The second thing is with the team, getting the right team on the bus, getting the executive management team fortified so we've made some changes there. And then lastly, just overall portfolio assessment. Since I've joined the company, there were no acquisitions done, but over the last decade, the company's transformed significantly from just being Sun Hydraulics as of December 2016. when Innovation Controls joined the Helios Group. And each one of those acquisitions we've done has deployed a lot of capital, and the company's done a remarkable job to delever, and that focus is clear from a capital deployment perspective, and that's not changing right now. Our focus is on paying down debt. But we also have a remarkable company from a diversification perspective, from a profitability perspective, from a cash flow generation. And so it's really how do we do more of that, of the progress we've made over the last year. And so with the tariffs coming into the mix, certainly has didn't foresee that, obviously, when we entered the year and put out our original guidance. And so we're cautious, but we actually see that as a nice opportunity as well. And we've had some early wins. So That's just high level, and I'm happy to go a little deeper into any of them if you'd like.

No, that's perfect. That's what I was asking. Thank you. Maybe just one or two on tariffs. You talk about the $20 million from the U.S. to China-based customers. How long will that take to transfer the manufacturing assembly? How costly is it? And is this something that you would have thought of doing at some point in time regardless of the tariffs?

Yes. That's a great question. And when we look at the opportunity there or the risk, however we want to say it, that $20 million is just kind of generally what we would have expected to ship a product that was assembled in the U.S. to our China market. But the good thing is, as we highlighted, is we do have a manufacturing footprint there and assembly capabilities. We already are doing that for some of our cartridge valves from the sun perspective and we intend to make additional ones at the end of the day for the tariff uh environment or absent the tariff environment our objective of this in the region for the region is all about making more products in the regions that we're selling them and absent tariffs that's still a good thing from a from our go-to-market perspective of our customer centricity serving our customers uh more timely and then being able to localize supply chains and and limit logistics costs we see that as a good opportunity so that that was something we were already looking at uh prior to tariffs but also has accelerated some of the work from an investment perspective it's minimal because we already have the operation we have the capacity And beyond just our China operations, we have other Asian manufacturing capabilities as well in South Korea. I would say it's accelerating our focus, and we think we can do that over the next quarter and be ramped up with the products we want to assemble there. There likely still will be some export, and certainly if there's any de-escalation in the tariff and the non-punitive retaliatory tariffs, it wouldn't be something that we would necessarily change the direction on anyhow.

Got it. Very helpful. I'll leave it there. Jump back in line. Thank you. Thanks, Chris.

Our next question comes from the line of Nathan Jones with Stiefel. Please proceed with your question.

Good morning, everyone. Hi, Nathan. I guess I'll start off with one on the competitive positioning around tariffs. You talked about it a little bit in your prepared remarks, but I mean, clearly there should be some pretty nice opportunities if you're manufacturing in the US and any of your competitors are importing from China, just given what are now massive cost differences on that front. Any information you can give us on where you think those opportunities are, what percentage of the market is imported, I think for a lot of your business, 100% is manufactured in the US. Just where you see those opportunities, and does it create opportunities to go off the market share gain or price to market and improve margins or some of both, and what's the priority there?

Yeah, Nathan, I think for us, the way we're looking at it is a market share gain opportunity, not necessarily a cost play. A lot of our competitors... Well, let's just take hydraulics versus electronics. And so from a hydraulics perspective, there's plenty of copycat Chinese product from our sun cartridge belt perspective. And so that's an immediate opportunity for those folks that do not have some sort of U.S.-based manufacturing capability. To your point, it's not cost competitive at 145% tariff on U.S. imports. The other opportunity is with our faster business, too, and we've seen some wins there already in the coupling business where there are U.S. operations but rely on Chinese manufacturing, and those are those sales conquest opportunities we've already realized. I think on the electronic side, it's a little bit different competitive landscape. If you look at, like, our Balboa business, as you're aware, we have our Tijuana business, Facility that majority over 95% is compliant of our products, but some of our competitors have different footprints there. And so we see that also as an opportunity and on the innovation controls as much as our, our, our manufacturing footprint is here. It's truly also the app development and the hardware enabled sales by the software that we develop. And so we're continuing to double down on our software development and differentiation and actually have some really cool enhancements products that we have already soft launched one one notable one is in the off-road recreational marine space called no roads that we're pretty excited about that opportunity to again try and conquest sales from our competitors these tariffs are you know they were implemented extremely quickly and so those tariff impacts on some of those competitors imported from China are going to happen pretty quickly

And I'm sure your customers are scrambling, looking for domestic sources. Is this something that we could see the benefit of to your results in the second quarter or is it third quarter? I mean, I imagine this stuff happens. It's going to happen pretty rapidly.

