Q3 2021 Gentherm Inc Earnings Call
Greetings and welcome to the gender, Inc. Third quarter 2021 earnings conference call at.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please.
Please note this conference is being recorded.
I will now turn the conference over to your host <unk> Brentano Senior Vice President of Investor Relations. Thank you you may begin.
Thank you and good morning, everyone and thank you for joining us today.
<unk> earnings results were released earlier this morning, and a copy of the release is available at <unk> Dot Com <unk>.
Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of <unk> website.
During this call we may make forward looking statements within the meaning of federal Securities laws.
Statements reflect our current views with respect to future events and financial performance and actual results may differ materially.
We undertake no obligation to update them, except as required by law.
Please see <unk> earnings release, and its SEC filings, including the latest 10-K and subsequent reports for discussion of our risk factors and other risks and uncertainties underlying such forward looking statements.
During the call we may discuss non-GAAP financial measures as defined by S. E C regulation G.
Reconciliations of these non-GAAP financial measures to their comparable GAAP financial measures are included in our earnings release or Investor presentation.
On the call with me today are Phil I alert, President and Chief Executive Officer, and Matteo M versa, Chief Financial Officer.
During their comments, Phil and Matteo will be referring to a presentation deck that we have made available on our website at <unk> dot com flash events.
After their prepared remarks, we will be pleased to take your questions.
Now I'd like to turn the call over to Phil.
Thank you Jane and good morning, everyone and thank you for joining us today.
I'm pleased with the continued strong execution of the Jensen our team despite the unprecedented global supply chain disruption in production volatility.
The automotive industry continues to face semiconductor related customer volume reductions and plant shutdowns escalating freight cost and other inflationary factors in.
In addition, all little changes in customer production levels are creating significant near term challenges predominantly related to managing variable production costs.
For example, light vehicle production in our key markets in the third quarter was 19% lower than what was expected just three months ago.
While our automotive revenues declined 8% in the third quarter, excluding the impact of foreign currency translation compared to a year ago, we outperformed light vehicle production in our key markets by 15 percentage points.
In addition, we continued our momentum on automotive awards, securing $260 million in awards from global Oems and the third quarter.
On the cost front, we continued our disciplined approach to expense and working capital management, while increasing our R&D investments.
In addition, we've been negotiating with our customers and suppliers on reimbursement and price increases to partially offset the near term material cost changes that we're experiencing as a result of the supply disruptions.
We are now starting to realize some financial benefits from these discussions.
In spite of the significant supply chain headwinds on a year to date basis, we delivered adjusted EBITDA margin rate of 15, 8%.
And generated $117 million in cash flow from operations, 60% more than the first nine months of 2020, and nearly 40% more than the first nine months of 2019.
Hi, Teo will provide more details on our financial results in a few minutes.
Now turning to the automotive highlights on slide four.
In the third quarter, we launched our automotive solutions on 11 different vehicles across six Oems, including General Motors, Great wall and Nissan.
We continue to see momentum on our Ccs product and launched on the GM Hummer EV, great wall way and the Nissan Infiniti <unk> 60.
On the technology front I am pleased to share that Gen. Thurman was recognized in our partnership with Lear as a 2021 automotive news pace pilot innovations to watch award winner.
For the into thermal comfort seat powered by our climate since technology.
Receiving this award is the outcome of our joint efforts that has resulted in a smart solution that delivers faster passenger comfort.
On the battery performance solutions front, the fastest growing product in our portfolio as our cell connecting technologies.
Our production program with BMW scheduled to launch next year is progressing well.
We also continued to win additional development projects with several customers around the world.
Including our very first prototype samples with embedded sell censoring.
Just last week, we announced our partnership with Datong NXP semiconductors to jointly develop a new cell connection system leveraging the unique capabilities of both companies.
This first of its kind cell connection system will integrate the datong NXP single cell monitoring integrated circuit with the proprietary design of Gen. <unk> foil based conductor to replace complex sensor cable harnesses.
We see this partnership is an important milestone that will significantly advance electric vehicle battery performance.
Safety longevity and improve user feedback.
We're excited that Oems and battery manufacturers are increasingly interested in our innovative mechanical structuring process because of the increased design flexibility and the ability to enhance overall safety of the lithium ion battery pack.
On the climate since front, we continue to see growing interest from global OEM customers.
And we're making great progress on advanced development projects.
