Greetings and welcome to the Helios Technologies Third Quarter 2023 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tania Almond, Vice President of Investor Relations and Corporate Communications. Thank you. You may begin.

Thank you, operator and good day everyone. Welcome to the Helios Technologies third quarter financial results conference call. We issued a press release announcing our results yesterday afternoon. If you do not have that release it is available on our website at hlio.com. You will also find slides there that will accompany our conversation today. On the line with me are Josef Matosevic, our President and Chief Executive Officer; and Sean Bagan, our Chief Financial Officer. They will review our third quarter results along with our updated outlook for the remainder of 2023. We will then open the call to your questions. If you turn to Slide 2 you will find our safe harbor statement. As you may be aware, we will make some forward-looking statements during this presentation and the Q&A session. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from where we are today. These risks and uncertainties and other factors have been provided in our latest 10-K filing as well as our upcoming 10-Q to be filed with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. I'll also point out that during today's call we will discuss some non-GAAP financial measures which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP with non-GAAP measures in the tables that accompany today's slides. Please reference Slide 3 through 6 now. With that, it's my pleasure to turn the call over to Josef.

Tania, thank you and welcome to today's call. I want to take a moment to send our heartfelt sympathy to everyone being impacted by the recent conflicts in the Middle East. We are all living through very tenuous times. Shifting to the business, let me start by welcoming Sean to his first quarterly call with Helios. Sean joins us most recently from Polaris, where he spent 23 years advancing through their global ranks. He has a proven track record of building, growing, and transforming global businesses into highly productive and profitable operations. Sean has hit the ground running and is a great fit within our team and our company values. He joins us at a very important time as we face a dramatic shift in the market dynamics this quarter. I would like to thank the Helios team for their tenacity in navigating these challenging conditions while maintaining focus on our long-term goals. We saw positive trends starting this year. Last quarter, signs of stalling began to show as we advanced through August and September — they took a turn. As I noted on our last call, our near-term visibility is indeed less clear than our long-term outlook. EMEA shows signs of weakening before it improves. The US economy has shown signs of softness. The APAC recovery is taking longer than expected, especially in China. Our customers in the Americas, currently representing 55% of total revenue, are beginning to hesitate. These customers are facing a less favorable environment for consumer spending and financial liquidity. This equates to what the Fed has been pushing for: a slowed economy to turn down inflation. Given current conditions, we have been taking proactive actions to protect our margins by optimizing our cost structure while balancing our resources to deliver the parts and services our customers have come to expect. Even with global macroeconomic and geopolitical uncertainty, I am confident our strategy is intact. While we manage through the short term, we must continue to lead and execute for the long term. For the last several years, we have been methodically investing for growth. We are well positioned to drive significant leverage across the top and bottom lines when the markets start to recover. We are encouraged by the progress we are making across several customer projects we described last quarter. All these deals are still in place. The timeline for decisions has been pushed out based on the macro environment. Those customers are facing near-term challenges but remain opportunistic and committed. Most of these projects are currently expected to begin in 2024 and start to contribute in the latter half of the year. We continue to demonstrate that our innovation and engineering excellence are paramount. For example, we recently announced two advanced new products from our Electronics segment, both with initial customer examples. The first being the Power View P70 and most recently Climate Zone 2. We are also building on the value our acquisitions bring to create revolutionary technology. We recently introduced remote support software by integrating i3 capabilities with its Signet support platform into our open TV software. Together, this creates a solution that will increase customer satisfaction and loyalty, improve customer support, and enable a recurring revenue stream to capture this added value. In fact, our i3 team has created a software platform for a commercial food service customer, who has added it to thousands of their units. This same customer intends to leverage the Signet platform, as it will connect directly with this new software. We are seeing traction with our new products and services. It has just been masked now by the macroeconomic impacts I described. I will now turn the call over to Sean to review our financial results and updated outlook, and then he will hand it back to me for some closing remarks. Sean, please.

