Prepared remarks
Greetings, and welcome to the Helios Technologies Second Quarter 2026 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Tania Almond, Vice President, Investor Relations and Corporate Communications. Please go ahead.
Thank you, operator, and good day, everyone. Welcome to the Helios Technologies Second Quarter 2026 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 heliostechnologies.com. You will also find slides there that accompany today's discussion as well as our prepared remarks. Joining me today are Sean Bagan, President and Chief Executive Officer; and Jeremy Evans, Executive Vice President, Chief Financial Officer. Sean will begin the highlights from the second quarter. Jeremy will then review our financial results in more detail and provide our outlook for the rest of the year. Sean will return with some closing comments, and then we will open the call for questions. Before we get started, please turn to Slide 2, where 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 2025, 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 through 5 as I now turn the call over to Sean.
Thanks, Tania, and welcome, everyone. We're pleased you could join us today. It was five months ago at Investor Day that we introduced The CORE Strategy, laid out our 2030 financial targets and committed to a set of measurable objectives. Two quarters into that plan, our first half performance shows we are off to a strong start. The CORE Strategy is working and the stabilization plan for the business that our team mapped out over the last two years is now complete. We have entered a new phase of our journey defined by sustained growth that is underpinned by a fortified balance sheet. At Investor Day, we were still in the midst of that comeback, beginning to climb. Today, we're continuing to grow into the second half, gaining altitude faster than expected and we're positioned to keep climbing into 2027. We delivered another strong set of results in the second quarter. Sales of $232 million were at the high end of our guidance range and adjusted earnings exceeded the top end of our outlook. This marks our fourth consecutive quarter of double-digit pro forma sales and adjusted earnings growth, which is a solid indicator that the strategic actions we've taken continue to translate into consistent operating and financial performance. Based on the solid first half results and improving visibility into the balance of the year, we are raising our full year outlook. 2026 could represent the highest annual sales in Helios' history. Importantly, the order and business win dynamics behind these numbers remain robust. Our order intake grew double digits over the year-ago period for the fourth quarter in a row, giving us increasing confidence in near-term demand. Our order growth is primarily driven by the combination of last year's business wins ramping and new wins continuing at a healthy pace. These wins span both segments. In Hydraulics within MCT, Sun saw its strongest growth in China across mobile and industrial and is on pace to have a record year in its APAC region. Within FCT, Faster continues to benefit from strengthening demand from our customers in construction and agriculture, and we've rolled out a new product portfolio, completed the qualifications needed to meet industry standards and have been building some inventory to position us to start penetrating the data center thermal management market. In Electronics, we are realizing growth across recreational, health and wellness and industrial applications, supported by the investments we made in our ability to solve complex problems for our customers. All of this gives us growing confidence that the changes we have made are driving sustainable results. The quality of our earnings continues to improve as well. Higher volumes, favorable segment mix and our operational initiatives drove another quarter of solid year-over-year margin expansion, reflecting the operating leverage inherent in our business model and the progress we're making in continued footprint optimization and productivity. Impressively, we generated record operating cash flow in a second quarter, with that cash generation allowing us to further strengthen the balance sheet, reduce our leverage ratio, increase organic investments and return capital to shareholders through our longstanding dividend and additional share repurchases. This balanced approach is fully aligned with the value creation framework we laid out as part of The CORE Strategy. Stepping back and reflecting on our first half results, we are tracking ahead of our organic growth and margin commitments. Our sales engine is performing. Our innovative products and road maps continue to take market share. Our operational excellence initiatives are supporting ongoing margin expansion toward the long-term targets we shared at Investor Day. We will stay focused on disciplined execution and investing in high-return opportunities, positioning Helios for continued progress against our targets. With that, I'll turn the call over to Jeremy, who will review the second quarter financial results in more detail and our raised 2026 outlook. Jeremy, over to you.
