Q3 2022 Gentex Corp Earnings Call
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[music].
Yeah.
Good day and thank you for standing by welcome to the Gentex reports third quarter 2022 financial results conference call.
At this time all participants are in a listen only mode.
The speaker's presentation, there will be a question and answer session.
To ask a question Duane This session you will need to press star one one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Josh Ubers Ski. Please go ahead.
Thank you.
Good morning, and welcome to the Gentex Corporation third quarter 2022 earnings release Conference call I'm, Joshua Brewski Gentex director of Investor Relations and I'm joined by Steve Downing President and CEO .
<unk>, Vice President of Engineering, and CTO, and Kevin Nash, Vice President of Finance and CFO .
This call is live on the Internet and can be reached by going through the Gentex website, and IR Dot Gentex Dot com all contents of this conference call are the property of Gentex Corporation and May not be copied published reproduced rebroadcast retransmitted transcribed or otherwise redistributed Gentex Corporation will hold responsible and liable any party for any damages incurred.
By Gentex Corporation with respect to any unauthorized use of the contents of this conference call. This conference call contains forward looking information within the meaning of the Gentex Safe Harbor statement included in the Gentex reports third quarter 2022 financial results press release from earlier this morning, and as always shown on the Gentex website.
Your participation in this conference call and 5% of these terms now I'll turn the call over to Steve Downing, who will get US started today. Thank you Josh for.
For the third quarter of 2022, the company reported net sales of $493 6 million compared to net sales of $399 $6 million in the third quarter of last year, which was a 24% increase quarter over quarter.
For the third quarter Global light vehicle production in North America, Europe , Japan, Korea, and China increased approximately 26% when compared to the third quarter of last year.
Light vehicle production in the company's primary markets of North America, Europe , and Japan, Korea was up 22% on a quarter over quarter basis.
Some of the supply chain issues that plagued the industry in the third quarter of last year have improved and overall light vehicle production growth contributed to the company's quarter over quarter revenue growth.
However product mix for the third quarter and overall sales levels were still impacted by customer order adjustments supply chain challenges and labor availability issues.
Together these headwinds resulted in unit shipments being approximately 750000 units lower than our original forecast at the beginning of the quarter, which resulted in a revenue shortfall of about $35 million to $40 million.
While there appears to be some improved stability in the light vehicle production environment and the overall supply chain. The company continues to experience significant customer order fluctuations on a week to week basis and difficulty in sourcing advanced electronic components for our most complex products.
For the third quarter. The gross margin was 29, 8% compared to a gross margin of 35, 3% for the third quarter of last year.
Gross margin was impacted on a quarter over quarter basis by raw material cost increases unfavorable product mix and labor cost increases and prior commitments to annual customer price reductions.
The continuation of cost increases in raw materials as well as unfavorable product mix had the most significant impact on our margin profile during the third quarter.
Additionally, while the overall improvement in sales levels helped to offset fixed overhead costs during the third quarter the increase in labor costs more than offset the gains in overhead absorption to create additional margin pressure.
During the third quarter product mix issues, driven by component shortages in our advanced feature mirrors and lower sales to our tier two customers contributed about 150 basis points of margin headwind that we believe will improve during the fourth quarter.
The company is also making progress on cost escalation conversations with our customers and we expect relief to begin during the fourth quarter, which should provide improvement in our margin profile as we move through 2023, and then into 2024.
Operating expenses during the third quarter increased by 15% to $64 million compared to operating expenses of $52 $7 million in the third quarter of last year.
Operating expenses increased during the third quarter, primarily due to staffing professional fees increased outbound freight expenses and travel related expenses.
Our operating expense growth for the third quarter continues to support our product development strategy as well as previously sourced new program launches product redesigns and supportive component supply issues and our ongoing commitment to new technology areas.
The increase in operating expenses was in line with our plan and represents the level of development needed to achieve the forecasted growth rate for the rest of this year and into 2023.
Income from operations for the third quarter was $86 $8 million compared to income from operations of $88 $2 million for the third quarter of last year.
During the third quarter. The company had an effective tax rate of 15, 7%, which was primarily driven by the benefit of the foreign derived intangible income deduction.
Net income was $72 7 million for the third quarter compared to net income of $76 7 million for the third quarter of last year.
The change in net income was primarily the result of the quarter over quarter changes in gross margins and operating profits.
Earnings per diluted share for the third quarter were <unk> 31, compared to earnings per diluted share of 32 for the third quarter of 2021.
I will now hand, the call over to Kevin for our third quarter financial details. Thanks, Steve.