And more importantly, our first production program is progressing very well.
Our microclimate platform incorporates multiple thermal effectors, including next generation Ccs net conditioning footwell and surface heating all coordinated by our electronics and software, which utilizes <unk> proprietary thermal physiology based algorithm.
As the transition to electric vehicles accelerates Gen. <unk> is perfectly positioned with our breath of solutions, including our core climate comfort products climate as well as our battery performance solutions.
To help Oems achieve their electrification goals by increasing vehicle range.
And energy savings all while delivering a best in class personalized thermal experience.
Now on to slide five to discuss automotive awards.
In the third quarter, we continued our business award momentum and secured $260 million in New program awards across 13 different OEM customers.
Our global team, 170% of the opportunities available to us.
Of note our win rate was negatively impacted because we did not win one opportunity against the incumbent due to the very short time to launch.
Importantly, I am pleased to share that nearly 40% of our awards in the quarter were for electric vehicles.
We won multiple Ccs awards, including platform wins with the Dodge Ram 500.
Ford Explorer EV and the Lincoln aviator EV.
I'd like to congratulate our still Lantus customer business unit for winning both Ccs and seat heater awards for the next generation Ram 1500.
I am pleased to share that we are now the exclusive thermal seat provider for this platform as a result of this conquest win.
During the quarter, we received for steering wheel heater awards across multiple Oems, including the Buick enclave Ford Mustang, Great Wall way VB, seven and the <unk> Lincoln Co E SUV.
On the battery performance solutions front, we continue to make progress in expanding our business winning air cooling battery thermal management awards for the Hyundai Kona and Renault Sun water.
While our award dollars and win rates are lower in the third quarter compared to the first two quarters of the year, we continue to see strong momentum in quoting activities leading into the fourth quarter.
Now, let's turn to slide six for a discussion of our medical business.
During the third quarter, we saw increased demand for our medical products, especially our flagship product Blanka troll and.
Im pleased to share that we secured a large blanket purchase order to replace competitive devices at the Mayo clinic in Rochester, Minnesota.
In addition, we also secured a large upgrade award from Massachusetts General and Boston.
These are just two examples of how we're driving market share growth in our medical business.
In addition to growth in <unk> unit sales were also seeing increased demand from hospitals that are using our hemotherapy equipment to treat COVID-19 patients.
As an example in the third quarter HCA healthcare in Nashville, Tennessee bought 20, Hemathermal devices for use throughout their network.
In the third quarter supply chain disruptions caused by parts shortages and production labor constraints impacted our ability to fulfill all of the strong customer demand and medical.
We're working hard to address these constraints in order to meet the continued strong demand going forward.
Summarize I am proud of the <unk> team for consistently outperforming light vehicle production in the key markets we serve.
Despite the headwinds in the global supply chain, we generated significantly higher cash flow compared to the third quarter of last year.
While uncertainty remains about where production rates will be for the next 12 months. We believe there is significant pent up demand that will need to be met once the unprecedented supply chain constraints are resolved.
I am extremely proud of our team's agility flexibility and dedication to deliver on all of our commitments to our stakeholders in spite of these tremendous challenges.
We will remain focused on operational execution innovation and cash flow generation, all of which position us well to continue to deliver over the long term.
With that I'll turn the call over to Matteo for a little more color on our financial results.
Thank you Phil and thank you to everyone joining the call today.
So let me turn to slide seven to focus on the items that most significantly impacted our third quarter results.
For the quarter total revenue decreased by 6% compared to the same period last year.
And if we adjust for the impact of FX, our overall product revenue decreased by 7%.
Starting with the automotive segment revenue was $233 million down by 7% compared to the third quarter of 2020.
And adjusting for the impact of foreign currency translation.
Automotive revenue decreased by 8%.
In comparison, according to IHS latest data light vehicle production for our key markets of North America, Europe, China, Japan, and Korea decreased by approximately 23% over the prior year quarter.
And as Phil mentioned earlier, we outperformed light vehicle production by approximately 15 percentage points.
The majority of our product lines were impacted by the OEM shutdowns related to the semi conductor shortage in.
And specifically.
Ccs revenues decreased 7% driven by lower production volume, Austin, Lantus, and GM trucks and Suvs.
<unk> revenue decreased 16% due to lower production of GM trucks, and Suvs as well as lower production volume with Ford still Lantus and BMW.