Yeah, as you can imagine, we're aggressively identifying those opportunities and going after them in line with our go-to-market kind of targeted approach. I see it more as a back half opportunity just given the inventory positions that a lot of folks have, you know, three to six months type inventory levels. That stuff isn't tariff burden and will burn through the system. But, again, we have seen wins already, and we will get some Q2 revenue out of that, but we're not counting on it to be a significant impact until the back half. And that's only if, you know, July 9th, Annex 1 rulings come up. And, I mean, this is so evolving and changing by the day. that that could change drastically as well. But nonetheless, we think once we get in and the stickiness of our business and the quality of our products, even with that, if you get in, that there's an opportunity to land that, particularly if it's in an OEM opportunity where it's related to the design of the product and you get into the manufacturing cycle. So we see it as a good opportunity and trying to pursue all that aggressively.

Understood. I guess a follow-up question. I wanted to talk about the go-to-market strategy. You talked about, you know, hunting, not fishing. Can you talk about a little bit of, you know, what you thought was incorrectly positioned in terms of the commercial organization, what changes that you've made and, you know, what hunting, not fishing actually means to Helios?

Yes, definitely. So when I look at the organization and our products, Great products, great quality, typically outlast whatever application machine they're going into, yet being a very critical component for those products. And if that goes down, that whole piece of equipment goes down. And for us, it was a bit of a... and I'm broad brushing the organization. I'm going to go into a little bit more specifics on the four flagship brands. But broad brush of us just not being aggressive, just sitting back. A bit of the fishing comment is a little bit of the system sales organization that we had of expecting this volume to come to us. And my background at an OEM, I clearly understand how OEMs buy, and they don't buy on a – system from a perspective, particularly with us when you're trying to pair hydraulics with electronics, you're dealing with different purchasing groups, different buyers. And so a lot of the sales were just taken in, an intake of opportunities that would come to us. When I talk about the hunting, it goes back to the strategic planning and really understanding those product categories and markets that we're entitled to win with our products, and then taking those targeted segments and going after them, specifically with aligning resources and a process behind that to go win new business. And then also with our existing customers, going deeper with them. And we've got new wins in that. We try to highlight some of them in the call as well. And then on the back end, it's really about how we incentivize our sales team and the things we're trying to accomplish that supports our strategy. Because I'm a firm believer in our system solution strategy. When we pair our businesses together and the products together, It's a powerful value proposition. So incentivizing that cross-selling and also engaging then more deeply with our customers and driving that accountability culture, not only internally with our teams, but also with our customers.

And Nathan, this is Jeremy. Hey, Nathan, this is Jeremy. I just wanted to add, I come from a distribution background, and Sean talked about the OEMs, but we have a similar focus on our distribution partners, right? They're key in our go-to-market strategy, and we've been engaging with them To understand where they're growing, how do we partner with them to get more face time with those end customers and really promote those new products that we're coming out with? And I would echo what Sean said. I think it was a bit more passive. I'm sure it's fluctuated over time. But since me joining the company, I think it's been more of a passive relationship. And our teams have done a really good job in the last months of reengaging with those distribution partners as well.

Awesome. Thanks for taking my questions.

Thanks, Nathan.

Our next question comes from the line of Jeff Hammond with KeyBank. Please proceed with your question.

Hey, good morning, everyone. Good morning, Jeff. Maybe just starting with the $15 million of tariff headwind, how much would you expect to cover of that with price? What price... Increases have been kind of implemented already through the systems. And then if we looked at, you know, if we looked at 2026 and we annualized that at 30 million, how much can you take that number down through, you know, sourcing bonded warehouse, the stuff you laid out on slide 14?