Thank you, Josef, and hello everyone. I'm thrilled to be here. As most of you know, I joined Helios as CFO on August 9. In my first 87 days, I had the opportunity to visit all our major operations while meeting many of our global team. I am impressed with the strength of our leadership and believe we have the right strategy to continue to grow the business and leverage our diversification across markets, geographies, and products. We have strong brands, leading market positions, and expansive manufacturing capabilities. These span across processes that range from injection molding, deep processing, cable harnessing, precision machining, to circuit board printing. We are nimble and responsive, and Helios has a culture of excellence grounded in a strong value system. Combine this with our regional manufacturing capabilities and low-cost operations, and it is clear that our strategy to innovate with integrated solutions, including remote service through software systems, makes us very tough to follow. We are starting from a very solid foundation from all the investments we have made as we further optimize our cost structure. This enables us to weather near-term challenges and be well-positioned to capture the compounding effects of driving leverage across our businesses as conditions improve. Let me start with a review of third-quarter results, talking to Slides 7 through 13. I believe the slides speak for themselves and provide quite a bit of detail, so I plan on hitting some key points and providing additional color. The surprise factor in our results for the quarter was most visible in the $26.2 million or 12% sequential sales decline from the second quarter of this year. Demand in the third quarter reflected a sudden change in dynamics, as certain customers across mobile, agriculture, marine, industrial, and health and wellness end-markets shifted gears and began pulling back orders and pushing out decisions. Given we have quite a bit of book-and-bill business, this readily impacted the third quarter. Every region was down sequentially this quarter, the exact opposite of what we saw in the first and second quarters. European markets were especially weak across both segments and were down 24% compared with the second quarter, or $13.8 million, more than half the total decline. The Americas were down 7% or $8.7 million sequentially, while APAC was up 8% or $3.7 million. The lower volume in the quarter heavily impacted gross profit and margin year-over-year and sequentially due to under-absorption. Gross profit declined $9.6 million, and gross margin contracted 380 basis points year-over-year. While we had benefits from pricing and foreign exchange, it only partially offset the volume impact along with inflationary costs. Given the larger decline in volumes sequentially, gross profit was up $16.1 million from the trailing second quarter, resulting in gross margin of 29.6%. The $6 million increase in SG&A expenses compared with Q3 2022 primarily relates to acquisitions, integration, higher wage and benefit costs, along with increased R&D investments to maintain our leadership positions. As evidenced by our actual Q3 2023 sequential reduction of SG&A expenses, we are executing plans to control overhead expenses while continuing to position the business for the opportunities we have to diversify and grow. Adjusted EBITDA in the quarter was $35.6 million, or 17.7% of sales, reflecting the impacts of volume and investments. Volume is significant for the business as our decremental margins run at about 40%. Our strategic plans are focused on improving our incrementals while reducing our decrementals. I see opportunities to leverage fixed costs as we gain new customers in new markets while also continuing to gain efficiencies from our integrated manufacturing and operating strategy. Our effective tax rate in the third quarter was 30.5%, up 690 basis points from 23.6% in the prior year based on the mix of earnings in various jurisdictions. Diluted non-GAAP cash EPS of $0.44 in the quarter reflects the impacts I’ve discussed, as well as a $0.09 impact from higher interest expense compared with last year. Briefly by segment on Slide 12, you will find the third-quarter review of our Hydraulics segment. Sales were up 1% over the prior year period, driven by sales to the Americas and some pricing. We estimate about $7.8 million in sales were delayed due to supply chain shortages. This started to come down sequentially compared with last quarter. Sales declined in the mobile, industrial, and agricultural end-markets. Acquisitions added $11 million and there was a $2.2 million favorable foreign exchange impact this quarter. Sequentially, hydraulics declined $20.4 million, driven by swift changes in the mobile, agriculture, and industrial end-markets. Notably, of those markets, on a year-to-date basis, agriculture is still up, which only intensifies the degree of unexpected change in demand this quarter. The decline is readily seen by region, with EMEA being down $12.5 million quarter-over-quarter, more than half of the overall decline. Gross profit declined $5.4 million year-over-year, resulting in gross margin contracting 430 basis points as pricing and efficiencies were not able to offset flattish volume to reflect the margin profile of acquired businesses, restructuring costs, and higher wage and benefit costs. Sequentially, gross profit was down $8.6 million, although