Thank you, Sean, and good day, everyone. As I review our second quarter results, please refer to Slides 6 through 8. Second quarter sales were $232 million, up 9% compared with $212 million in the prior year period and at the high end of the expectations we laid out on our first quarter call. When adjusting for the CFP divestiture and foreign exchange impacts, sales were up 16% year-over-year. Gross profit increased 19% in the quarter to $80 million, and gross margin expanded 280 basis points year-over-year to 34.6%. This is the fourth straight quarter of year-over-year gross margin expansion. In addition to volume and mix, the margin improvement reflects ongoing operational initiatives and benefits from our portfolio and footprint actions, along with the positive contribution from approximately $1 million of net IEEPA tariff refunds. From an operational perspective, we continued to execute on footprint optimization initiatives that support margin expansion, increase productivity and drive operating leverage. During the quarter, we closed the Faster facility in Canada and further consolidated our Faster North American operations. We expect these actions to drive efficiency and cost benefits starting in the second half of 2026. Second quarter operating income rose 48% year-over-year to $33 million, and operating margin expanded 370 basis points to 14.0%, with non-GAAP adjusted operating margin up 280 basis points to 17.8%. Adjusted EBITDA increased 25% to $49 million, and adjusted EBITDA margin expanded 260 basis points to 21.2%, marking the fourth consecutive quarter with adjusted EBITDA margin above 20%. Our operating expenses increased by $2.2 million year-over-year, primarily driven by employee benefit costs and an isolated bad debt expense. Excluding these two items, we managed expenses in a disciplined way, keeping them essentially flat year-over-year on a consolidated basis while increasing investment in research and development and delivering solid sales growth. This is an important contributor to the operating leverage you see in our expanding operating and EBITDA margins. Diluted EPS in the quarter was $0.66, up 94% compared with the prior year period, and adjusted diluted EPS of $0.88 rose 49%, exceeding the high end of our outlook by $0.05 per share. The upside reflects strong sales growth, margin expansion, disciplined operating performance and the net impact of IEEPA tariff refunds. Turning to the segments, please refer to Slide 9. Growth remained wide-ranging, driven by both segments and all regions. Hydraulics sales in the second quarter were $146 million, up 14% year-over-year on a pro forma basis, normalizing for the impact of foreign exchange and the divestiture. We saw growth across the Americas and EMEA, with APAC up significant double digits on a pro forma basis. By end market, mobile saw the most strength, with the construction category continuing its growth. Agriculture also contributed to the year-over-year growth, while sales to the industrial end markets were relatively flat year-over-year. Hydraulics' gross profit increased 9% year-over-year and gross margin expanded by 160 basis points to 34.6%, driven by higher volumes, mix and the benefit of the IEEPA tariff refund. Operating expenses were roughly flat year-over-year in absolute dollars and lower as a percent of sales, with segment operating income growing 16% to $29 million and operating margin up 200 basis points to 19.7%. In Electronics, second quarter sales were $86 million, up 19% year-over-year, with growth in all regions and particularly robust performance in APAC. Enovation Controls delivered a record for a second quarter, with demand remaining healthy across recreational markets, including continued strength with a large OEM customer that has been a key contributor to recent volume outperformance. We are realizing growth in health and wellness, mobile and industrial, while core markets in marine remained soft. Electronics' gross profit in the quarter increased 41%, and gross margin expanded 530 basis points to 34.6%, reflecting fixed cost leverage on higher volume and direct labor cost efficiencies, as we optimize our footprint and processes, as well as the benefit of the IEEPA tariff refund. Segment SG&A expenses increased as we continued to invest in R&D, resulting in the segment operating margin expanding 490 basis points to 13.1% and operating income nearly doubling to $11 million. On Slide 10, we generated a second quarter record of $42 million of cash from operations