Q1 2023 Gentex Corp Earnings Call

Speaker 2: question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Joshua Bursky, Director investor relations.

Speaker 3: Thank you. Good morning and welcome to the Gentex Corporation first quarter, twenty, twenty three earnings release conference call. I'm Joshua Bursky, Gentex, director of investor relations and I'm joined by Steve Downing president CEO , Neil, BAME, CTO and Kevin Nash, vice president of finance and CFO .

Speaker 3: This call is live on the Internet and can be reached by going to the Gentex website and into ir.gentex.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.

Speaker 3: 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.

Speaker 3: This conference call contains forward-looking information within the meaning of the GenTech Safe Harbor Statement included in the GenTech report's first quarter 2023 financial results press release from earlier this morning and as always shown on the GenTech's website. Your participation in this conference call implies consent to these terms. Now I'll turn the call over to Steve Downing who will get us started today.

Speaker 4: Thank you, Josh.

Speaker 4: For the first quarter of 2023, the company reported net sales of $550.8 million compared to net sales of $468.3 million in the first quarter of 2022.

Speaker 4: which was an 18% quarter-over-quarter increase and a new quarterly sales record for the company.

Speaker 4: For the first quarter of 2023, global light vehicle production in North America, Europe , Japan, Korea, and China increased approximately 6% when compared to the first quarter of 2022.

Speaker 4: Many of the supply chain issues that held back the industry during last year have improved, and the demand for our products, combined with the increased light vehicle production, led to record revenue in the quarter.

Speaker 4: While light vehicle production is still below pre-pandemic levels, demand for the company's products resulted in a 12% outperformance versus the underlying market.

Speaker 4: For the first quarter of 2023, the gross margin was 31.7% compared to a gross margin of 34.3% for the first quarter of last year.

Speaker 4: The gross margin was impacted by raw material cost increases and labor cost increases, which were partially offset by improvements in freight related costs and price increases to customers. As compared to the fourth quarter last year, the gross margin increased sequentially from 31.2% as a result of the higher sales levels, improvements in freight related costs, favorable product mix, and more.

Speaker 4: and price increases to customers that carried forward into this year.

Speaker 4: These tailwinds more than offset the potential margin decline coming from the one-time benefit of cost recoveries in the fourth quarter and the higher labor costs that became necessary last year.

Speaker 4: Calendar year 2022 was marred with significant gross margin impacts from raw material cost increases, supply chain stresses, labor cost increases, volatility, and overall inflation that resulted in significant downward pressure on our margins and profitability.

Speaker 4: In the fourth quarter of last year, we began the process of stabilizing and improving gross margins by realizing one-time cost recoveries for calendar year 2022 and securing sustained price increases that carried into the first quarter of this year.

Speaker 4: Gross margins hit a low point in 2022 during the third quarter when they fell to 29.8%, but in the fourth quarter we secured one-time cost recoveries that improved margins to 31.2%.

Speaker 4: In the first quarter of 2023, we further improved gross margins to 31.7%, even without the benefit of any one-time cost recoveries.

Speaker 4: Our plan for margin recovery is based on a timeline that covers 2023 and 2024 and is designed to achieve a targeted margin profile of 35 to 36% by the end of 2024. Based on our progress in the last 2 quarters, I believe we are well on our way to accomplishing this plan. Operating expenses during the first quarter of 2023 increased by 8% to $61.5 million compared to operating expenses of $57.1 million in the first quarter of 2022.

Speaker 4: rate for this year and next year.

Speaker 4: Income from operations for the first quarter of 2023 was $113.3 million compared to income from operations of $103.3 million for the first quarter of last year.

Speaker 4: During the first quarter of 2023, the company had an effective tax rate of 15.9%, which was primarily driven by the benefit of the foreign derived intangible income deduction.

Speaker 4: Net income was $97.6 million for the first quarter of 2023 compared to net income of $87.5 million for the first quarter of last year. The increase in net income was primarily the result of the quarter over quarter increases in net sales and operating profits. Earnings per diluted share for the first quarter of 2023 were 42 cents.