Motive net sales in the third quarter of 22 were $480 9 million or 23% increase when compared to $391 3 million in the third quarter of 2001, and auto Dimming Mirror unit shipments increased 17% during the quarter compared to the third quarter of 'twenty one other.
Other net sales in the third quarter of 2002, which includes Dimmable aircraft Windows and fire protection products were $12 7 million compared to other net sales of $8 3 million in the third quarter of last year fire protection sales increased by 78% for the third quarter of 22 compared to the third quarter of 'twenty, one and Dimmable aircraft window sales decreased by 7% for the third quarter of 'twenty.
Two compared to the third quarter of 2001.
The company continues to expect that Dimmable aircraft window sales will be negatively impacted until there is a more meaningful recovery of the aerospace industry and the Boeing 707 aircraft production levels improve.
Share repurchases during the third quarter, the company repurchased 9 million shares of its common stock at an average price of $26 per share for a total of $22 $3 million for.
For the nine month period ended September 30, the company repurchased three 3 million shares of its common stock for a total of $93 5 million.
As of September 32022, the company has approximately 21 5 million shares remaining available for repurchase pursuant to its previously announced share repurchase plan.
Company intends to continue to repurchase additional shares of its common stock in the future and support of the previously disclosed capital allocation strategy, but share repurchases may vary from time to time, and we will take into account macroeconomic issues, including the lingering impacts of the COVID-19, pandemic and supply constraints market trends and other factors the company deems appropriate.
Shifting over to the balance sheet. The items mentioned today are valued as of September 32022, and are compared to December 31 of 21, unless otherwise noted.
Cash and cash equivalents were $222 9 million down from $262 3 million, primarily due to capital expenditures and cash flow from operations.
Short term and long term investments combined with $175 million down from $213 1 million. This was primarily due to splitting out equity method investments of $39 7 million, which were previously reported under long term investments.
<unk> receivable was $292 4 million up from $249 8 million due to the timing of sales within the quarter.
Inventories were $418 3 million, which increased from $316 3 million primarily in raw materials.
The company has continued to be proactive related to raw materials inventory with ongoing supply chain issues component shortage issues. In addition to significant customer order volatility as well as our forecasted growth in the next 12 to 18 months. The company has taken on additional components of certain medium and long lead time items to help manage risks and meet customer demand.
As previously mentioned when the supply chain constraints start to alleviate in the component shortages begins to decline the company will evaluate the proper levels of inventory at each commodity level.
Accounts payable increased to $171 4 million up from $98 3 million primarily due.
Due to increased inventory purchases and capital expenditures.
Let's take a look at preliminary cash flow items for the quarter third quarter 2022 cash flow from operations was $47 1 million, which was the same as operating cash flow in the third quarter of 'twenty, one and year to date cash flow from operations was $236 4 million compared to $299 4 million.
Operating cash flow for year to date, 21, which was driven primarily by the year to date change in net income.
Capital expenditures for the third quarter were $50 5 million compared with $13 million for the third quarter of 2001 and year to date capital expenditures were $108 5 million compared to $44 4 million for year to date Capex in 'twenty one.
And lastly, depreciation and amortization for the third quarter was.
It was $23 2 million compared with $23 6 million for the third quarter of last year and year to date depreciation and amortization was $73 3 million compared with $75 1 million for calendar year 'twenty, one I'll now hand, the call over to Neil for a product update. Thank you Kevin for the third quarter of 2022, where we experienced our highest total launch rate we've seen in the past three.
Years.
During the quarter, we had 50 launches of our interior and exterior auto dimming mirrors and electronic features.
Over 50% of the launches for the quarter were advanced feature launches with Homelink full display mirror and our digital video recorder me are leading the way.
Now for some updates on full display mirror.
We're excited to announce that during the third quarter, we began shipping our full display mirror product to our 14th OEM Honda.
On the new policy.
I know, it's been a great customer to work with on this exciting product and its great to see this technology in their vehicles.
In addition to the Hyundai Palisade, we began shipping full display mirror on three other vehicle nameplates.
Cadillac lyric.
These metrics and the Subaru Outback.
With these four new nameplates. This quarter, we have now announced 79 nameplates that full display mirror has been launched on.
This technology continues to have growing interest and growth potential we're excited to see how well. This product is being received by our OEM customers and the end consumers.
Also in the third quarter of 2022, we began shipping our base auto dimming mirror containing a digital video recorder on both the Toyota Yaris and the Rs Cross for the Japanese market.
These are our first launches of our base auto dimming mirror with this DVR capability and we believe this product has great potential to expand into other platforms as well as regions.