and $31 million of free cash flow. CapEx in the quarter was $11 million, or 4.9% of sales, an increase from prior quarters and reflecting our increase in strategic organic investments. Our trailing 12 months adjusted free cash flow conversion remained healthy, and our cash conversion cycle improved by 11 days compared to the same period last year. Flipping to Slide 11, we have updated our capital allocation priorities as our trailing 12 months net debt-to-adjusted EBITDA leverage ratio has improved to 1.4x, down from 2.6x in the prior year period and below our target operating range of 1.5x to 2.5x. In addition, our net debt declined to $264 million, the lowest since the third quarter of 2020. We have shifted our priority to investing in organic growth opportunities, maintaining our increased level of returning capital to shareholders and pursuing strategic acquisitions. We extended our history of paying cash dividends to 118 consecutive quarters, or over 29 years, with a quarterly dividend of $0.12 per share. We also repurchased approximately 79,000 shares for a total of $6 million in the quarter, leaving $76 million remaining on our share repurchase authorization. Year-to-date, we have returned $18 million to shareholders through dividends and share repurchases, up 40% versus the first six months of 2025. We view this balanced approach of continued disciplined investments and capital returns while meeting our debt service obligations as a key element of our value creation framework. Slide 12 reflects the 2026 financial priorities that we established at the start of the year. This quarter, we made progress against them all. We remain focused on operational execution and investing in high-return opportunities as we carry this momentum into the second half. Turning to Slides 13 and 14, with that strength behind us and improved visibility into the third quarter, we are raising the full-year outlook. We now expect sales to be in the range of $880 million to $900 million for the year, compared with $839 million as reported in 2025 and $792 million on a pro forma basis excluding CFP sales. This implies 12% growth over 2025 at the midpoint, driven primarily by volume growth in our core platforms and the ramping of recent commercial wins. At the midpoint of this range, we would achieve the highest annual sales in the company's history, topping our 2022 level, which is even more impressive when you consider the fact that we divested $60 million in run rate CFP sales last year. At the segment level for the full year, we expect Hydraulics sales in the range of $555 million to $565 million, up approximately 13% at the midpoint on a pro forma basis. For Electronics, we expect sales in the range of $325 million to $335 million, up 11% at the midpoint. We expect 2026 adjusted EBITDA margin to be in the range of 20.2% to 21.0%, raising the bottom of the previous range, reflecting gross margin expansion, operating expense discipline and the full-year benefit of our portfolio and footprint actions. We expect adjusted diluted EPS in the range of $3.05 to $3.25, reflecting 23% growth at the midpoint. For the third quarter of 2026, we expect sales to be in the range of $215 million to $222 million, up 8% over last year's third quarter at the midpoint when taking the divestiture into consideration. At the segment level for the third quarter, we expect Hydraulics sales in the range of $133 million to $138 million, up approximately 9% at the midpoint on a pro forma basis. For Electronics, we expect sales in the range of $82 million to $84 million, up 5% at the midpoint. We expect consolidated adjusted EBITDA margin for the third quarter to be in the range of 19.8% to 20.6%, down 30 basis points at the midpoint compared to the previous year and adjusted diluted EPS of $0.70 to $0.77 per share, up 2% at the midpoint compared to the previous year. As we constructed our raised outlook, we continue to remain cognizant of tougher comparisons in the second half, driven by the timing of end market recoveries and the ramp of certain commercial wins. We also are considering ongoing external factors, including rising energy and fuel prices, tariff dynamics, broader inflationary pressures and geopolitical tensions. Despite these factors, our raised full year outlook reflects the strength we see in our order trends, new business wins, and operational execution, balanced against these considerations. With that, please turn to Slide 15 and I'll turn the call back to Sean for his closing remarks.