gross margin contracted just 150 basis points. SG&A expenses increased by $5.6 million year-over-year. This increase was driven by incremental SG&A from acquisitions, as well as inflation in labor and operating costs and investments in R&D. Sequentially, SG&A was unchanged. Please turn to Slide 13 and we'll discuss the Electronics segment. Given its US sales concentration, there was no foreign currency impact in the quarter for the segment. Year-over-year, electronics sales declined $6.6 million, or 9%, and had about $3.4 million in sales delayed due to the supply chain. Marine, which has held fairly steady in sales every quarter for the last two years, dropped this quarter, impacting both the year-over-year and sequential comparisons. Notably, another category in our recreational market, off-road vehicles, mostly offset the decline in marine. This does validate our diversification strategy is working. This quarter, we broadly had so many markets impacted at once. Our diversification was not able to overcome the macro drag. Health and wellness was down over 20% year-over-year and 8% sequentially but still up over 50% from the trough in the fourth quarter last year. Gross profit was up $4.2 million from lower volume while gross margin contracted 320 basis points as pricing and efficiencies were not able to offset lower volumes, higher material costs, restructuring costs, and reduced leverage of our fixed cost base. SG&A expenses increased 22% compared with last year, which included incremental SG&A from acquisitions, increased personnel costs, and investments in R&D. Sequentially, SG&A grew 2%. Please turn to slide 14 for a review of our cash flow. We generated $11.8 million in adjusted cash from operations. Capex of $5.9 million was 3% of sales for the quarter, with investments in capacity expansion in North America and Asia essentially complete and equipment purchased. The trailing 12-month adjusted free cash flow was $53.1 million with a conversion rate of 103%. Turning to slide 15, even as we face headwinds, we have an extremely healthy balance sheet and the financial flexibility to execute our strategy for growth. Helios's track record of delivering exceptional margins drives its strong cash flow engine. Our capital allocation framework prioritizes reinvestment back into the business to support new product development and operational efficiency. Our long-standing dividend is an important component of overall shareholder returns. Finally, we remain opportunistic in executing both flywheel and transformational acquisitions that fit strategically into the Helios portfolio. Cash and cash equivalents were $35.2 million, providing us sufficient liquidity. Total liquidity at the end of the quarter was $219 million. We reduced debt by $4.6 million in the quarter and our net debt to adjusted EBITDA leverage ratio was 2.98 times at the end of the quarter. In summary, while our near-term outlook is less than expected from the start of the year, I am extremely encouraged by the underlying strength of our foundation and strategy, the boundless white space of opportunity, and the prospects around creating more discipline to prioritize investments that will produce shorter payback and higher returns. Turning to slide 16, we'll talk to our updated expectations for the remainder of the year. I will start by saying we have an opportunity to further our discipline around financial forecasting processes through greater rigor of data analytics and leveraging the power of business intelligence. Our updated outlook considers the rather swift change in demand we experienced in the third quarter and the feedback we are receiving from our sales channels and customers. Having been abruptly impacted by global macroeconomic uncertainty and the resulting dynamic market conditions, we are modifying our outlook appropriately for the remainder of the year. We now expect revenue in the range of $820 million to $835 million, implying fourth-quarter revenue of approximately $178 million to $193 million. With the decline in volume and the impact to margins, combined with continued disciplined investments, we are moderating our adjusted EBITDA targets for this year to $152 million to $167 million. I believe our business can support delivering mid-20s and better adjusted EBITDA margin over time with sufficient volume. In the near term, our focus is on executing our long-term strategy while protecting margins and controlling expenses in our operations. We have several significant projects underway that should start to materialize in more meaningful ways later in 2024 and build through 2025. Though we expect current market conditions to result in a slower start for 2024 than we had earlier anticipated. Like my experience at Polaris, where I was involved in the growth of the company from $1 billion to nearly $10 billion, I believe that as Helios continues to execute on our solid strategy while improving our processes and systems, we can grow well beyond the next milestone of $1 billion in revenue. While the near term has macro headwinds, Helios is positioned well to weather these market fluctuations with its expansive end markets, innovative products, diversified geographies, leading market positions, strong brands, and extensive manufacturing capabilities. We have significant potential, and our long-term future is very bright. So let me turn it back to Josef, who will reference slides 17 to 18.