Speaker 3: in the first quarter of 22.

Speaker 3: And auto-dimming mirror unit shipments increased 16% during the quarter compared to the first quarter of 22. Other net sales in the first quarter of 23, which includes dimmable aircraft, windows, and fire protection products, or 13.3 million compared to other net sales of 10.3 million in the first quarter of 22.

Speaker 3: both compared to the first quarter of 2022.

Speaker 3: share repurchases. During the first quarter of 2023, the company repurchased 1 million shares of its common stock at an average price of $27.19 per share.

Speaker 3: As of March 31 of 23, the company has approximately 19.7 million shares remaining available for repurchase pursuant to its previously announced share repurchase plan. The company intends to continue to repurchase additional shares of its common stock in the future in support of the previously disclosed capital allocation strategy.

Speaker 3: But share repurchases may vary from time to time and will take into account macroeconomic issues, market trends, and other factors the company deems appropriate.

Speaker 3: Shifting over to the balance sheet, the balance sheet comparisons mentioned today are as of March 31 of 23 as compared to December 31 of 22. Cash and cash equivalents were $215.5 million compared to $214.8 million. Short-term and long-term investments combined were $229.4 million, up from $202.3 million.

Speaker 3: which includes fixed income investments as well as the company's equity and cost-benefit investments.

Speaker 3: Accounts receivable was $332.9 million, up from $276.5 million due to the higher level of sales during the first quarter. Inventories were $401.8 million, down slightly from $404.4 million. And accounts payable increased to $166.9 million, up from $151.7 million.

Speaker 3: Looking at preliminary cash flow items for the quarter, first quarter 2023 cash flow from operations was 120.9 million which was an increase from 115.9 million in the first quarter of 22. CapEx for the first quarter was 42.8 million compared with 23.9 million for the first quarter of 23 and depreciation and amortization for the first quarter was 24 million compared with 24.7 million for the first quarter.

Speaker 5: science features.

Speaker 5: For the advanced features, full display mirror and home link were a significant portion of those launches.

Speaker 5: Now for an update on Full Display Mirror. During the first quarter of 2023, we began shipping Full Display Mirror on 8 additional nameplates.

Speaker 5: These new vehicle nameplates are the Lexus RZ.

Speaker 5: are the Lexus RZ, the Maserati Gran Turismo.

Speaker 5: The Mazda CX90.

Speaker 5: Mazda CX90, the Nissan Rukes for the Japan market.

Speaker 5: the Toyota BZ4X and the new Toyota Crown for the Japan market.

Speaker 5: the Toyota Crown Kluger, and the Toyota Granvia for China and other markets.

Speaker 5: The Mazda CX90 Full Display Mirror is our first FDM shipping to Mazda.

Speaker 5: And it can be found on their website when building a vehicle under the accessories section.

Speaker 5: We're excited to be shipping to Monthos and we believe the product will be successful in its initial introduction so that we can drive greater penetration over the long term.

Speaker 5: At the conclusion of the first quarter of 2023, we have now launched Full Display MIR on 94 nameplates across all regions of the world.

Speaker 5: This product continues to see strong growth and it's been extremely well received by our customers and the consumers.

Speaker 5: As we look at the remainder of 2023, we're targeting at least 10 additional nameplate launches.

Speaker 5: and we expect that our 2023 unit volume to be at least 300,000 units higher than our 2022 volume.

Speaker 5: FOLIS Playmere has been in production for over seven years now, and in future quarters we will only be providing nameplate updates, one that has a significant growth or strategic impact.

Speaker 5: We will continue to provide updates on our unit shipments and the progress to the annual goal.

Speaker 5: During the first quarter of 2023, we've seen great improvement in supply chain constraints that have been driving us to execute a significant number of redesigns. The team at GENTEX has done an incredible job working through all of these issues and constraints to avoid OEM interruptions. I'm excited to get the team fully back and engaged on new products and launches.

Speaker 5: but some of our development team will continue to remain focused on new iterations of products to help us achieve our gross margin initiatives.