Thanks, Jeremy. As I conclude our prepared remarks, let me reflect on the course we charted five months ago and the progress we've made. At the halfway point of this fiscal year, we have crossed an important inflection point. This is no longer a story of business stabilization; it is a story of profitable, broad-based growth. The progress we have made is not the result of one great quarter or one favorable market; it is the outcome of thousands of people across Helios executing our strategic priorities every day and staying focused on serving our customers. I want to thank every Helios colleague for their commitment, collaboration and relentless focus on execution. The momentum we have built is a direct reflection of their efforts, and I am proud of what we have accomplished together and even more excited about what is ahead. Heading into the second half, I am encouraged by what I see across our businesses. What gives me the most confidence is not just the favorable trends in our results or the financial performance we delivered in the first half; it is the quality of that performance. We are growing through new business wins, bringing innovative products to market, improving our operations, and generating strong cash flow to keep investing in our future while returning capital to shareholders. We have moved from turnaround to takeoff, and we are entering the second half with increasing altitude, momentum and confidence while navigating through a turbulent macro environment. To our customers, distributors, suppliers and shareholders, thank you for your continued trust and partnership. We remain focused on executing with discipline, creating long-term value and building an even stronger Helios for the years ahead. With that, operator, let's open the lines for Q&A, please.
Questions and answers
Our first question, we'll hear from Mircea Dobre with Baird.
So Sean, if I heard correctly in your prepared remarks, you talked a little bit about some footprint or restructuring action that you were taking at Faster. I'd like to hear more about that as to what's going on there? And maybe more broadly, how you're thinking about capacity and your footprint in Hydraulics business. Related to this, your CapEx guidance, 4.5% of sales, that's a pretty healthy number. So you guys are obviously continuing to invest. Maybe you can clarify as to what the areas of investment and what you see as the most compelling opportunities.
Mig, thanks for the insightful questions. I'll start and then pass it to Jeremy to discuss CapEx dynamics. Regarding the Hydraulics footprint, specifically Faster, we consolidated our American operations and established a facility in Maumee, near Toledo, Ohio, which we are now building out. We hired a North American general manager from outside and are relocating some operations from Mishawaka, Indiana, where Daman and our manifold assemblies continue to grow strongly. We have worked through the operational challenges, which has created more capacity. As a data point, Daman had a record order week two weeks ago, so growth remains strong. That frees up capacity to add automation and equipment in the Indiana facility. We also closed a Canadian facility acquired through a small purchase and moved that production to Italy. As we gear up to enter the thermal data center coupling market, having capacity, distribution, and inventory in the U.S. is important since it represents the largest market opportunity. Jeremy, could you speak to CapEx dynamics and the tightening of the range?
Sure. The updated guidance reflects a CapEx range of 4% to 4.5%. And part of that guidance change is due to increasing our sales expectations. So we've actually taken the top end of that range down a little bit. But it reflects a few things. First is the investment that we've been making in the thermal management just in creating capacity to make the data center couplings, establish a clean room for that. So that's a piece of it. Second, we continue to invest in our low-cost centers for engineering, specifically Tijuana, Mexico. We've got low-cost manufacturing as well in India and in China. And we had a plan to leverage those centers more. And when the tariff situation really began to flare up in early 2025, we put some of those efforts on hold. Now that the tariff situation seems to have stabilized, we're putting some of those activities back in motion. And so it's just setting up those facilities to receive some incoming manufacturing activities. And those are, I would say, two primary focuses of the incremental spend, with a third component being continued investment in our automation and productivity capabilities. We've had some aged machines throughout the facilities that we're starting to upgrade, as well as some targeted productivity enhancements as well.
I guess my follow-up on the Electronics business. You've had a lot of growth in the first half here organically. And when I'm looking at the full year guidance for revenue, that implies solid double-digit growth. It seems to me that the end markets that you're exposed to here are not growing anywhere near double digit organically. So maybe I'm misunderstanding something here, correct me if I'm wrong. But if what I'm saying is correct, how should we think about this outgrowth? What's driving the outgrowth? Is it specific customer wins? I think you hinted at that. Maybe give us more context there? And how sustainable do you think this could be as we think about 2027?