This product is also the first gentex DVR product that has an app available to allow the consumer to pull recorded information from the mirror to their phone, which creates a more consumer consumer friendly user experience.
The teams at Gentex had been doing an outstanding job executing the high volume and extremely extremely complex new launches that have been driving our new business growth all while managing through the product redesigns that have been necessary due to the component shortages that our industry has been facing.
As we look forward our launch rates continued to look strong and as we continue and come out of this redesign cycle due to the component shortages I'm excited about our ability to refocus all of our development efforts to new products and technologies.
I'll now hand, the call back over to Steve for guidance and closing remarks. Thanks Neal.
The company's current forecast for light vehicle production for the fourth quarter of 2022 and full year 2022, and 2023 are based on the mid October 2022, S&P Global mobility forecast for light vehicle production in North America, Europe , Japan, Korea, and China light vehicle.
Production in these markets is expected to increase 3% for the fourth quarter as compared to light vehicle production for the fourth quarter of last year.
For calendar year 2022 light vehicle production in these markets is forecasted to increase 5% when compared to calendar year 2021.
The company believes that revenue will remain difficult to forecast for the remainder of the year as a result of high levels of volatility in customer orders and vehicle production volumes electronics supply chain constraints labor shortages and overall economic uncertainty.
Based on the updated light vehicle production forecast as well as year to date financials. The company is updating certain guidance estimates for calendar year 2022 to the following.
Revenue for the year is expected to be between $1 nine and $1 95 billion.
Gross margins for the year are expected to be between 32 and 33%.
Operating expenses are expected to be between 235 and $240 million.
Our estimated annual tax rate, which assumes no changes to the statutory rate is forecasted to be between 14 and 15% cap.
Capital expenditures are expected to be between $140 and $150 million and depreciation and amortization is forecasted to be between 101 hundred $5 million.
Additionally, based on the company's current forecast for light vehicle production for calendar year 2023, the company still expects calendar year 2023 revenue growth of approximately 15% to 20% above the new 2022 revenue guidance of $1 nine and $1 $95 billion.
Overall, the third quarter was impacted by the perfect storm of component supply issues that included both scarcity and cost increases product mix issues labor shortages and customer order volatility.
While we are disappointed with this quarter's financial performance, we are confident in our ability to work through these issues and improve the gross margin profile as we move through the fourth quarter and into next year.
Beginning in the fourth quarter, we expect to see improvements to margins that will be driven by the benefit of the company's first rounds of cost escalation negotiations with customers to address ongoing commodity freight and labor pricing pressure.
These improvements should continue throughout next year and into 2024, as we work to offset cost increases with updated pricing.
The plan, we have developed and are executing to address these issues is consistent with our patient approach that we described previously and seeks to balance the need for pricing increases with our desire to continue to grow the business through new technology deployment at our customers.
As the fourth quarter begins and we transition into 2023, we remain confident in our ability to grow the business and improve margins while at the same time, expanding our technology portfolio.
As we work to accomplish these objectives, we will continue to take a balanced long term approach to these challenges and believe that this plan will get us back to our targeted margin profile by the end of 2024.
That completes our prepared comments for today. Thank you for your time and we can now proceed to questions.
As a reminder to ask a question. Please press star one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from Luke junk with Baird. Your line is now open.
Okay, great. Thank you I appreciate you taking the questions I wanted to ask with the New terminal bigger picture question first in the near term just wondering if you can help us unpack your sequential gross margin expectation as we go into the fourth quarter as implied by the updated full year guidance.
Quickly are the initial cost recoveries that you're contemplating already agreed to and in the P&L sitting here in October and Conversely, what lessons should we took away from the third quarter in terms of things that could still pressured the margin sequentially.
Yes, so right now there is the.
The current financials that are running through to start the fourth quarter do not include the benefit of those price increases. So those are going to get finalized here in the next couple of months, but it should take effect in the quarter for the quarter.
And the second part of your question is kind of what lessons were left in Q3 that may leave a lingering effect and part of that I think the biggest issue there that would be more than the bill of material increases. The part that's the unknown piece that would could potentially go into Q4 would be the mix issues.
What happened in Q3 that the reason why we referenced the 150 basis points due to mix.
We had some significant component issues on <unk> during the quarter that caused us to Miss a lot more units in the quarter than what we were expecting and so that mix typically when that happens goes to base auto dimming mirrors at a much lower margin profile and with some of the launches we had in some of the business growth that we saw both it really in all the <unk>.
<unk>, but especially some strong growth in the China market.