Electronics revenue decreased 20% due to the lower deliveries of the memory seat module to Ford as a result of their production shutdowns.
This decline was partially offset by higher <unk> related sales.
These negative effects were partially offset by higher sales in the other product lines and specifically steering wheel heaters revenue increased by 9% due to higher volumes with Tesla model X and Y and great wall.
Automotive cable revenue increased by 3% due to higher volume with Bosch.
<unk> revenues increased by 6% due to higher sales of the 48 volt Mercedes C class and the BMW <unk>.
And other automotive revenue increased by 22% due to higher sales of Mec conditioners.
If we move to medical revenues increased by 6% due to higher Blanka toll and hemo term sales as Phil just mentioned earlier.
Moving to the gross margin.
Gross margin rate for the third quarter was 28, 5%.
And this compares to 31, 8% in the year ago period.
The 330 basis point decrease was driven by the negative impact from industry wide supply chain disruptions.
Annual customer price reductions as well as wage and material inflation.
These were partially offset by cost recoveries from customers and supplier cost reductions.
We estimate that the impact of the supply chain disruptions in the quarter.
Adjusted in approximately $29 million in lost revenue for <unk>.
And $9 million and higher cost of goods sold due to higher material costs.
<unk> productivity at the factories and increased premium freight.
Partially offset by $4 5 million in cost recoveries from customers.
Moving to operating expenses, which were $48 7 million in the quarter compared to $44 1 million in the prior year period.
The 2021 third quarter amount included <unk> 7 million of restructuring charges.
Compared to zero point $3 million in last year's third quarter.
So if we adjust for restructuring and acquisition expenses in both periods.
Operating expenses were $47 9 million up from $43 8 million in the third quarter of 2020.
The year over year increase of approximately 9%.
It was primarily driven by higher research and development costs as we increased investment in climate Science and battery performance solutions.
<unk> G&A due to the reversal of the temporary austerity measures taken last year to mitigate the impact of Covid.
Partially offset by higher R&D income.
Adjusted EBITDA in the quarter was $30 5 million.
<unk> to $50 1 million in the prior year period.
And finally adjusted diluted earnings per share in the quarter was 51, a share compared to 91 cents per share in the third quarter of last year.
And our effective tax rate was 22, 9%.
So now moving to the balance sheet on slide eight.
Our cash position at the end of the quarter was $195 million up sequentially from $187 million in the prior quarter.
The increase of $8 million was the result of $24 million free cash flow generation.
Partially offset by repayment of the revolver and cash expenditures related to acquisition and technology investments.
The 24 million free cash flow generation in the third quarter compares to $19 million in the prior year period.
And the $5 million year over year increase was driven by higher cash flow from operating activities.
Partially offset by higher capital expenditures.
And notably as Phil mentioned earlier year to date, we generated $117 million in cash flow from operations and $88 million in free cash flow significantly strengthening our balance sheet.
As of September 30th the net debt decreased sequentially by $17 million.
And total debt stood at $40 million and we closed the third quarter in a net cash position of $155 million.
Based on the trailing 12 month consolidated adjusted EBITDA and the September 30th we.
We had $440 million of remaining availability on our line of credit.
Up from $432 million at the end of the second quarter.
And the total available liquidity as of September 30th was $635 million up from $618 million at the end of June.
So now let me turn to slide nine for the 2021 guidance.
And let me start by saying that the semi conductor shortages and related customer volume reductions continue to be extremely volatile, creating significant challenges in the foreseeable future.
Based on our performance in the third quarter of 2021.
The latest light vehicle production forecast.
And the best information that we currently have from our customers and suppliers.
We are updating the guidance that we last provided on September 14th.
We are now expecting product revenues to be in the range of 1.0 to 210 5 billion, assuming FX remains at current levels.
And the midpoint of our guidance range implies an organic growth rate of approximately 11%.
Additionally, we now expect adjusted EBITDA margin rate to be in the range of 14% to 15% and.
And our effective tax rate for 2021 to be between 20 and 22%.
Capital expenditures are now.
Now expected to be in the range of $40 million to $50 million.
And with that I will turn the call back to the operator to begin the Q&A session.
Thank you.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question is on the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Luke junk with Baird. Please proceed with your question.
Good morning, Thanks for taking the questions.
Hello, Good morning, Luke.