Hey, Jeff, thanks for the question. Right now, we have deployed price increases across all four of our kind of flagship brands. Our intent overall to the tariff risk, wherever it lands, is to cover the dollars. It could put some margin pressure, obviously, if you're just covering the dollar impact, but we're trying to attack it from all angles. So using the local China assembly example, that one you can solve, obviously, without without putting price increases in place. And in fact, there's likely opportunities to get some margin enhancement if we can build the products at a more cost-competitive position than we do in the U.S. Really, it's a bit of a reaction to ultimately where the final rulings land and with the objective, again, of building products where they're consumed, where our customers are. And so that's kind of the first step. But then certainly we know we have direct cost impacts that we're feeling already. We're not going to feel as much of it in the second quarter just due to our inventory position coming into the second quarter and capitalizing those costs. But as those start rolling out, those price increases will help offset some of that. We're continually looking at our supply chain and sourcing and what we can do on the back end, like we said, with the bonded warehouses. That may not come into play as much, particularly if USMCA stays intact, at least for our health and wellness space. But then I go back to the volume and the go-to-market initiatives and the aggressiveness on trying to conquest wins, and that's a bit of that plan offense. And just the incremental volume we can create will help offset that and actually help expand margins. As we know, we've got a bit of an overcapacity situation right now with the company, and so filling that up will help us leverage that fixed cost basis. So all in, intent is to cover dollar for dollar, but We're being flexible with where the final rulings land.

Okay, great. And then, Sean, you mentioned kind of assessing the portfolio maybe as part of your listening tour. Do you think that entails divestitures of maybe some of the more recent acquisitions you made, or it's more fine-tuning than that?

Yeah, I think we're keeping an open mind to all of it. I think as I step back, it's looking at first the strategic fit and the financial performance of the various businesses. And we've had a lot of cycles and a lot of due to COVID and a lot of end market weakness that we're still battling. So a bit of it is, do we see a path to growth and a path to accretive returns? We have taken some small actions already within the business that we've talked about, particularly on the engineering side of the organization to get it much more targeted and focused and absorbing that into the business, which does involve cost savings when you're taking away a rooftop or an office. Additionally, on the back end with the manufacturing footprint, tariffs is causing us to move some things around, but also we had absorbed the faster U.S. operations into our Indiana and Florida facilities. And so we'll continue to look at the back end, but absolutely we'll be evaluating the portfolio and continue to look at does it fit and does it have a path to helping our accretive returns over time. But we also are not interested in cutting our way to growth either. And so if we ever are looking to shrink the portfolio, we would be in a much better capital position to then get more acquisitive M&A perspective, like the company's done over the last decade, but currently have to focus on debt reduction to have that flexibility to start looking at M&A more seriously, which likely won't happen until next year, given the current projections for the company.

Okay. Thanks a lot, Sean. Thanks, Jeff.

As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Meg Dobre with Baird. Please proceed with your question.

Good morning. So Q1 came in ahead of your initial expectations. When you look at your Q2 guide, how does that compare relative to the original plan?

Hey, Meg. Good morning. Thanks for the question.

So from a original plan perspective, obviously we got it first quarter and we got it to the full year. I would tell you that we are ahead from a first half perspective relative to our internal plan. So it's better when you combine our first quarter actual results and our second quarter guide. So we're feeling pretty good going into the first half of the year. And certainly then it changed when the tariffs came on to add more uncertainty. But as we said in our prepared remarks, We still believe and see a path to growth this year over prior year, which effectively was closer to that midpoint of our original annual guidance. But from the first half perspective, we feel we're ahead.

Okay.

And then is sort of the implication here, in a way we're kind of like modeling and thinking about the business, that we should take your prior, EBITDA guidance, subtract the $15 million worth of cost impact that you've outlined for the second half, and then maybe make some of our own assumptions on demand? I mean, is that how you think about it? Is the $15 million drag to sort of be fully realized in the back half, or is it less than that because you're raising price, you have some kind of mitigation strategies that you've qualitatively discussed previously?