What you saw with some margin pressure from base auto dimming mirrors exceeding the percentage of business that we're expecting.
Okay. Thanks for that Stephen then I follow on actually flows right from that and that's the impact of component shortages on FTM. So maybe either you or Neil could comment on this I'm just wondering the impact if we zoom out and look at FTM shipments for this year, if theres any way to quantify.
But more importantly, as we roll to 2023, just wondering if it's possible that youll see a catch up effect on FTM shipments next year.
The components you need are more readily available in other words, where do you envision that take rates next year versus your current level of dam shipments. Thank you.
Yeah. So I'll start I'll start kind of with the number side I know I am sure Youll have some comments on kind of what's happening behind the scenes on availability of components and what that trend is.
This year, we're probably lifetime Q4 wraps up if we don't have any more significant issues I would say this year is going to end up about 150 to 200000 units light of where it would've been if we hadn't had the component issues. So.
We're putting up obviously record numbers on FTM shipments this year and that growth has been pretty pretty astounding. It would've been even better if we had availability of components. So.
That will kind of help you understand what the impact has been throughout the year and what we're expecting throughout Q4 in terms of <unk> shipment availability due to component issues.
Neil you want to jump in yeah, I think from a components side. The team has been doing an outstanding outstanding job.
Finding parts trying to get the replacement is built in and redesign.
The components into our design new components into the product when we see next year.
We're going to be a little bit of a challenge on a few parts as we get into the probably the second quarter of next year, I think thats going to start to alleviate and we will have less pressure on getting the availability of some of the parts that we've been struggling with so I think as we go into next year, our ability to produce at the rate needed, especially the second half of next year I think.
We will actually be quite positive and Luca sorry, I did forget to answer one part of your question. The question is heading into next year, what do we expect for volumes. Yes. We do think there will be some catch up from parts. So we missed this year. One thing we did experienced throughout this year, whereas we had several launch customers call and asked to increase demand versus their original forecast.
Unfortunately, given the component issues, we werent able to support those higher volumes, so if component issues, where to where to get improve we do think there is some tailwind based on the desire for that product that could happen into next year.
Thank you for all the color I'll leave it there thanks.
Thanks, Luke next slide.
Please standby for our next question.
The next question comes from John Murphy with Bank of America. Your line is now open.
Good morning, guys.
Just a first question on the can you hear me.
Yes, yes, Sir Okay, yes.
On the revenue guide at the midpoint of the range basically largely unchanged tightened you tightened it up here.
You had just dismiss that you've alluded to a 700000 units in the third quarter.
You just mentioned FTM youre still going to be 101000 units light relative to what you were expecting before so I mean, it seems like despite the pressure in the third quarter and these other issues. You just mentioned on mix you Havent really taken the revenue number down that much I'm just I mean, obviously costs are inflating and youre, taking those up so I understand that but there is not much change and truly in the in the revenue mid <unk>.
<unk>.
What makes you believe that you're going to make this up in the fourth quarter or is there something else going on here, where youre. Following the IHS schedules and then maybe just some risk in these numbers.
Yes, if you look at if you look at what we're expecting and what we're seeing the and I'm, sorry, I keep saying IHS, but S&P global mobility. So we all do that.
Yes, it's going to take me at least five years before.
I don't think yes.
But that's a different story.
Definitely doesn't roll off the tongue, the same way, but one of the things that we're looking at and we look at the at the data heading into Q4, we do think there are some additional risk.
Especially on the component side for us.
We also believe on the vehicle volume side. There is there is going to be tough for the industry to keep up with that level of production in Q4, and then we know around the end of the year, especially between Thanksgiving and the holidays.
Things start to lighten up a little bit and usually in that and that is especially common when you have a very strained production environment than what we've seen in the last year in other words Oems just like our supply base have been working incredibly hard trying to hit these levels of production and so we think theres going to be at least a little bit of a pause at the end of the year to get people arrest.
Yes.
Okay and then the second thing on the component shortages. Obviously this is persistent.
<unk> been Rins these issues and so as the whole industry for a while I mean as you go.
Through these redesigns.
How are you kind of insuring.
Supply going forward as Youre working through the Redesigns and even if this chip shortage in aggregate.
Into next year, which it sounds like it's going to.
Do you have the ability to kind of sidestep it with these redesigns and maybe get back on track with new chip supply you chip supply elsewhere are redesigned to allow <unk> to <unk>.
Warranted.
So I'll go first and you're correct.