First wanted to ask about the guidance and specifically I don't know if you'd be able to outline any swing factors within the range just trying to think of what range of outcomes, you're contemplating in the fourth quarter as we look at the low end versus the high end of guidance.
Sure look let me, let me jump in real quick first and just kind of.
Frame it and then we will we will try to answer the specifics there, but I think it's pretty clear that the story of Q3, and then leading into the guidance for the remainder of the year, it's really around the supply chain volatility and especially related to semiconductors and the customer cancellations.
I really want to emphasize that consumer and OEM demand continues to be very strong and growing for our product for our thermal solutions product.
We believe once the supply chain.
<unk> as a result, we're going to return to considerable revenue recovery and growth.
And I believe a return to high teen EBITDA margin rates.
Take a quick look at Q4 of 2020 Q1 of 2021 I think those are solid proof points of what we can deliver and what we expect to return to.
But with that let me let me just give a quick view of what's Hasnt is transpiring for us specifically in the industry.
Now looking back at Q3, the industry expectation and at that time the customer information. We were getting was that we would expect to see a recovery in Q4.
But certainly late Q3 up until the current moment, we've seen a rapid deterioration in.
And in the <unk>.
Supply chain situation, especially related to semiconductors.
And driven heavily for us by customer order cancellations.
The customer volatility and shutdowns or even at a higher rate in Q4 than we've seen previously.
This is even though our customer orders are really running high we feel we have to continue to assume that these cancellations will go on for the foreseeable future for us.
Based on this we really believe the IHS forecast for the fourth quarter is overstated.
In addition, we are experiencing even higher volatility from our own semiconductor suppliers on our side.
One of them very recently informed us of a supply gap to be expected in Q4. This could have a significant impact on our Q4 revenue as well. So our guidance is based on all of these points that I just mentioned, which is as of now the best information we have.
We're continuously monitoring this as you can imagine really proud of our operations and supply chain team.
Global our global employees led by Rafael barcode they continually.
Find creative solutions to help us keep running.
So although we expect this to continue for the foreseeable future. The information, we're receiving from customers and our semiconductor suppliers would indicate that in 2022, we should return to a gradual improvement and possibly a recovery by the second half of 2022.
So we're keeping our fingers crossed that.
That maintains and.
Now that we see things start to turnaround next year.
Whatever you want add anything to that so look.
Specifically.
Trying to narrowing down your question on the fourth quarter. So let me give you a little bit of color on what we our thing.
So.
If you look at.
The midpoint of the annual guidance that we provided.
It would imply.
Fourth quarter revenue that will be a slightly below what we have.
Experienced in the third quarter for the reasons that feel just mentioned so it.
It would imply a revenue of about $235 million with an adjusted EBITDA rate of about 10% for the fourth quarter. So if you compare what we are expecting for the fourth quarter compared to the third.
I think in terms of profitability. In addition to the decremental margin that you would normally expect.
Relations with incremental revenue.
We also expect to have higher cost net of recoveries in the fourth quarter compared to the third, particularly as it relates to spot buy and premium freight.
And also I think an important point to note is that the recoveries that we received in the third quarter actually reflect a Q.
Cumulative amount from the negotiations that actually occurred.
Starting a couple of quarters ago.
So there is always a time lag between when the cost.
Anchored by Genzyme and when did he qualities actually negotiated with our customers and quite frankly, we also filed.
Purposely the sequence as we try to go to our customer with the best and most complete information that we can have in order to actually maximize.
The amount of debt at callers itself, so thats a little bit the dynamics that are happening in the as far as the gross margin is concerned.
And then one last comment I would make on the Opex side.
In line, we worked we have seen in <unk>.
Also mentioned in prior calls we.
We're expecting.
The fourth quarter opex to be slightly above the third quarter.
And he is going to be primarily again around R&D as we continue to invest in battery performance solution in climate sense, and making sure that we have a successful launch on these awards that we secured in the prior quarters, So thats a little bit that the dynamic that we're seeing and what we have factored in the fourth quarter.
<unk> projection.
Thank you both for that there was some really great color next question wanted to ask about this quarter's awards Phil's mentioned, both in the press release and in your comments on the call here that 40% of those words were for electric vehicles and I'm. Just wondering if you could expand on what youre seeing in terms of spin.