Speaker 5: I'll now hand the call back over to Steve for guidance and closing remarks. Thanks, Neil.

Speaker 4: The company's current forecast for light vehicle production for the second quarter of 2023 and full years 2023 and 2024 are based on the mid-April 2023 S&P Global Mobility Forecast for light vehicle production in North America, Europe , Japan, Korea, and China.

Speaker 4: Light vehicle production in these markets is expected to increase 14% for the second quarter of 2023 as compared to light vehicle production for the second quarter of last year.

Speaker 4: For calendar year 2023, light vehicle production in these markets is forecasted to increase 4% when compared to calendar year 2022. Based on this light vehicle production forecast, the company is making no changes to its previously provided estimates for 2023. Revenue for the year is expected to be approximately $2.2 billion.

Speaker 4: Capital expenditures are expected to be between $200 and $225 million, and depreciation and amortization is forecasted to be between $100 and $110 million for 2023.

Speaker 4: Additionally, based on the company's current forecast for light vehicle production for calendar year 2024, the company expects calendar year 2024 revenue growth of approximately 10% above the 2023 revenue guidance range of approximately 2.2 billion dollars.

Speaker 4: Overall, the first quarter of 2023 performance was largely in line with our expectations, as demand for our products was very strong, which ultimately resulted in record sales performance for the quarter.

Speaker 4: Our teams continue to perform diligently to avoid supply shortages, and our focus on labor challenges has resulted in employment growth in recent months.

Speaker 4: We believe these increases in headcount will provide our operations team some much needed relief from the hectic build schedules we have experienced much of last year and will be critical in supporting the aggressive growth targets we are forecasting throughout the remainder of 2023 and into 2024.

Speaker 4: A larger team is also critical to create the opportunity to reduce overtime, scrap, and yield loss, which are needed to support our gross margin recovery initiatives.

Speaker 4: Obviously, there remains a tremendous amount of work to be done to achieve the targeted margin profile, but I'm pleased with the progress made so far. And I have the complete confidence that the Gentex team has the capability, adaptability and grit to accomplish our plan.

Speaker 4: That completes our prepared comments for today, but before we jump into questions, Josh is going to walk us through a short statement regarding our proxy.

Speaker 3: Thanks Steve. As you all know, we have entered into proxy season and yesterday we received Glass Lewis's summary report of our proxy and we believe we need to address one concerning area in their report. Gentex is disappointed in Glass Lewis's recent recommendation to oppose the continued nomination of Ms. Leslie Brown to its board and strongly urges its shareholders to vote in support of Ms. Brown.

Speaker 3: the board's gender diversity and two have improved the board's racial diversity.

Speaker 3: toward a more diverse representation on our board.

Speaker 3: Glass Lewis's recommendation is based on the logic that it is the responsibility of the chair of the nominating and corporate governance committee to achieve a 30% goal of gender diversity and clearly outline a timeline for improving the board's diversity.

Speaker 3: specifically with a focus on gender diversity. It follows that without this timeline, Glass-Lewis is recommending against supporting the chair's nomination to the board.

Speaker 3: This recommendation, therefore, seeks to support gender diversity by advising a vote against one of Gentex's female board members.

Speaker 3: In 2016, Ms. Brown was the first female board member in the company's history, and since that time she has served with distinction, intelligence, and respect.

Speaker 3: In summary, we believe that while Glass Lewis's goals for board diversity come from a good place, the recommendation against Ms. Brown shows a clear disconnect between their stated goals and any logical progress toward achieving said goal. In other words, we vehemently disagree with Glass Lewis's logic of abstaining votes for a qualified female candidate that has a successful record as a director for the company and is not a member of the board.

Speaker 3: as a means of supporting for gender diversity. Ms. Brown has served on the committee since 2018, and in her new role as committee chair, Ms. Brown is uniquely capable and qualified to lead this committee and remain on our board. We encourage our shareholders to vote in favor of Ms. Brown. Thank you for your time, and we can now proceed to questions.

Speaker 2: Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. With dryer question, please press star 11 again.