Thank you very much, Sean. Again, we are very happy to have you on the team. It's certainly an interesting time. When I look at what Helios has been able to accomplish together over the last three-plus years, I am incredibly proud of the team's hard work and dedication. You can see from the last couple of slides that we have a great foundation of established step-level growth that we are building from, reflecting back to 2019 going into 2020 when the pandemic started and there was a market pullback — no one knew exactly what could be accomplished in the near term. You can see how much we have grown since then. We are so much better positioned today from all the investments we have been making in the last several years. This is why I'm more excited today than I have ever been, thinking about our ability to jump off with the next step on the growth curve. When you think about how we have been transforming into an integrated operating company, it could start to generate recurring software sales as early as next year — that is a true transformation. We have a great future in front of us. We will navigate through this, just as we have gotten through the pandemic. We have a proven strategy, a dedicated team, and are excited to keep driving total growth every day. With that, let's open up the lines for Q&A please.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Chris Moore with CJS Securities. Please go ahead.

Hey. Good morning, guys. Thanks for taking a few questions. Maybe you could just provide some more thoughts on 2024. It sounds like the large deals you're working on aren't lost, they've been pushed, but maybe just a little bit more on how you're thinking about 2024 at this stage.

Hey. Good morning, Chris. Look, this is probably the key part to understand about our story right now. We are getting in front of these large OEMs. We have been bidding on deals that we have never had the chance to bid before, and you see the shift in our mix of OEM business. In Q2, it was up 61%. In Q3, it declined 53%, which was reflected in our results. And as we saw the broad macro impact us across all of our end markets, including agriculture, especially in the marine and health and wellness industries, it's kind of what you saw here in Q3. On the other hand, we grew in absolute dollars sequentially in the distributor and integrated channel. So back to your question, the size of those OEM deals that we are bidding on are bigger than we could have imagined at the beginning, and they are clearly still in play and have not been canceled. We continue to work with those customers hand-in-hand in pretty much everything we have said from day one. When you get invited to the table with those OEMs, you've got to have the right products. You've got to have the technology and differentiation, and you need to have, most importantly, the capacity and the processes and systems in place to handle that before you even get the final signature on the paper. Combined with our regional approach in manufacturing, it makes us a strong candidate. We are building out our center of excellence for maximum leverage and ultimately for margin improvement. This has been a very methodical step-by-step approach that we have been constructing now for over two years, and we certainly expect this will play out exactly how we structured it. There are really no indicators that tell us it will not, and once we are expecting, it becomes a very sticky relationship based on the core foundation that we have developed over the years. So we are, like everyone else, somewhat frustrated by the macro environment right now. But unless we think the world is going to end tomorrow, we're going to stay laser-focused on investing in our future and execute those deals and protect our business. The scope of those deals, Chris, is expanding pretty much day by day, as additional customers have learned of our capability; our flywheel acquisitions have contributed towards making this stickiness even stronger. We had to invest in additional talent and engineering, and that explains the investment portfolio in capacity and SG&A. We don't want to cut into this because we are literally in the finishing stages of those deals. So the key message here is to stay the course with us. We continue to be extremely confident that we will execute our strategy.

Got it. Extremely helpful. Thanks, Josef. Maybe just one follow-up. It's interesting how broad-based the decline was in kind of how quickly you saw that downturn. As you mentioned, OEMs were, I don't know, 61% in Q2. So as you kind of become more and more focused on the OEM route, is that where you saw that quick decline? Was it the OEM's ability to make a quick decision and pull back versus the distribution side?

That is correct. It was largely in the marine sector and recreational and health and wellness. We also saw a pullback in Europe and North America too.

Got it. So I would guess longer term that means quarters could be a bit more lumpier because of the OEM focus, but the flip side obviously is there in terms of quicker decisions on the positive. So, I'll leave it there. I appreciate it.

Thank you, Chris.

Thanks, Chris.

Our next question comes from Jon Braatz with Kansas City Capital. Please proceed with your question.

Josef, when you look at the projects that are upcoming in 2024 or late 2024 maybe in 2025, are they more in the consumer markets versus the industrial markets? How can you parse that out for us?

Good morning, Jon. All of them are really in the industrial commercial markets. It's where we are focused, largely OEM system sales. The story that we have been excited to tell over the last two years starts with proprietary technology on the manifold side. And then it progresses through the cavity, and then you build that manifold system into something much bigger, adding electrification to that. You can't really incorporate any other products and our products once you design it. So we continue the notion that has been developed years ago in the industrial commercial applications, very nichey, but with much more content over time.

I'll just add, there are quite a variety of different end markets. So when we look across whether it's food service or construction, we're really starting to see that diversification we've been trying to foster continuing to blossom there as well.