Perfect products packaging factor similar to that essentially the question is are you seeing a higher hit rate and more content per vehicle on evs or is it maybe too soon to tease that out.
Yes, I think well first of all the quarter the number of opportunities in front of us with a little bit lighter in the quarter just to get to the specific award number.
And that's that's a result of Oems kind of pushing off some of the decisions.
A lot of that is based on the their own resource constraints with the supply disruptions. So Q4 is it looks pretty good and the early part of next year. The pipeline of awards looks good and definitely as you say a lot of EV opportunities in front of us.
Bob.
We're seeing definitely.
A higher uptake of our climate solutions and a higher.
Content per vehicle, both on Evs and.
Theres this continuum that Oems are looking at kind of a transition from certainly more thermal.
<unk> devices in the vehicle to help them.
Managed the power consumption and of course that leads all the way up to climate sense. Obviously, that's the path we are.
Actively working towards but.
Things we are seeing for example, seeing more cars with interior heated.
<unk> panels, and armrest definitely higher rates of the.
The seat comfort product in steering wheels.
All of these are are helping them to reduce the amount of power needed for the HVAC.
So thats certainly the place and of course.
Battery performance products sale cell connecting and.
In battery heating, we mentioned air cooling.
Product so those all give us an added bit of content going forward.
And then if I could just squeeze one more and it's now been three months since you disclosed the first climate since commercial contract just wondering if you could expand on your comments on the reaction that you are seeing in the market now the customer has stepped forward and.
Looking to commercialize that product and in terms of your own capability set also wondering to what extent you have capacity to take on additional development contracts, let's say to the extent that there is interest in the market.
So let me start with the production contract we're working on that as the momentum on that project is really building without customer fact, two weeks ago. We had 20 of the top executives from that customer in our Tech center to do a deep dive on the product and the feedback we got was phenomenal they're very.
Cited about this.
Specced estimate to be a predominant feature in that vehicle when it launches. So that's that's really I mean, we couldn't ask for better status on that project.
When it comes to the development projects Youre, absolutely right now that we have a production project that's absorbing a lot of resources, because we have to do that flawlessly.
And we have to prioritize the opportunities that are out there based on the strength of interest and.
Potential upside opportunities with those with those customers Luckily we do have.
Two customers that were pretty active with in.
In terms of doing development projects testing evaluations and.
There appears to be some good promise with dose.
And that's pretty much maxing us out on resources, obviously, we're continuing to present our solutions to.
To other customers in that kind of build that cadence over time, but.
I think things are transport transpiring exactly as wed like on climate sense at this point.
Okay, great. Thank you for all that color I'll go ahead and leave it there.
Thank you thanks Luke.
Our next question comes from the line of Ryan <unk> with Craig Hallum Capital Group. Please proceed with your question.
Good morning, Brian Thanks for taking my questions Hey, Ryan.
Phil you mentioned that more conservative industry production outlook for Q4 relative to IHS helpful context there.
And any sense for 2022, IHS forecast at about 10% production growth any directional thoughts at least relative to what youre seeing across the industry.
Well.
We kind of have this immediate short term view, which is pretty tainted by repetitive constant order cancellations from our customers and it's not slowing down into Q4, so that makes it very difficult for us to forecast. How this is going to transition into the early part of 2022.
So it's really too early for me to speculate on what what vehicle production might look like.
I can tell you that we get information, obviously from our customers and from our semiconductor suppliers and we're trying to triangulate that there appears to be optimism heading into 2022, especially on the back half of 2022 and a gradual.
Increase but.
And all we have to be careful we have heard that before so I'm a little bit cautious.
<unk>.
Certainly.
I can tell you what we're what we're thinking and how we're gearing up as we're going to make sure once that once the floodgates open that we are ready to deliver and we've been very cautious about keeping our labor in place keeping our facilities primed for when this volume kicks up as I mentioned that.
Feedback, we're getting from our OEM customers as that.
There are consumers.
Continue to want our product and to expect this to continue to grow. We also have done consumer studies on our own and.
The results on those are phenomenal.
Other folks who have our product in their vehicles.
Basically refused to have a vehicle without it going forward. So I think we're in a really good position and we just have to be careful to.
That we don't overreact on the on the cost side, given the current situation and are ready to come out of the gates running.
Switching over to the Auto awards.
Mentioned, Nextgen Dodge Ram Ccs and seat heater awards and exclusivity across debt how does that compare to the previous program and then is the Ccs is that an active heat coolers that feedback.