Yeah, definitely the latter, Meg. It wouldn't be just taking and layering on $15 million of cost. We don't feel there's that impact that big of an impact here in the second quarter. Certainly we didn't really feel much in the first quarter. It's obviously a cash flow drain because we got to pay the tariffs at the time of import the products, but it's really the back half. And as I said, our intent is to cover the tariff, the 15 million. Now there's going to be some timing issues with that and how quickly can we absorb it and does anything change? But I wouldn't layer on just 15 million of costs. I would I would at least expect $10 to $15 million of abatement through the actions we take. And by the way, the $15 million might not be that high if we're moving production and abating the tariffs from the current ruling. So we're going to be flexible as they change and adapt quickly. And I think that's a huge benefit to the size and scale of our company relative to bigger conglomerates that we can move quickly. And we also have that footprint already. I talked about one of the things I love about our organization is the diversification of it. And you look at even our revenue where just over half of it's in the U.S. and call it a quarter and a quarter in the EMEA. and Asia Pacific, and our employee count emulates that as well. And so it speaks to the capabilities of the operation just to move quickly and adapt. So trying to provide a little bit more color than just what you asked, but I would not add in $15 million of cost with no assumption of recovery.

Yeah, because, I mean, that's the question. You're understandably kind of pulling the full-year guidance. But in terms of right-setting the numbers for the back half of the year, if the message here is, look, we have the 15 million of headwinds, but we think we can mitigate most of that, then it would seem to me that relative to the prior, the original guidance that you have issued, the only variance would then really be change in demand, whether or not demand is actually getting worse relative to where you initially guided. Correct me if I'm wrong there, but related to this, the question is, in the month of April, other than the pre-buy that you talked about, have you seen any other changes in demand, either from your customers or your distributors, that would suggest, you know, directionally kind of what might happen here as the year progresses?

100% alignment with you on how you characterize that. And that's how we thought about it coming into the call in terms of the guidance. We're not going to try and predict the various outcomes of the tariff rulings and ultimately what that downstream effect is on the back half of the year. So that's why we were tried to be very specific on our on our Q2 guidance. And honestly, for as I've shared on prior calls, when we get to these calls, it really comes down to an execution play to deliver our forward quarter because we do see positive demand trends. And one thing I would say is our order intake is exceeding our quarterly sales in the first quarter. For five consecutive months, our order will continue to increase. So we are seeing positive signs, but is that going to stick? Is there going to be impacts from tariffs longer term? So We didn't try to be cute with our guidance and pretend like we have the precision in the back half because there is just too many variables and uncertainties right now. But I will reiterate, we see a path to growth this year just as we did coming into the year. And so it's not as much about pulling our guidance or affirming our guidance. It's just acknowledging that demand in the back half is a big question mark. What we have in our control and what we're focused on is that go-to-market and customer centricity. And I think you've probably seen that with some of the product launches we've done and some of the changes we've made there to really attack those underserved markets, incremental revenue streams, and driving that accountability with our customers to be on this journey of growth with us. Go ahead, Jeremy.

Yeah, just a couple other points to add to the demand comment. For the first time in a while, we saw the recreational space within electronics grow. We've been talking a lot about that being down. That was a positive sign in the quarter. As well as in terms of the orders, the orders in hydraulics were up and higher than the sales. And one of the things we mentioned was the win-back focus with our son and Damon business when we established the center of excellence. We know we created some disruption within our customer base there. We had a backlog that was growing and extended lead times. We've got that back where it needs to be from an operation perspective, and we're engaging with those customers, and we're seeing some early progress there in terms of quote and order when. So, you know, the broader demand environment, what's going to happen, what happens with the tariffs, a lot of uncertainty there. But at least as we entered into Q1 and throughout Q1, there were some positive signs for us.