Okay, thank you. And one last question in your commentary. Obviously, your results have been affected as you said by the macroeconomic conditions. And also, you mentioned geopolitical issues. And two things: Number one, can you—is there anything specific to the geopolitical things that we're seeing that have directly affected your revenues? And then also, the conflict in the Middle East was more of a late third-quarter item. Have you seen any impact from what we're seeing in the Middle East here in the fourth quarter?

This comment was more about our response, Jon. We still have shipments pending into the Russian markets that we previously had. There is also quite a bit of hold-up on some orders that should have come. Folks have been a bit more cautious, waiting on the sidelines, placing some orders we anticipated to come in Q3 and waiting out what's going to happen here, if anything at all, but nothing specifically related to the Middle East.

Okay. Thank you.

Thanks, Jon.

Thanks, Jon.

Our next question comes from Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Hey, good morning, everyone. Jon, welcome aboard.

Good morning, Jeff.

Thank you.

So I'm just trying to get a better read on what's destocking and what's real weakening demand? And I think you made a comment around the fourth quarter that you still assume that inventories are high. Like what are your customers telling you about the level of destocking and where inventories are and when you think you get through some of the destocking?

Yeah. Good morning, Jeff. We just had a pretty large meeting with our distribution channel just over the last two weeks and touched the top 25. Clearly, we are seeing the inventory coming down. Is it coming down to the levels that they're getting ready to place large orders? Not quite yet. But when you look at the trend that's transpired, Sean, I believe you went from a 13% reduction to 6% to 3% to 2%. So it's clearly going in the right direction. It gives us a level of insurance against inventories that are pulling back, so there’s a continuing flow but way not at the level we saw a year ago.

The only thing I'd add, Jeff, too, is just sequentially. We continue to see an increase here in the third quarter in that distributor channel. So directionally, where the inventory levels are and the experience we saw in our sales in the third quarter gives us some confidence that there could be some opportunities to start replenishing that channel.

Okay. Can you just talk about the linearity through the quarter? I think you said July was okay and then it tailed off, and maybe just comment on October. We've heard from some companies that they saw August, September softness and then maybe lifted its head in October. I'm not sure if you're seeing that.

Yeah. We communicated in Q2 it wasn't still a strong quarter, but it was still pretty decent for us. Then we got into August and started seeing the marine segment pulling back, and then there was a sharp decline at the beginning of September, falling by about 37% to 40%. The largest piece was in the marine, recreational, and health and wellness segments.

Okay. And then, Sean, I think you talked about controlling decrementals, and I'm just wondering how you're thinking about balancing cost control and managing the decrementals on the downside versus some of these investments and capacity adds that you need to move forward with or want to move forward with?

Thanks for the question, Jeff. I think for me as I look at the capacity, it was important that we get that capacity in place as we're continuing to try and secure some of these larger OEM system sales, and we need to demonstrate that we have that capacity. When we look at the cost control side, we did a nice job in the third quarter reacting swiftly when we saw some of the volume coming down. We're not going to get the full effect. You won't see that in the third quarter. But as we get into the fourth quarter, you'll see the full effect of those very targeted savings. Now, I would tell you, we did not cut into R&D because that's the lifeblood of this company. But when you look at our run rate of our operating expenses, despite some acquisitions we've done this year, it will be relatively flat relative to the fourth quarter last year, which was the highest quarter of OpEx last year.

Okay. Appreciate it.

Thanks, Jeff.

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

Yes. Thank you. I want to put a finer point on the discussion here, and maybe focus on things at the segment level. So if we're looking at your Hydraulics segment, obviously, we don't have big health and wellness and marine exposure there. The agriculture softness, I don't know that that's terribly surprising given what the OEMs are going through right now. So that, at least to me, part makes sense. I'm just curious about mobile and industrial, because you talked about emerging softness there as well. And related to this, I'm curious as to how you think about your Americas portion of the Hydraulics business specifically, because organically this business has declined now for two quarters in a row. And I'm curious as to what's embedded in the guidance for the fourth quarter specifically?