That's a ventilated solution we had the Ccs previously we did not have the heat only.
So now we've taken that entire package for the ramp.
Got it one other.
One on the Auto Awards, you mentioned, one award stayed with an incumbent which impacted the win rate, but it seems a bit surprising I guess to go from call. It 90 ish percent down to 70% from that one award is that.
Is there anything else to call out there.
Yes, It was a good size award.
That excluding that we would have been well north of 80%.
That that's.
That <unk>.
Quotation was with a new customer.
We kind of shoe horned our way into that discussion with the customer got them excited about our product and they allowed us to quote kind of last minute.
We did a great job they love the product they loved our pricing.
But in the end they looked at their timeline and said that they didnt have resources.
And really they didn't feel like that at the time in the development process to move to us. So the good news is we've we've really.
Proved our relationship with that customer and I think there is going to produce opportunities going forward, but we're very transparent if we don't want an award.
We keep track of that.
Hey, Phil maybe a point of clarification is that dollar value win rate or is that just a pure quantity of opportunities.
Dollar value.
Got it.
Just one from me and then I'll turn it over to others.
Yes.
A growing and large amount of net cash on the balance sheet any updated plans on how you plan to utilize that.
Well, yes, I mean, we kind of have following our same strategy number one is make sure we're cautious and protective of the balance sheet because the world is so volatile.
As we all see so thats priority number one as I mentioned, we are definitely on the lookout for potential acquisitions that could help us accelerate.
And our growth within our focused growth strategy and the core areas that we're that we're working on.
That continues.
We're very active there and we're hopeful that we can find some potential partners that that we could fold in that would help us.
Add to our technology portfolio.
Expand our scale, a little bit and certainly look at regional expansion. So those are all areas. We're looking at.
Pretty excited that that were in the position that we can move on things like that certainly we're watching the stock price and if it makes sense we'll.
We'll.
Execute on our approved buyback authorization.
Great. Thanks, Bill Matteo.
Good luck guys. Thank you. Thanks.
Our next question comes from the line of Matt Koranda with Roth Capital. Please proceed with your question.
Hey, good morning, guys good morning, Matt.
Morning, Matt.
So Phil I think you had mentioned.
In response to one of the earlier questions. There is a potential supply gap from semiconductor supplier that can have a impact on <unk> revenue. So I just wanted to double check is that factored into the low end of the revenue guide for <unk>.
Implied in <unk>, and then just any more detail on the components.
Seeing the most challenges I guess.
Yes first part it is built into the low end.
And.
I can't give you a whole lot of detail but.
Clearly.
A critical semiconductor in one of our <unk>.
That we use and.
We're actively working with that supplier trying to find solutions, we're looking at redesign and.
Alternative chips and actively engaging with our customer as well they're scouring there.
Their landscape to find solutions. There are some options that are starting to pop up but that's a little bit too early to tell if we are going to be able to fill that void.
Okay. That's helpful and then any other detail on other components, where you're seeing the most tightness I guess in your supply chain would be helpful.
Not really that many to be honest with you in terms of our supply tightness I mean, obviously, we're seeing inflationary pressures.
And a lack of willingness by some suppliers to negotiate price downs and value improvements right now everybody is swamped with.
I'm just trying to keep things moving so those are the biggest pressures, we're seeing but not a whole lot most of it most of it is semiconductor related.
Okay that makes sense and then just one for.
One question on the guidance so on the adjusted EBITDA margin cut wondering maybe material. If you could just break that out how much is coming from gross margin erosion versus sort of a bit more opex I know you mentioned earlier that.
Probably a step up in R&D spending.
To all of the new programs that you're working on.
So just wondering if you could maybe help us out on that front.
And then I think you also groups gross margin headwinds at least in the release and the kind of three primary buckets. So I think they were like supply chain.
Price reductions and then wage and material inflation. So just wondering maybe if you could do the same for whats kind of.
Driving the gross margin outlook, that's implied assumption the remaining guidance for <unk>.
Sure. So let me start maybe from the <unk>.
Part of your question and just take India the.
The third quarter numbers, so the 330 bps.
The decline in the gross margin rate year over year, when you compare to third quarter of 'twenty, one versus third quarter of 2020.
Let me start with the negative.