Yes, I'll take that one, Mig. So on the Electronics side, Billy Aldridge and his team have been very aggressive from a go-to-market perspective and had numerous wins. We talked a lot about those ones at Investor Day. We showed a chart and that trend has continued. When we get here to the back half and as we tried to telegraph as we set out our operating plan this year, the back half obviously gets much tougher. So very impressive growth in the first half, easier comps. Our challenge now is to continue to grow here in the back half. You can see in the third quarter, we're still projecting mid-single-digit growth from the Electronics segment. But I think part of your question and your observation there in terms of the markets are more challenged certainly than on the Hydraulics side. And one of the big reasons there continues to be interest rates. A lot of the products that we supply into those OEMs are financed product. And so as the interest rates haven't come down, that hasn't stimulated growth. And you see that whether it's with the marine market that we see as the most challenged still or even just the recreational market. What is encouraging is what Billy has done from an organizational perspective is really combining the businesses to drive synergy, drive one head of engineering that drives the same engineering processes, product plans and how we can leverage our manufacturing plants better. And so we're moving some production to a lower-cost manufacturing facility in Tijuana that will help with our margin profile. But we really are encouraged because that health and wellness market, which is a significant portion of our Electronics segment, has rebounded off of those COVID highs and post-COVID lows. It's now stabilized, and we get decent market data in terms of how that market is performing, and it's really shifted. There's quite a lot of growth coming out of Asia, and we have our footprint there with Joyonway. The North American market is more challenged, but we continue to see opportunities to go deeper there and diversify. Our WaterGuru relationship is providing some nice growth. As we've talked about our Purezone product that we have come to market with, and we're developing a whole range of new Balboa product that will be coming out here over the next six to nine months that will help grow that as well. So yes, the markets remain challenged. Part of that's macroeconomic, but we're also outpacing that with wins. And as we talk about internally all the time across all of our business, we operate in smaller niche markets, and we're not going to pay as much attention to what markets are doing. Our focus is on outgrowing the markets and continuing to expand our breadth of products and going deeper with those existing customers, and that's exactly what Billy and his sales team have done.
And next we'll move to Jeff Hammond with KeyBanc Capital Markets.
So Sean, I think the concern originally in your guide was, 'Hey, we can only see so far out, and we've got some tough comps.' Maybe you can remind us some of the moving pieces in the fourth quarter. But it does seem like the program wins that you got last year are ramping and it seems like you're stacking more wins. And it feels like on the margins, maybe the markets are getting better, at least in Hydraulics. So just maybe talk through the cadence and why we step down if we've got all this momentum, both from a market and win perspective.
Yes. So the way we constructed the plan is we've laid out heavier first half, lighter second half. I think we still see that playing out. If you look at four of the last five years, it's 52% to 54% of revenue in the first half and then the back half, obviously, the remainder. Last year was the anomaly. I would point to what you mentioned in terms of the starting of the ramp of the wins because it took time to get our go-to-market engine going. And so generally, seasonality-wise, if you call it, that's just how it plays out. What our hesitation and why we didn't come out of the gate with more confidence in the back half is, obviously, there was a lot of uncertainty as we began the year. But our order visibility is really about a quarter out. Anytime you look at our order backlog, it's just about just over one quarter's worth of sales for us, given that some of the shorter cycles in terms of order for distribution or orders for our Balboa business. Now the OEMs provide longer-term forecasts, but they don't lock them until it gets closer to the near quarter. So again, some of those data points that we're looking at, we wanted to be cautious going in. Now that we've seen the momentum, we've seen the ramp of the wins, our pace of new wins this year has also continued to support the higher pace, that gave us the confidence to raise. And in fact, as we got to July, we had our best July ever from a revenue perspective and our best July order intake ever as a company. And that's something, too, because we're stripping out roughly $60 million of annualized revenue with our CFP business. So we believe we have the momentum, and it's going to continue to carry. And the other part there is that new product portfolio we launched last year that's continued this year will continue to accelerate in the back half, gives us a lot of confidence.