Speaker 2: Our first question comes from Ron Yevseke with Guggenheim Securities. You may proceed.

Speaker 6: Good morning team. Just a couple questions for me. How big of a benefit was was mixed this quarter thinking things on the product side like.

Speaker 6: lower base interior mirror shipments to China, maybe an increase in home link and ITM, and anything else you'd highlight.

Speaker 4: Yes, it's a combination. When we look at mix, we talk about two things. You have the overall mix of products, like you mentioned, how many advanced features versus base and outside versus inside. But then also you kind of take in, there's also a factor in there, which is the overall growth rate, but you're around 50 basis points or so of benefit from the mix.

Speaker 6: Okay, and then.

Speaker 6: Second half of last year increased, you increased wages quite a bit and I think had quite a bit of net hiring as well. Has that begun to have any benefits on the gross margin line in the form of reduced overtime or lower expedited rate or is that something we should think about as a source of upside maybe later this year and into 2024? Yes, the labor costs in general on the gross margin still, so a lot of the benefits

Speaker 4: of your basis based on the higher wages. We have seen overtime start to drop and probably the quickest benefit though to your point has been the lower freight expense. And so as we get past the lower freight then we'll start to be able to reduce overtime because we're still working overtime in order to build a little extra inventory on the finished good side to get back to.

Speaker 6: surface shipments versus air shipments, which is obviously going to help lower freight even more, and then ultimately it'll end in lower overtime. That's super helpful, and maybe just sneak in one more related to FDM for both you and Neil.

Speaker 6: Has your ability to secure new business wins been negatively impacted by the supply chain environment over the last several years? With that starting to improve, do you think we could see an acceleration in new customer wins and announcements?

Speaker 5: Yeah, I don't think the supply constraints have negatively impacted the customer award side. I think it's been more just on being able to build enough parts and quantity and supplied for the demand. As we come out of that from a supply constraint, and as we move forward.

Speaker 5: Yeah, we're not seeing, I mean we announced 94 launches that we've executed of full display mirror. We see a continued growth and ramp in the product and not just in launch execution but also in volume.

Speaker 4: Yeah, I'd say the single biggest impact wasn't in awards to Neil's point. It was more intake rates. So, over the last 18 months, there's been a lot of desire from OEMs to increase take rates. And we just haven't been able to support that until now. Right now we're sitting in a really good spot when it comes to advanced electronic content, especially for FDM.

Speaker 4: So, we're a much better spot right now to support higher volumes than what we were this time last year. Super helpful, Colin. Thanks, guys, and congrats on the quarter.

Speaker 4: a much better spot right now to support higher volumes than what we were this time last year. Super helpful, Colin. Thanks guys, and congrats on the quarter. Thanks, Ron. Thanks, Ron.

Speaker 2: Thank you. Our next question comes from James Picario with BNP Paribas exam.

Speaker 5: I wanted to ask about the first quarter unit volume shipments, at 12.7 million, a quarterly record for you guys.

Speaker 7: What what really drove that or does that reflect kind of max capacity at?

Speaker 7: within your current footprint or is this, you know, kind of set the stage maybe for.

Speaker 7: You know, you've invested, right? You've had capacity investments to just kind of set the stage for a new, you know, a new established bar going forward here for the rest of the year and beyond.

Speaker 4: Yeah, we're pretty darn close to max capacity at these levels. We can do a little bit more obviously with some extra overtime. The real investment that you see this year and the step up in CapEx and probably next year, another year after that at slightly elevated levels, that's going to create the facilities we need and some of the equipment and that's where we'll start to see some step function increases over the next 18 months in overall capacity.

Speaker 4: So, yeah, we do have some additional equipment coming online this year. And then brick and mortar projects over the next 18 months to two years are going to help us really kind of increase that overall capacity of the company.

Speaker 7: Got it and just on that topic. Is your light assembly plant in in China? I don't know if we want to call it a plant, but your footprint there is that also helping. Did that help drive this quarters unit volumes in any way?