Our supply chain disruptions accounted for almost 190 bps and this includes.
Obviously, the decremental margin on the incremental revenue plus <unk>.
The higher cost of goods sold that I mentioned in my prepared remarks due to.
Premium freight loss productivity at the factories in this base.
We had the usual annual customer price reduction, which is about 190 bps.
And then.
Wage and material inflation, which is about 70 bps.
The negatives and then these were partially offset by.
The recoveries that I mentioned, which is about the 170 bps and then we had other supplier cost reductions, which are kind of play about 100 bps positive. So that gives you the landscape of what.
What happened in the third quarter.
Gross margin rate and actually I would stress the fact that.
<unk>.
The.
If we were if you exclude the impact the net impact of the supply chain disruptions from these results.
We would have actually achieved gross margin rate between 30% and 31% which is.
Phil mentioned in one of the earlier question, what you would expect and what we actually proved that we can deliver in a normal more normal more normal environment. So so this is the breakdown for the for the third quarter now as far as the fourth quarter is concerned I think the.
Primary drivers of the.
A reduction on the EBITDA rate is around again centered on the gross margin rate and that's primarily due to the reasons that I just mentioned, okay and again.
Reiterating one point that I made earlier.
We expect in the fourth quarter.
To have when you look at it.
Cost.
Premium freight.
Lack of productivity at the factories and spot buys net of recoveries. This cost will be a little higher in the fourth quarter compared to the third just due to the timing of the recoveries overall, we have been able right now to recover approximately 50, 50% of our non inflationary costs.
And we are working through with our suppliers and customers to hold or increase this level of recoveries moving forward.
Okay very detailed.
I'll leave it there thank you.
Sure.
Thank you. Our next question comes from the line of Scott <unk> with C. L. King. Please proceed with your question.
Good morning, guys.
Hi, Scott.
Phil you said that.
Fourth quarter IHS.
You, obviously think that they are being overly aggressive probably.
What are you baking into your guidance how far off do you think they could be.
At the end of the day in particular when you.
Take into account some of the supply gap that you talked about.
Well.
I think it's difficult to say exactly where.
We think it's worse than third quarter kind of the way we're thinking about it.
And Thats all based on.
The orders we are looking at the rate of.
Order cancellations that were seeing the abrupt cancellation is kind of building that and so.
I would use slightly worse in the third quarter as a proxy for our thinking.
Okay.
Got it and then just lastly on.
Negotiations for price increases I know this is always a difficult.
Process.
Over the years.
Do you feel that you will be able to.
All of the relief that you need.
Eventually.
Unlikely to get all of it.
We're gradually chipping away and trying to get more.
Taken a four pronged approach to Scott one is obviously reimbursements for onetime costs, such as expedited freight and spot buys those tend to be a little bit easier more discrete.
Definitely looking at selective customers and methodologies to get price increases for inflationary pressure that's much harder to do.
Especially given our contractual obligations to customers in certain cases, but where we can.
We're using that in the last two are areas that are a little bit more long term, but but areas, we find to be a little more successful.
And those are would revolve around negotiating lower annual price reductions in the next years.
Yes.
It's something that customers are more open to discussing.
And then achieving better terms on new business awards, so what does that mean, possibly higher prices.
Leading to better margins on those.
And better terms overall, so those are the four ways we're approaching it.
There are a lot of difficulties in the discussion, which have led us to only be about 50% successful so far.
But I expect that to start opening up especially as the.
As the situation starts easing because think about the automotive.
Customer purchasing organizations. They are absolutely Barry just trying to keep their plants running.
And so being able to.
Set up meetings to discuss these complex.
Hi.
Recovery discussions is not easy.
Got it that's all I have thank you.
Thank you and thank you Scott.
Ladies and gentlemen, we have reached the end of the question and answer session I will now turn the call over to Phil Eyler for closing remarks.
Great. Thanks, everyone for joining our call today the results of the third quarter I believe demonstrate our continued focus on innovation operational excellence and cash flow generation.
While we expect continued industry headwinds for the foreseeable future our momentum of New awards, along with expanding demand for our new technologies and our continued focus on productivity.
Position us really well to deliver significant long term shareholder value.
We appreciate your interest and support and look forward to keeping you apprised of our progress.
Thank you.
This concludes today's conference and you may disconnect your lines at this time. Thank you.
For your participation and have a wonderful day.