Good morning, Mig. Regarding North America, to address your question specifically: in addition to the market softness, we also experienced some internal challenges related to establishing the center of excellence in North America. This will support the new incoming business as we transition products to Indiana, increasing our demand from a $25 million to $30 million business to nearly a $200 million business. We encountered a few minor setbacks during this process. As expected, when moving significant volumes and depending on outside contractors while setting up a new building, we likely missed out on about $7 million to $10 million in revenue, which is currently in our backlog. Looking ahead, we've recovered from that setback and are now operating at a run rate slightly exceeding what it was previously. We plan to align the backlog in the next couple of months.

But in terms of your comment for mobile and industrial end market softening, I'm trying to understand your perspective there because, at least from what I've heard thus far this earnings season on the construction side, there doesn't seem to be any production cuts unless I'm mistaken. Please correct me. And maybe the same thing with industrial as well. That I can see, but it's the other part that I find surprising. So can you comment at all on that?

Yes. Look, Mig, I mean looking at the chart now and all the numbers, at least in the markets we are participating in—you know well enough that we are a pure-play hydraulics and electronics company. We have a strong position in the marketplace and what they communicate is exactly what's going on. I mean, is it a temporary pullback here after orders being canceled? No, but the market has slightly pulled back.

Yes. Mig, it's Sean. I would just highlight specific to the Hydraulics segment when we look at it. I mean certainly it's that construction piece of the mobile, so the lighter construction-type vehicles, and then in the industrial side, or the industrial machinery that we saw the most severe year-over-year decline. So that's where the pressure points are. But there are pockets that were up as well. I mean oil and gas and renewable energy is more of the macro theme. So it was certainly a mix, but there was more to the downside throughout the third quarter.

Okay. In Electronics, I guess you talked about the health and wellness and the marine portion of the business seeing some pressure. When I'm looking at your implied guidance for the fourth quarter, it's got revenues maybe stepping down sequentially down to call it like $55 million. Is this the sort of run rate that you think carries into 2024? Because that would be—this run rate would basically be consistent with the prior year when you were experiencing pretty significant destocking in your health and wellness business?

So Mig, can you clarify? Did you say $55 million sequential reduction?

No sequential reduction; that the implied revenue for the fourth quarter in electronics is $55 million. I'm curious if you think of that as being a run rate into 2024? Or do you think that is there something that's temporary in terms of stock impacting the fourth quarter specifically? Or is this sort of where the new demand run rate moving forward?

Yes. No, I would not say it's a new run rate. I think you got two dynamics there. When you think of the Electronics segment, speaking to innovation controls, there's been more near-term headwinds, particularly in the marine space. I think when you look at that business as we head into 2024, it will be a tough start to the year, but we would expect that to recover as the year goes on. From a BELBOA perspective, as you know, last fourth quarter was kind of the trough had a nice first half and then the third quarter kind of declined a bit. But we clearly see that business on the up. We're seeing order rates continue to increase. So I would not say that's the new norm, but you're correct in terms of the fourth quarter implied guidance in that kind of $55 million to $60 million range relative to the third quarter where it was a little bit higher than that.

Okay. My last question is really on how you're planning on addressing all of this from a cost perspective because, obviously, the environment has changed for you. Decremental margins were high in the third quarter. The implied decremental margins in the fourth quarter are, by my math, north of 100%. So I'm sort of curious as to where exactly are you tweaking and what the carryover from savings would be into 2024. Thank you.

Yes. Mig, look, we are very focused on bringing those deals across the finish line and holding on to our engineering and R&D. So on the people side, we're going to need those folks that we invested in and trained to manage production as we onboard those new customers. We have taken countries discipline here in terms of cost control and controllable expenses, travel, and looking at many other areas, trade shows, and so forth. But we believe as it stands today, again, if the world does not end tomorrow, those deals will pay back and we shouldn't have this conversation much longer. So Sean, I don't know, maybe you can add your perspective.

Yes. I think Josef hit that right on. If you think about the cost structure of the company, certainly in our cost of goods sold section, some of the measures in the near term are where we have the excess capacity. We're taking the opportunity over the holidays to shut down a couple of excess days to save a little bit on overhead expenses. But really, as I kind of tried to highlight in our operations, our operating expenses sequentially will be down a couple of million dollars from where our run rate has been in the first three quarters. So you're really going to see the benefit of the actions we took in the third quarter as we saw the slowdown come in. When I look at the cost structure and you consider the fixed versus variable costs, we are also looking at what's flexible. These are opportunities to defer some things because we want to be mindful and not cut too deep into our muscle; when this volume comes back, as you highlight the decrementals, the incrementals are going to flow nicely, and we can leverage back up the OpEx to support the goal.