Speaker 4: Yeah, we've also we're, we're absolutely executing final assembly now in the China market for the domestic China production. And so that has that has helped with additional head count and additional equipment that is helping produce, helping raise the production level as well. It's a fairly minor amount still, but we have expansion plans there and through some third parties that we continue to look at to help with the labor challenges, but also

Speaker 7: dynamic, and how that plays into your ITM, your integrated toll module, and of course FDM is capacity, is chip capacity the constraint or is it more just your own in-house production and staffing.

Speaker 4: Capability now, I'd say all the way up through the end of calendar year 2022 component availability was the biggest challenge. Now we feel really good about where we're at on the electronic side. Now it's more about capital equipment and labor internally would be the only limiting factor, but right now we're able to keep up with demand. What OEMs are looking for with with those. So.

Speaker 8: Understood. Thanks. Thanks, guys.

Speaker 9: Thank you.

Speaker 9: Thank you.

Speaker 2: Our next question comes from Luke Young with Baird. You may proceed.

Speaker 10: Good morning, thanks for taking the questions. To start, Steve, hoping you could expand on what might be some of the less obvious aspects of the Gross Minds and Recovery initiatives at the company, such as overtime that you already discussed, but also things like scrap and yield loss that you're muscling up to address. In other words, maybe you could just touch on the

Speaker 4: But the internal parts of it that matter the most are the higher levels of revenue obviously gives us the opportunity to start to leverage overhead in a more effective way. We were able to do it with less overtime dollars than what we've been seeing in prior year despite the growth. So there's obviously some leverage that's created there. And then we have with the team growing, we have had some struggles with scrap and yield loss and that's

Speaker 4: that scrap and yield loss category to further drive margin profile improvement. And so you know it's one thing to get the team on board, it's another thing to get them trained, and it's a totally different process that probably takes three to six months before you know the newer team members feel comfortable in the environment and very capable and highly effective.

Speaker 4: We feel good about the team that we've put together and we know with a little bit of time and our operations teams Dedication will be able to make improvements in those areas as well. One more nuance that Neil mentioned in his section of the call is the VAVE portion. So those redesign efforts intended to reduce bill of material cost through re-engineering product not only helps with less material or more

Speaker 4: tooling, better tooling pricing, but it helps with the margin that way versus just lower component costs. Yeah, and that'll be really more like end of 23 and taking us into 24, the focus on on further improvement through VAVE activities. And that's why we talk about, you know, 23 and 24 as our total timeline to get back to that targeted margin profile.

Speaker 10: month. How do you think about leaning into that in terms of FDM in China, more richly contacting base mirrors or even emerging product categories for the Chinese market? Thank you.

Speaker 5: Yeah, for the Chinese market specific, that one changes really, really fast. And what you see, and we talk a little bit about base mears, executing base mears into that market, and that's what we've been focused on for the last couple of years, is continuing to grow that penetration. Again, this quarter, we had another handful of base mears launching and executing into the China market.

Speaker 5: With any of our products, that's the introduction that we have, is get base mirrors in and then start adding features and content. The market in China is moving and evolving really, really quick and the team is focused on how to adapt our products to grow that footprint outside of just the JV OEMs that we've been working with.

Speaker 5: and be more into the domestic side. But it does get into time, resources, and then the financial side of that of making it into the business that we want it to be. So there's a lot happening, a lot evolving in the space and you know we're kind of taking our time to make sure we're doing it right and coming out of the component shortage It's a time to start.

Speaker 9: looking out that next phase. Thank you, I'll leave it there.

Speaker 9: phase. Thank you. I'll leave it there. Thanks, Luke. Thanks, Luke. Thanks, Luke.

Speaker 2: Thank you. Our next question comes from John Murphy with Bank of America. You may proceed.

Speaker 2: Thank you. Our next question comes from John Murphy with Bank of America. You may proceed. Hey, John .

Speaker 2: John Murphy, if your line is on mute, please unmute.

Speaker 2: Our next question comes from Josh Nichols with B Riley. You may proceed.