And then two more. One, on data center, I think you said you're positioning some inventory. Just what's your line of sight on wins or customer announcement there? Obviously, you must have some visibility if you're starting to create space and starting to build inventory. And then separately, industrial end market, which maybe is a little bit of a catchall, but seemed flat in 2Q. But I think in the guide commentary, you moved it up. Maybe just talk about that end market and what you're seeing there.
Yes, sure. So from a data center perspective, obviously, we're trying to penetrate and enter a new large market. That's with a product we know very well out of Faster in our couplings. And before you obviously become a supplier, you need your product validated and the technical validation is more stringent certainly than we've experienced from an ag or construction perspective. Certainly, product quality and reliability are paramount. You can't be leaking fluid in a data center. But then obviously, ramping up our own manufacturing capabilities, demonstrating that we can deliver timely product and have availability within all the regions, it's a big undertaking. Now we have started to build some inventory. We have not built in any revenue into our back half guidance, and that's just being cautious. But again, I think we said that last quarter, we'd be disappointed if we didn't generate some revenue, but we now have samples out with about a dozen prospective customers that are sampling our products. So we believe an order would be imminent here in the back half. But it's taken some investment and upfront realignment back to Mig's question on some of the changes we've been making from a plant perspective to get ready for this. This represents our single largest opportunity across Helios today. And so we're treating it that way and are very excited about the opportunity it presents to help support our CORE Strategy growth. Jeremy, maybe you can take the second part.
Yes. I'll touch a little bit on the end markets and comment about industrial. First, we track the orders and the sales down to our end market level. If you look at industrial on an as-reported basis, for us, it's down, but that includes the sales that were through our CFP entity that were divested. When we take that out, we see that in the first half, industrial is fairly stable, just up a little bit. We've characterized it as stable in our presentation. I think where we're seeing the strength from an end market perspective continues to be mobile, and that is where we roll up construction and construction for us has been up, as well as the health and wellness. That market, as Sean described, has recovered and we're seeing some decent growth there year-over-year. The other area that's up is aerospace, and we have that within our Hydraulics segment. It's on a smaller base, but we're seeing nice growth there as well. So it's really the mobile, aerospace and health and wellness that we see as the positive catalyst for the growth in our outlook. Industrial for us is more stable. And then the one market that is fairly large for us in Electronics is recreation marine. We still haven't seen that turn. That market is still depressed when we track what we see coming in from an order perspective.
And next, we'll hear from Tomo Sano with J.P. Morgan.
I would like to ask about the gross margin has expanded for four consecutive quarters. How should we think about sustainability? And if you decompose mix, productivity and footprint actions in back half and then some color for the components into 2027, please?
Tomo, this is Jeremy. Specific to the gross margin expansion, as we've been communicating, the biggest lever that we have when it comes to gross margin is our volume and just filling up the capacity that we have. As we've returned to growth, we're seeing that come through. Our incremental margins in Q2 were a little higher, but they are being impacted by the IEEPA tariff refund. So there's roughly a $1 million benefit flowing through our gross profit. If you strip out the IEEPA tariff refund impact, it was still good flow-through, more consistent with what we would expect as our volume ramps. We continue to drive productivity and leverage the low-cost centers of manufacturing. The more recent activities, the Faster consolidation, the closing of the Faster Canada office and some of the things we have in motion are going to play out more in the second half of the year and when we get into 2027. For the quarter and the first half, I would say that was minimal compared to how we exited 2025. But what we're really seeing is the volume ramp. There are some cost pressures that we see there as well, specifically on product components that we have to mitigate, around printed circuit boards and memory chips and some of the aluminum that we're managing through. But definitely pleased with how we've been able to expand the gross margins, and it's a clear focus, one of the priorities that we set out as we entered the year.
And follow-up on The CORE Strategy versus the measurable objectives under The CORE Strategy, after two quarters, what's tracking best? And what's proving more challenging than expected?