Okay. Thank you.

Thanks, Mig. Our next question comes from Nathan Jones with Stifel. Please proceed with your question.

Good morning, everyone.

Hi, Nathan.

Hi, Nathan.

A few follow-ups to some of Mig's questions here. Starting off with these large contracts and the capacity additions, you guys are pretty confident those are going to get signed in the third quarter and that volume was going to, I guess, start in the first half of 2024. It sounds like that's pushed out to the second half of 2024. The capacity additions have been added, so there's increased fixed costs there that's going unabsorbed at the moment. Maybe some more color around why those contracts didn't get signed in the third quarter as planned. What kind of guarantees or commitments you had from those customers in order to go and put that capacity in, or whether that was calculated risk to demonstrate your ability to deliver on volume without commitments in hand from those customers? Just any current expectations for when we might see these things actually get signed?

Yes. So Nathan, once again, the customers that we have been communicating to our investors, including all of you, those deals are well in play. We expect to sign those deals based on what we have communicated. There hasn’t been any change. We have some ownership in this as well as we have assumed the capacity in many areas to be completed sooner, but due to supply chain challenges, equipment challenges, and many other issues as you stand up new processes, those are not the same processes that we had previously. So, you're mixing a hydraulic operation and have to make sure it stands up correctly to come out of the gate strong with the cost structure and the margin that we want. Not to deviate from your question, but we are certainly on track to lock in those deals. This current macro pullback hasn't helped in terms of timing, but there is no indication we are too far down the road with these customers we have been working with. One of them is literally in the 99 percentile now, so that is the best I can say without overcommitting and under-delivering.

I was just going to reference your capacity question too and the headwind you had from the expense. If you look at the major expansions in our Electronics segment, that's certainly in our Tijuana factory for the Balboa business, but also with some of the moves of the innovation control manufacturing there. It opens us up to significantly more opportunities to bring in more business. I'd highlight wire harnessing as a key one, but really, it's not going to affect us too much this year because we're just bringing that on board in the fourth quarter. We expect to fully have enough volume next year for that to cover the additional overhead and depreciation. When you look at the Hydraulics segment, particularly over in Europe, what we've been doing is really impressive between the automated warehousing and additional setups we’ll be putting in place next year. That will quickly pay off once the volume starts to increase. Lastly, with the Mishawaka and Sarasota Florida move that Josef referenced, it was really more of a space expansion—50,000 square feet, but moving equipment from both Florida and Ohio into there. Thus, there isn't much of a drag, and we will start earning that back completely in 2024 as that volume flows through.

Okay. Just following up there, Josef. I mean, I think you said you have some ownership of this as well. And it sounds like potentially there are milestones that you need to hit before the customer will commit to these contracts, and maybe hitting those milestones slipped out of the third quarter. Was that more behind what the delay in signing these contracts is?

There were a couple of things, Nathan. So one is finishing that capacity. And what I mean by that, it's not just putting the building up or putting the expansion up, but standing up the equipment, setting up the automation, training the people. This is a completely different process. We are no longer talking about commodity; we are talking about a system. That system's debt training comes with testing, and I read that waiting a couple of weeks longer to get it right versus starting this and fumbling could be costly. So we're not going to do that. So that's one ownership. The other is the fixed contractual obligation, how to price that product accordingly over the next three to five years and the following model change because when you expect, you expect. We are not talking about one piece of business, Nathan; we're talking about a full system. We do not have straightforward applications. We are a highly specified complex product operation that allows us to charge accordingly.

And Nathan, I would just add I think what Josef is describing is obviously, each one of these deals with all of these very large OEMs is very customized applications, and all of these different facets of pulling these systems together have to be customized and be very unique to the situation. It's just a much more complex process as we are evolving into this new model. So it just takes more time.

And do you have commitments from these customers that once all of these processes are stood up and you can demonstrate that you can produce the products and they work that they will commit volume to Helios?

I think we do.

Thank you very much everyone for joining us today. We appreciate your interest and continued support of Helios and look forward to updating you on our fourth quarter results in February. We will be attending a number of investor conferences between now and the end of the year. So we look forward to seeing you out on the road. Please feel free to reach out to me with any follow-up questions. Have a great day. Take care.

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