Understood. One final question for me. You talked about not cutting your way to growth. I can appreciate that comment, but the question is whether or not there needs to be cutting or restructuring of any form to adjust for the volume conditions that you do have. And I'm talking about the hydraulics business specifically. When we're sort of looking here, your gross margins are looking pretty materially different than they did back in 2022, 2023. Admittedly, the revenue is lower as well. But within your cost structure, right, SG&A has really not been where the drag has been on your hydraulics margins. It's really been gross margins. So, you know, as you mentioned, there's a capacity issue here. There's a lot of capacity and not enough volume to sort of support it. So I guess my question would be this. At what point in time do you start really thinking hard about the amount of capacity that you have in this business? Because realistically, we have seen now multiple quarters where we're running on almost two years of organic declines in this hydraulic business. So how do you think about the pure cyclical component of the business and what you have to do just from a short-term standpoint to manage that gross margin relative to maybe something that's a little more structural to get us back to where we were a couple years ago, even on lower volume. Thank you.

Yeah, Meg, that's a good observation, and I would answer it a couple different ways relative to faster and relative to sun, but even a broader comment, certainly the absorption to me is the number one opportunity there. I want to address the not going to cut our way to gross, but I will highlight we have been judicious with our costs. If you look over the last four quarters, we've taken our operating expense SCA costs down and tried to manage that. But now as you look up to the to the top of the piano and that cost of goods sold line, absolutely the volume is causing the dilutive effect on that gross margins. The other thing I would highlight that's broad is that our profile of our hydraulics business has changed acquisitively, and as I said earlier on one of my answers to the question, that all of our acquisitions that have come in since we were Sun Hydraulics have been at a dilutive state to what Sun Hydraulics was on a standalone basis. So there's a little bit of the mixed dynamic there, but I also see that as a – tremendous opportunity when I go back to my listening tour and hearing from an acquisition integration perspective, we've got way more opportunities to do more with what we have bought and actively pursuing that. Jeremy just referenced one with our win-back strategy in Damon. When I look at Faster specifically, as we know, they're highly indexed agricultural segment. And that industry, that market's continued to be down for four years in a row, particularly in the U.S. with registrations. We are seeing positive signals there in indicative order books and the team doing a tremendous job from a diversification perspective to get more into the commercial and construction space just over at Bama where I know you were as well. You just see the tremendous opportunity and major OEMs there, Lieber, Pelfinger, that we've got great relationships to go deeper with. We feel FASTER is clearly on the right path, and we see growth for that business for the balance of the year if there isn't something disruptive in the overall geopolitical macro space, including tariffs. From a Sun Hydraulics perspective, it's all about partnering with our distributors. As you know, we go to market through distribution on that business with some OEM direct business where it makes sense. Like we talked about a aerial work platform opportunity that we won in the first quarter. But the distributor business, when we talk about go to market, it's really partnering with them and getting back to what made Sun great. We've spent a lot of time with our customer engagement, the product trainings, our largest customer, distribution customer in the U.S. We just had a great event with them here in Sarasota to celebrate that. And it's really driving that accountability and putting data and statistics and analytics behind it to demonstrate where we do have underperforming distributors, we need them to improve. And if they aren't, then we're going to find the right partners and give the distributors that we have very longstanding relationships and success with to bet on them and give them more territory and opportunity to continue to grow with us. But at the end of the day, we see a lot of tremendous success. green shoot opportunities. That order book, that distributor inventory level declining again for the third quarter in the U.S. gives us positive signs that as this grows, which the NFPA, our main industry association we belong to on the fluid power side, shows that second half recovery coming. So we are excited and we'll do what's needed to create that growth.

So it sounds like we're waiting for more volume rather than restructuring capacity.

I would say everything's on the table, though. I mean, we're not satisfied absolutely with where we're at, but I'm not disappointed in what the customers and our team delivered in the first quarter and the path we're on right now. If growth doesn't materialize, For the third consecutive year, we absolutely need to do something from a capacity perspective. So I wouldn't consider anything off the table. I'm keeping a very open mind to that. But I will highlight again, we are very optimistic about the green shoots and the new products we've launched and the customer engagement we have that we would like to grow our way into this. But if the growth doesn't materialize, yes, other actions will be on the table.

Thank you very much. Thanks, Meg.

We have reached the end of the question and answer session. Ms. Almeda, I'd like to turn the floor back over to you for closing comments.

Great. Thank you, Operator, and thanks, everyone, for joining us today. We look forward to seeing a number of you at upcoming trade shows and investor conferences. As always, if you have any follow-up questions, feel free to reach out to me directly. Have a great day.

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