I would say, Tomo, the best certainly is our organic growth. We're committing to a five percent organic outgrowth of the market GDP, if you will, model, and we're pacing well ahead of that. And I think implied with our full year guidance, that holds. Certainly, our operational goals are progressing as well. We're seeing roughly just over 100 basis points of expansion from operating income and EBITDA on an adjusted basis, and we're pacing ahead of that as well, implied with the midpoints of our full year guidance. So we feel great about our progress out of the gate. Now the challenge will be the sustainment of it. We really characterized this past second quarter as us completing that stabilization phase and now it's growing on tougher comps. That said, when we look at the second half, whether you measure it on a two-year or a three-year basis, we are actually accelerating our growth. And so we think the trajectory is there. Certainly, from an M&A perspective, that's a core part of our growth plan, and that's really going to be driven by our ability to delever and have our balance sheet in much better shape. That also was a turning point in the second quarter with our adjusted net leverage getting down below 1.5x, which we said we want to operate in that 1.5x to 2.5x range. So that gives us more optionality in our capital allocation moving forward, and we've highlighted that on our prepared slide in our earnings material. That debt paydown is now going to be deprioritized as we continue to look for opportunities to invest, whether it's with our share repurchase program or outside M&A opportunities as well. But generally feeling really good about our early innings, two quarters out of 20 of our 2030 plan, ahead of plan.
And our next question, we'll hear from Chris Moore with CJS Securities.
A couple. So China was one of the hardest hit geographies during COVID. It looks like currently seeing strength there, both in Electronics and Hydraulics, finally getting back to where you were. The question really is, do you see China potentially as a nice growth driver from here?
Chris, this is Jeremy. Yes, China as well as the APAC market, but really driven by China, has been a bright spot for us, both in Hydraulics and Electronics. In Electronics, we have the Joyonway business down there. That came through an acquisition, and over the last several quarters we've increased the capabilities that we have. We have a great team there and the Electronics management team is executing well. For Hydraulics, there was some business shift in the middle of last year driven by tariff escalation. But even beyond that, we've seen the business there grow. The business that we exited with CFP was primarily in APAC. When you strip that out, we're seeing really strong growth within Hydraulics as well. One of the dynamics we see is that many manufacturers and OEMs are moving manufacturing into China and exporting out of China into Europe. So we're seeing a bit of that dynamic. We think that's driving it, but also just having a strong presence there, a strong management team with solid execution means we're growing with our customers there as well. So it's definitely a good market.
Got it. Very helpful. And maybe just a couple more on data center. So as Sean said, it might be the biggest opportunity that sits in front of you right now. Hopeful for perhaps some orders in Q4. Just from a cadence perspective, when you look at it, would be '27 start to ramp revenue a little bit, '28 is probably where it gets more meaningful. Is that a fair way to look at it? Or could there be big orders at some point in '27? I'm just trying to understand how you're thinking about it at this stage.
Yes. That's how we're looking at it internally. As we said, we don't have anything in the 2026 outlook, but we would, again, be disappointed if we didn't see orders come through. We've got a little bit of sales in our 2027 expectation with a gradual ramp from there. One of the criteria is just getting qualified by the large hyperscalers and some of the other customers in the market. We have been building prototypes and building some inventory. We've got product samples out with various customers now that are evaluating the products. It's a lengthy process. But we would expect some sales in 2027 and then a gradual ramp outward.
The other piece I'd add is later this month we've got some key internal meetings that will help us chart that plan out further. In September, we're going to have our grand opening of the Toledo Faster facility. We've got some key customers coming and some prospective customers with upcoming meetings that will allow us to put some good color around that later this year and as we guide into next year. Again, it's by far our largest opportunity in front of us and it's a little bit about our ability to scale with it because there's a shortage of couplings and quick disconnects within that market space. So we're pretty excited, obviously.