The statements of mine, but I think the one advantage all of the Redesigns is it's really hard to get guaranteed commitments I mean, when we're redesigning the new components. The team works really hard to try to get those commitments from the supply base. What we've experienced for the last 18 months has made us a little more jaded in terms of whether or not we actually believe those commitments.
<unk> will play out in reality, but the one advantage of having multiple designs for instance, let's say, we havent FTM than we've maybe redesigned it once or at least twice in particular, a part number we now have several different bill of materials that are approved and validated at an OEM, meaning if even if the new components were to fall short we're still securing.
And you see part of this evidenced in our inventory levels, where were still securing parts under both designs because they have corporate common uses but then it also gives us more flexibility to be able to help an OEM by having multiple part numbers that are in multiple circuit designs that we can revert back to if other components become a problem.
Okay. It's helpful. And then just lastly on Forex I mean I've got imagined.
A benefit both on translation, but probably even on an economic basis and can you kind of elucidate what maybe you saw in the third quarter and what you expect going forward.
Actually it was a slight negative on the top line, probably 25 30 basis points. So most of our stuff is denominated in U S. But we do have some in RMB and euro. So there was a slight negative on the top line and on.
On the purchasing side as well, but it was probably 25 to 50 basis points.
On that.
Meaning the purchases on the cost side offset that theoretical benefit on the revenue side for a net negative is that a fair way to characterize it yes, yes, okay alright. Thank you very much guys.
Thanks, Jonathan.
Please standby for our next question.
Our next question is from David Kelley with Jefferies. Your line is now open.
Hi, everyone. This is Gavin Kennedy on for David Kelly.
Just starting with the gross margin drivers in the quarter. You noted 150 basis points of mix in tier two headwinds can you walk us through the other impacts that you were seeing this quarter and the other moving parts there for the margins.
Yes, the biggest one that we've been talking about all year really is the raw material cost increases.
That was about 300 basis points of headwind and then in addition to that the labor headwinds of about 100 basis points. So when you combine all that together that's about the main drivers there were some puts and takes.
Inside of that but those are the biggest ones that are moving it down versus last year.
Alright that makes sense and then as a follow up your guidance implies a meaningful ramp up into Q4.
Do you expect to fully offset input cost headwinds in the quarter quarter via pass throughs and are there any retroactive recoveries that might provide a one time benefit in Q4.
Yes. So I mean, there is I mean part of that implication is that there will be some onetime benefit from the recovery that Steve talked about earlier.
We're looking at both.
Some of that applies to 'twenty, two but into 'twenty three 'twenty four as pricing changes going out.
And so that would positively impact Q4 margins, specifically and then we do see yes, the sales levels supporting some of that offset and as we've talked about the mix it was pretty weak.
Towards base mirrors in the quarter really driven by growth in China outpacing the rest of the market and and then weakness in FTM. So I mean, we would expect that some of that would alleviate as well in Q4.
But if you look at if you look at our year to date gross margin performance. The full year range is very similar to where our year to data. So it's not a meaningful step up in Q4 that helps us get to that full year guidance in other words any if we hit Q4 inside of that full year guidance range.
That's what it takes to hit that for the full year.
Got it thanks, Tim.
Thank you David.
Please standby for our next question.
Our next question is from Ryan Brinkman with JP Morgan. Your line is now open.
Hi, Thanks for taking my questions I wanted to ask first on raw materials I saw on the release you discussed the quarter over quarter increase in raw material prices it seemed to be in the context of comparing to the third quarter of 'twenty, one and so maybe year over year not sequentially, but a basket of automotive commodities that we look at is down 42%.
Versus <unk> last year, it's down 27% versus <unk> this year and I think our indexes heavily weighted towards steel, which you don't really buy and doesn't take into account some of your more esoteric PGM or coding exposures or whatnot, but still sort of surprised that you are still experiencing the higher commodity if maybe you can talk a little bit about what your exposure.
<unk> are there that are hurting your margin or if maybe the spot prices have started to move in the right direction already but theres, some kind of lag factor of hedging in place that might be offsetting the impact on the P&L as of now and then based upon what you know today what is your expectation for how raw materials may impact the margin going forward.
Yes, that's a great question.
It's really heralds back to the last nine months and our approach has been.
Much more of a patient wait and see approach to understand the underlying supplier base and materials market.
What we are concerned about was going to Oems to quickly with a not a complete picture of the cost scenario and so given our given our income statement and our balance sheet and ability to wait a little longer we wanted to wait until we felt like we are 80% of the way through the cost increases that way, we could portray a more accurate depiction to our customers and not have to.