Speaker 7: Yeah, thanks for taking my question and great to see the record sales for the quarter. Just looking here, I guess you're almost near the low end of the gross margin guidance for the year here in the first quarter. Is there much further action that you really need to take to kind of get to the targets that you have for this year? And then other things that you're doing as you try and move towards more normalize gross margin profile.

Speaker 4: It's, you know, hopefully may not be completely a linear improvement, but the goal is to continue to get better every quarter. And so, yeah, there's there's a lot of action steps that we have in place. Some of them I just talked about a couple of questions ago being primarily focused on operational improvement as the team comes on board and helping with the training to help lower yield scrap costs.

Speaker 4: and lower overtime further. Obviously on the customer side we have some pricing stuff we still need to work through with the customer base and those should be tailwinds to the margin profile as well. We don't expect those to happen all at one time. We think it is going to take take a little more time and probably be you know evenly smooth throughout the year as we settle those those negotiations.

Speaker 7: Yeah, thanks for clarifying and then I guess the last question for me. Growth in the 1st quarter, right? Coming in above right? The percentage that you're looking to 15% or so that you're looking for for this year. And then, you know, 14% light vehicle production expected in the QQ as well bodes well.

Speaker 7: or surpassed at 15% growth target this year and just waiting for a little bit better visibility before potentially revisiting that.

Speaker 4: Yeah, I think the upside is obviously there. The risk factor is what are we dealing with? Is this a little R or a big R that's going to happen in the second half of this year? And higher interest rates, how are they going to impact the high-priced vehicle market? And so one of the things that we're very optimistic about is for the first time in a while, we have a question.

Speaker 4: get its legs under it a little bit more than normal. Obviously, it wasn't like pre-pandemic where we could operate a week-long schedule really without too much chaos. So, we're not all the way there, but we're starting to make improvements and getting back to that area. So, yeah, there's definitely some upside there. The Q2 production environment's a little overstated because of the chaos that happened last year in Q2 on the automotive...

Speaker 4: capacity start to increase as well and that's a good sign for us because it hasn't just been the supply and the components and our own ability to keep up it's also been OEM struggle to be able to get capacity back to where it was pre-pandemic and we're starting to see some strength there in our customer base so it's pretty exciting we're just hoping that the macroeconomic portion of this doesn't have a have a huge impact on the back half.

Speaker 4: Obviously, by the time we post Q2, we'll have a better sense for that. In other words, what is the second half of the year going to look like? And I would say there is an opportunity to do slightly better than what our forecast was. As the last three years have taught us, though, there's always a massive opportunity for it to be worse than expected as well. So call it a little worn out from getting punched on the ropes, but I think we're just hanging it. We're happy that we had a good...

Speaker 2: Thank you. Our next question comes from Federico Morendi with Bank of America. You may proceed.

Speaker 4: Hey guys, it's John Murphy. Can you hear me? We got you. Yeah, sorry. Sorry for the technical difficulties before. You know, one thing you made a statement that's actually very interesting and very enlightened in that you need a larger team to take costs down, which is kind of the opposite of what a lot of people think in the world these days. You need less people to, you know, and have them do more and more.

Speaker 4: you know very interesting. Did you outline what the overtime costs are? How bad you know scrap has been and yield loss has been? Maybe relative to history if you can't put dollar terms on that just kind of give us an idea of like you know how much overtime you're running that might go away? You know how bad scrap is relative to history and yield has been versus history?

Speaker 4: Yes, I'll start kind of with a generic answer and I'm sure Kevin will jump in with some details, but if you look at overtime really over the last 18 months, we've been running probably at about two times the amount of overtime that we would have normally expected. So there's a healthy amount of overtime, obviously there's a certain amount of employees who like that overtime and there's a certain amount of it that helps you take advantage of CapEx and your footprint.

Speaker 4: Unfortunately, over the last 18 months, it's been way beyond that. And so that's why we look at overtime as one of the key drivers of savings over the next 12 months. Yeah, so I think really to just tailor in on that, if you look at, you know, that incremental headcount, which is probably about, we've added close to four to 500 teammates on the hourly production side over the last year. If we're that short, we were trying to build, have sales in this 450 to 500 million dollar range a quarter.