And just a final one there. I know you have some out to hyperscalers. Ultimately, who are you selling to? Are you selling directly to hyperscalers? Are you selling through distributors? Or are you selling through both channels?
Mainly to integrators that are building the equipment, building the cooling racks. But the product needs to get validated by the hyperscaler. So we've got NDAs with multiple hyperscalers and are going through that process. Our sale will be to an integrator, typically.
Just to clarify, the comment about having product samples out is not primarily focused on the hyperscalers. It's other potential customers that we're talking to.
Next, we'll hear from Nathan Jones with Stifel.
I'll do one on data centers as well. Sean, you've been talking about this being the largest growth opportunity in front of Helios. Can you talk about what you think the addressable market is? And you also mentioned that there's a shortage of supply in here. Is there product differentiation where you think your product performs better than other products? Or is that not necessary — is it just you have to be qualified, you have to show you have a product that does the job here and there's so much demand that you'll be able to gain share that way?
Yes. We had, in terms of addressable market, some illustration in our Investor Day materials. Effectively, we see the opportunity for that data center space as almost larger than our existing addressable markets when you look at ag and construction. It's a massive opportunity for us. We're entering later and must displace existing competitors or address a shortage. The differentiated product attributes we're best at, and where we feel very good, are leakage rates — which are critical in a data center application. We've tested competitive products and feel very good about where ours stack up on performance, and we're bringing some MultiFaster-type technology to the market as well. We'll continue to launch a series of products. We've announced some, and we will continue to do that and believe we are positioned well to capitalize on this. Otherwise, we wouldn't be making the investments we've made.
I guess my follow-up question is going to be around capital allocation. Obviously, the balance sheet's in really good shape now. So I guess one following up to Mig's question on CapEx, 4% to 4.5% this year. What do you think the sustainable rate of CapEx is? And then I assume given some of the Investor Day targets, that we're moving into a period where we're going to see more M&A. Can you talk about what the strategic priorities for M&A are? What kind of size of deals you're looking at? Any help you can give us there.
Sure. I'll take the first part on CapEx and Jeremy will talk about M&A. This year is a little higher as a percentage of sales. We're typically running anywhere from 3% to 4%. The last couple of years since I joined the company, there was no need to add capacity. Now it's a bit of spending on optimization and equipment to become more efficient in plants that have paybacks. As we see growth returning, we'll continue to optimize the footprint. We're nowhere near needing significant capacity expansion as we can continue to grow likely about 50% of what our current sales are with our existing footprint. From a capital allocation perspective, we prioritize investments in ourselves first given the growth we see. Over the near term, investing in our Hydraulics business and the uptick we've seen gives us confidence to continue to invest. We track NFPA data, PMI, and industrial production signals. We need to be ready; we can't get behind on delivery dates. For our distributors, inventory levels have come down for four quarters in a period when the market is increasing, so we know they're at restocking levels. That supports orders. From an M&A perspective, it will play a key part of future growth as our cash flow brings leverage down. We're going to allocate capital to drive shareholder returns and pursue M&A thoughtfully.
It's important that we identify acquisition opportunities that complement our existing portfolio. We're excited about what we have; the teams are executing well. You've heard us talk about our long-range planning process that we kicked off in 2024 and the CORE Strategy. We're heading into that planning process this year and M&A will be a big piece of it, talking through the white spaces we want to address. Some of it comes down to build versus buy. What can we do internally and what can we accelerate going inorganically? What are emerging trends and who are the companies and capabilities that can help us get there faster but also accretively? We'll take a very disciplined approach, aligning the management team on focus areas and using that as a springboard into execution.
There are no further questions at this time. I would like to turn the floor back to Tania Almond for closing remarks.
Great. Thank you, operator, and thanks, everyone, for joining us today. We hope you can enjoy the last few weeks of summer. We'll be on the road and look forward to seeing many of you at the fall conference circuit. Please reach out to me if you have any follow-up questions, and have a great day.
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