Back four or five or six times with this conversation we feel like as we as we got about halfway through Q3, and we felt like we understood the scenario fairly well.
Like I mentioned, we're about we feel like we're about $80, 80% of the way through those cost increases and so we began engaging really in Q3 and with heavy focused on trying to get most of these situations resolved in Q4 to set us up really for partially for Q4, but then also moving into 2023 and so there's been a lot of there's been a lot of catch up.
Data that we had to provide the Oems and Theres, obviously, a lot of conversations that go around on the impact of these verification of the cost impact and then how do you set up contracts that reflect what we need to to at least offset some of those costs. So.
We were we were a little bit behind some of the supply base in terms of asking for this money that was done deliberately now that we're in this stage, we feel pretty confident and comfortable with the data presentation, and where we're at and feel very comfortable that we're going to reach success over the next 18 months in getting these issues resolved.
Okay, and I think when we first started talking about this like probably on the <unk> 21 call I think you've seen yourselves as maybe having the luxury to wait right.
You don't have any you're not levered your investment grade you've got an embarrassment of riches on on the margin versus adient or others, they're levered there John graded they only have mid single digit margin and so.
People are being asked to deliver 1% to 2% annual customer price reductions and a 2% CPI world you can offset that with 3% to 4% productivity and a 9% CPI world.
Those suppliers had an emergency, whereas you guys could sort of wait I'm just curious if.
Looking back you know you still think maybe that was the correct approach or if you can make up for it I mean I heard Ford earlier this week they sounded like the most understanding that they had ever been.
First we wanted to push back and then we're like yes. These suppliers they actually do up a point and then they pointed up to $1 billion are you still going to is that still going to beyond the com and youre going to be as compensated as the others went earlier or maybe automaker ears less sympathetic for an investment grade non levered supplier with 30%.
Gross margin relative to a junk rated one that they have to help out or.
Things could go wrong.
Well I think I think I would tell you there's a lot of questions. There. So I'll start working through them in order, but I think number one is yes, we still believe our strategy was the right one and only time will tell.
What I can tell you is the fact that we took our time, we have not been met with the resistance that you would that you would expect if you were going to be told flat out now.
One other thing is we are in a constrained environment and so we most Oems do realize that you have to at least negotiate some type of a favorable deal in order to guarantee the supply. This is the same issue we've seen with our supply base and so.
Its not like Youre going we're not going to get all the parts, we want Oems have been able to get all the parts that they want from the supply base either and so there is a certain natural inclination towards making sure that we set up deals that are favorable for both the supplier and for the OEM and that's still our focus and that includes not only repreve on bill of material increases but also.
Long term sourcing in contracts and so the different approach that we take isn't just focus on 100% and getting our cost cover so that we can move on it's about how do we balance the short term returned to profitability that we need for our shareholders and balancing that with how do we make sure. We're getting that product awards that can help drive growth over the next three to five years.
And so we're not taking a very short sighted approach to that for Oems, we sit down and try to be very open about we have significant cost issues that have to be addressed today, but at the same time, we are open to the concepts over the next three to four years of certain awards that could help us grow the business and produce some offset to cost issues through volume and through growth.
Opportunities.
And so right now I would tell you that we still think this is the most holistic approach and the right one for us for who we are there is no doubt if you're if you're if you're teetering on the brink of insolvency that Oems are very very motivated to get your cash right away to make sure that doesn't happen but.
It is something that we're going to continue to work on and we believe this is not going to be over in Q4. This is going to be a recurring theme for us throughout all of calendar year 2023.
Got it thank you very helpful.
Thanks, Rob Thanks, Brian .
Please standby for our next question.
Okay.
Our next question comes from Josh Nichols with B Riley. Your line is now open.
Yes, thanks for taking my question.
Just to touch on the margin point again, the full year guidance kind of implies a pretty healthy step up in gross margins for <unk> 300 bps plus.
One how much of that is coming from price increases versus.
Mix and then second part of the question is just how much of this customer base is going to have these <unk>.
Increases that come through in <unk> versus how much maybe remaining for early part of 'twenty three that could.
And a potential further step up for next year.
Yes, Steve mentioned right, we have a couple of different pronged approach.
One of them is approaching them about the cost inflation that we've seen to date and through from really the start of this last year through now and so we would expect some of that to hit the fourth quarter. So call. It 100 150 basis points maybe in.
In that range.
The rest of it as we talked about mix was a little bit weak sell the rest of it is going to come through mix and if sales improve hopefully offsetting that with our normal leverage cadence to get to that sequential improvement in margin, but as Dave mentioned, our year to date gross margin is in that 32% range already. So we just have to be have that sequential improvement from the overall product portfolio.