Speaker 3: We were running incentives last year at this time that were paying 2x to 2.5x overtime premium. And so then you're getting a lot less, a lot more cost from a unit perspective. And so at this time we have just straight overtime primarily that's happening because of the higher headcount. Once you improve.

Speaker 4: about the last couple percentage points of yield or yield loss in this case, on a revenue of this size you start to talk about a couple million dollars or a few million dollars in savings potential that are out there. And so these are the types of things that we need to get really good at and make improvements in to get back to that kind of ideal state on the margin profile.

Speaker 3: It's still right around 8 to 10% of total revenue for the company. Shipment's continue to be higher because it is a higher mix of base. So that's probably closer to the 10, revenue's probably closer to 8.5%. But it's really driven by the outside mirror growth is driven in a lot of the...

Speaker 3: the growth with Tesla, and then some of the other EV manufacturers growing outside mirror volumes in that market. But it's still kind of that 9% of revenue because it's primarily based mirrors. That's very helpful. Thank you guys.

Speaker 3: Tesla and then some of the other EV manufacturers growing outside mirror volumes in that market. But it's still kind of that 9% of revenue because it's primarily based mirrors. That's very helpful. Thank you guys. Thanks John .

Speaker 4: Thank you. Our next question comes from David Wiston with Morningstar. You may proceed. Thanks. Good morning. For Steve, I think you were hinting at an accounting difference. I just wanted to clarify. Is expedited freight in COGS and then regular freight is in SG&A? No, it's the shipment. The shipment incoming is in bill material, so it's in COGS.

Speaker 11: Okay, and the press release you called out just...

Speaker 11: Want to interrupt is it?

Speaker 6: You had an improvement in both is it? Yeah, we did have improvements in both. Yep.

Speaker 11: Okay, on the press release, you called out an increase in staffing and also in professional fees. Does the staffing increase more on the hourly versus corporate side or is it balanced? And then what type of professional fees are you increasing spending on?

Speaker 4: Yeah, there were increases in both, but the statement that you're reading there is in relation to operating expense. So that's really on the professional side. So it's more about engineers, development teams and outside consulting as well to help keep up with the launch rate and some of the new products we're working on. Okay.

Speaker 11: products that we haven't seen in vehicles before like much larger dimmable surfaces? Are they being a bit more cautious now just focusing more on the present due to macro fears?

Speaker 4: Well, it's actually, we haven't seen a slowdown in their interest in new technology due to recessionary fears. In fact, I would say we've seen a pickup in interest and engagement as OEMs have gone back to the office. It's actually increased the, from an R&D standpoint, the ability to talk about new product development and execution. Escape last year. So, I'll.

Speaker 4: I'd say that was one of the hardest things during the pandemic. It was, you know, when people were working from home, it was really tough to show a prototype of a brand new product or discuss even, you know, the theory of what a vehicle of the future could look like. So that was a difficult selling environment. I would say that part's improved a lot. We're getting back to customer visits and we've had a lot of OEMs coming to Zeeland to visit CRR&D facilities.

Speaker 4: and some of our new product concepts. We haven't seen any negative headwinds yet due to recessionary fears in terms of new R&D or product efforts. Okay, and just lastly on the airplane window growth, it was really good. Is that primarily more airbrush production starting or any growth from Boeing? There was a lot of Boeing there. We were always cautious about putting that percentage in because it was pretty much zero.

Speaker 4: this time last year. So it did improve a lot, which is a good sign, but we are actually running pretty consistent production right now in our aerospace area, so it's good to see that area coming back and obviously getting back to producing. Airbus has started to pick up a little bit, but the vast majority of those sales are still Airbus, I mean it's still Boeing related.

Speaker 2: Okay, thanks. Thank you. Thanks, David. Thank you, and this concludes the Q&A session. I'd now like to turn it back over to Josh Oberoski for any closing remarks.

Speaker 2: This concludes our call. Thank you everyone for your time and questions and have a great weekend. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Speaker 2: Thank you everyone for your time and questions and have a great weekend. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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