Bolio and a little bit from a recovery side and as you head into 'twenty three again this conversation is.
Active and onetime recoveries mmp's price changes as we move into 'twenty, three and even beyond potentially but we're going to balance that as we said right. We're looking for growth longer term and not just.
Satisfying our needs today, so I think that our teams have been working through that and balancing.
Thanks added approach to help get that long term maintain that long term philosophy.
Thanks, Dan add to some fair to assume that there's not going to be any price cuts that you typically see in the first quarter, given what's going on with the supply.
Supply chain and component price increases, but just thinking about that.
That's correct Yep Yep.
Thinking about next year, you reaffirmed the growth outlook.
Again, much higher than the market I'm, just curious given that there's so much going on with the slowing economy rising fuel prices interest rates, but.
Juxtaposing that as inventory levels that remain well below historical levels that would probably support.
Or prevent any big slowdown.
Previously with price cuts and inventory issue. So I'm just curious your thoughts about how you handicap that going into the next year and the <unk>.
And takes to the risks and opportunities to the top line guide for next year.
Yes, Youre exactly right. This is very interesting.
Look internally a lot that if it werent real it'd be very very fascinating from an overall macroeconomic standpoint to study this.
It's very real but youre exactly right you have a lot of puts and takes going on in the overall light vehicle production space right now where you have very low inventories really are pretty high demand and but then you have these this looming headwinds and obviously interest rates.
Causing a problem my best guess is that those negative headwinds really won't play much of a factor until the second half of next year, because it will take us the first half to meet current demand and get inventories back up to where they need to be on dealer lots and then in the second half is where the biggest risk factor for next year resides around what our sales look like throughout the year.
What we're seeing there right now is the.
The S&P global mobility forecast has pulled back.
Kevin is laughing at me I'm trying to get that out of my mouth, but if we look at their forecast, it's pulled back quite a bit from where it was even six months ago for 2023, and so even at those lower levels of light vehicle production increases for next year, we're still feel comfortable with our with our forecast. So we only need 4% to 5% help from the.
Light vehicle production side to hit that 15 to 20, meaning what we're implying is anywhere from 10% to 12% outperformance to market. So if the market goes to a flat market for whatever reason.
Still expect to see that outperformance and that's really driven by the strength of our product portfolio.
Great. Thanks.
Thank you.
As a reminder to ask a question. Please press star one on your telephone.
Please standby for our next question.
Our next question comes from David Whiston with Morningstar. Your line is now open.
Thanks, Good morning.
You've talked a lot about labor shortages today I was just curious are those on at gentex or the customer or the upstream are everywhere.
They're everywhere and they definitely have impacted us as well, it's been a very tight labor market in west Michigan.
And honestly.
Even with the even with the changes in salaries and wages. It has been it's still a very constrained market trying to get the team put together and the size we need to support this level of sales so.
From an operational standpoint were run on a tremendous amount of overtime right now to hit these sales levels and obviously thats been part of the headwind that Kevin described on the labor side.
Impacted margins.
And for you guys directly as the labor need more on the hourly side are salaried side.
It's both but definitely the these the hourly side is what is the biggest risk factor in driving the gross margin deterioration.
Operating expense side I have seen a step up in terms of higher salaries and wages.
On operating expenses as well and we're holding we're holding together pretty well there because they're our ability to outsourcing use contractors to help offset obviously on the manufacturing side thats not as easy.
And I've been hearing from dealers. This week that they are not really expecting any kind of major recovery in Toyota Honda inventory until middle of next year I'm, just curious what youre hearing from them and what youre thinking on that.
Yes, I mean, there are pretty quiet about what they communicate in terms of how they're going to get production levels back up to the inventory to meet some inventory needs are at least once that they have.
This is purely speaking from our guide based on what we're seeing but I would I would tend to agree I don't think you're probably until the summer before you start to see any meaningful recovery in inventory levels. If it does happen, it's because that's bad news on the sales side. So.
From a from a vehicle sale standpoint.
Okay and.
Your stock really gets undervalued in my opinion and it seems to be pretty cheap right. Now are you I know, there's macro storm clouds are considered too but at the same time, even if we do have a recession auto volumes are likely to go up next year because of the chip shortage impact.
So is it time to get more aggressive on buybacks.
Well I think what we've position we've taken for the last six months has been just obviously cash flow slowed up a little bit as we move to secure inventory and move inventory levels higher when we look at this price we would tend to agree with you. If you look at our growth prospects. The revenue the desire for the products. We have the only negative that you would talk about is.
The gross margin deterioration the one thing that we like to remind shareholders of we've done this before right 2008, nine margins deteriorated, we rebuilt them 2012, and 13 it happened again down into the low 32% range.
Know how to go to work on the income statement to drive value and improve margin profile and so yes. We would agree with you. We look at this and say this is an opportune time to enter the market if you're long gentex.
Okay. Thanks.
Thanks, David.
Please standby for our next question.
Okay.
Our next question comes from James Picariello with BNP. Your line is now open.
Hey, good morning, guys.
Hi, James.
Yes.
Bridge to the intact, 15% to 20% revenue growth rate for next year, just wanted to revisit that.
Generally.
That range was pegged to.
LBP growth of I think 10% now we're looking at a 4% industry assumption so.
Can you kind of unpack, how you're thinking about.
What what's still informs the confidence.
I imagine recovery pricing.
Embedded in your net price.
Certainly helps better mix.
Improved chip supply and you redesign work.
You probably adds another layer, but yes, just wanted to get your take on.
Okay.
Yes. In addition to the factors you mentioned I would say the single largest.
The piece that adds confidence to our forecast is the amount of <unk> that we had to say that we couldnt ship and produce this year and how many Oems we had to say we can't increase take rates because of the constraints on on.
On raw material side, and so when we look at the LDP forecast, what we're what we're seeing from our take rate standpoint, and the things we had to say no to we feel we feel really good about the desire for our products, especially especially <unk> as we head into next year and so this is like you mentioned typically you would see our forecast move a little bit closer.
In line with the changes in LBP I think heading into next year, we feel really comfortable with the demand for our products.
Got it so it would be just on on the customer recovery.
<unk> line.
Your typical price down is something like 2% to 3%.
What could your net pricing.
For next year in terms of.
How successful these recovery negotiations.
Katrina.
What we are modeling right now and what we believe needs to happen to hit to hit the financial performance. We're talking about is a net positive 50 to 100 basis points.
Okay.
Net net positive of 150.
50 to 150 to 100 and that strategy. In addition to what we yes and Thats. In addition to what we pick up in the fourth quarter. So.
We're going to have some pickup in Q4, and then we expect to see on top of that another 50 to 100 basis points and positive pricing and thats not taking in product mix. Our sales growth. That's looking just at same same kind product sales from one year to the next.
Got it and just my last one.
The implied guidance for the fourth quarter has.
Gross margin level.
Basically a 34%.
Yes.
And I imagine that probably has some discrete benefit.
Embedded so how.
How should we be thinking about the gross margin trajectory for next year through next year, what's what's the right exit rate.
For the fourth quarter and 23.
Just kind of just so the bar is decently set in terms of.
In terms of the <unk>.
Progress.
Yes, if you if you actually look at our Q4, we would actually be slightly below that in terms of what we think Q4 guidance is if you like Kevin mentioned, we're at $31 nine year to date.
On our current gross margin profile, so to hit the 32 to 33.
Really really anywhere in that 32% to 33% range gets you there on a weighted average if youre looking at the high end and yes, we would need to be closer to that we don't think we're going to get there in Q4 that early and so we kind of thought what were lapping out is really a 'twenty Q4, all of 'twenty three and then through 2024, what is your kind of inner velocity when you come into 'twenty.
And then what your exit when we get through 'twenty three we're thinking we're going to finish 'twenty by.
By the end of 'twenty three so let's call. It Q4, 'twenty three we better be somewhere in the 33% to 34% range. If we're going to then by the end of 'twenty four get back to that $35 36 range and so that's kind of the math that we've laid out and thats assuming that there are some headwinds and <unk> in there and some of the things we've talked about but it's also looking at some of the factors that.
We know to be we're not done with our cost escalation scenario from the supply base. So.
We think we're 80% of the way through it but that implies are still 20% to go on a supply base side and cost that we're going to have to absorb and find a way to either offset or offset by our customer base. So we'd probably be a little below your estimate there for Q4. This year, but then growing and strengthening not only in Q4, but all the way through 2023.
And through 2024.
That's helpful. Thank you.
Thanks James.
At this time there are no further questions I would now like to turn the conference back to Josh <unk> for closing remarks.
Yeah.
Thank you everyone for your time and questions today as you May know, we will be at Sema in Las Vegas next week, and we would welcome investors to join us in our booth if youre interested in attending please let me know and that said this concludes our call and we wish everyone a great weekend.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly.
As Johan during Q&A, you can dial star one one.
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