Gentex Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2023

Key Takeaways

  • For Q3 2023, Gentex reported net sales of $575.8 million, a 17% year-over-year increase, outperforming light vehicle production by 12% in revenue and 5% in unit growth.
  • The company's gross margin rose to 33.2% (up 3.4 percentage points YoY) driven by higher sales volumes, freight and tariff cost improvements, customer price recoveries, and favorable product mix.
  • Operating expenses increased 14% to $69 million, reflecting elevated R&D and engineering investments to support advanced feature launches and ongoing technology development through 2024.
  • Full Display Mirror momentum continued with approximately 1.75 million units shipped through Q3 and the 2023 annual shipment forecast raised by ~500,000 units, although design cost optimizations are underway to address higher electronic component costs.
  • Looking ahead, Gentex expects full-year 2023 capex of $200–$215 million and targets a 35–36% gross margin by end of 2024, planning material cost reductions, supply-chain optimizations, and operational efficiency initiatives.
AI Generated. May Contain Errors.
Earnings Conference Call
Gentex Q3 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Gentex Reports Third Quarter 2023 Financial Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone.

Operator

You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. Would now like to hand the conference over to your speaker today, Josh O'Berski, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to the Gentex Corporation Third Quarter 2023 Earnings Release Conference Call. I'm Josh O'Berski, Gentex Director of Investor Relations, and I'm joined by Steve Downing, President and CEO Neil Boehm, CTO and Kevin Nash, Vice President of Finance and CFO. This call is live on the Internet and can be reached by going to the Gentex website and at ir.gentex.com. All contents of this This call are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcast, retransmitted, transcribed or otherwise redistributed.

Speaker 1

Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any unauthorized use of the content 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 Q3 2023 financial results press release from earlier this morning and as always shown on the Gentex website. Your participation in this conference call implies consent to these terms. Now, Now I'll turn the call over to Steve Downing, who will

Speaker 2

get us started today. Steve? Thanks, Josh. Before we jump into the quarterly summary, I wanted to take a few minutes to discuss the war in Israel. As you may be aware, Gentex made an acquisition in early 2021 of Guardian Optical Technologies based in Tel Aviv.

Speaker 2

And since that time, we have been growing our technology presence in Tel Aviv, which is primarily focused on using AI to create innovative products focused on driver and in cabin monitoring. We have also recently partnered with a company named Atasky, which is also headquartered in Israel. We remain close contact with our team and partners in Israel and are thankful to report everyone on those teams along with their immediate families are safe as of our latest report. It is important to note, however, that while our team is safe, several of our team members and partners have already experienced loss of friends and extended family members. As a Gentex team, we continue to keep our employees and partners in our thoughts and prayers and are constantly looking for ways to show our support for their safety and the safety of their families and friends.

Speaker 2

For the Q3 of 2023, the company reported net sales of $575,800,000 Compared to net sales of $493,600,000 in the Q3 of 2022, a 17% quarter over quarter increase. For the Q3 of 2023, global light vehicle production in North America, Europe, Japan, Korea and China Increased approximately 5% compared to the Q3 of 2022. While the last few years have been negatively impacted By labor and supply chain issues that limited our ability to meet customer demand, the last several quarters have improved significantly. The growth in the Q3 is a continuation of the unit and content growth we experienced during the first half of this year and is indicative of the success of our technology platforms, including the launch rates and increased take rates of our Full Display Mirror products. In terms of performance metrics, Our unit growth in the Q3 outperformed the underlying market by 5%, while our revenue beat the market by 12%.

Speaker 2

For the Q3, the gross margin was 33.2% compared to a gross margin of 29.8% for the Q3 of last year. The 3rd quarter gross margin increased by 3.40 basis points on a quarter over quarter basis as a result of the higher sales levels, Improvements in freight and tariff related costs, cost recoveries and price increases from customers and improvements in product mix. However, some of these improvements were partially offset by increased raw material costs, labor costs and scrap and yield loss as compared to the Q3 of last year. When compared to the Q2 of this year, The gross margin in the 3rd quarter improved from 33.1% to 33.2%. We continue to make progress on our margin recovery plan that we estimated would take until the end of 2024 to complete.

Speaker 2

In the 6 months following the close of the Q1, We have seen gross margins expand 150 basis points as the gross margin grew from 31.7% during the Q1 of 2023 to 33.2% in the Q3. Obviously, I'm very pleased with the progress made so far in calendar year 2023, but we still have an incredible amount of work to do in the Q4 of this year and in 2024 in order to accomplish our goal of achieving a gross margin of 35% to 36% by the end of next year. Our focus for the next 18 months will be on achieving improvements in our material costs and supply chain expenses, but will also include targeted improvements in our operations by increasing throughput, lowering scrap and yield loss and reducing overtime expenses. Operating expenses during the Q3 increased by 14% to $69,000,000 compared to operating expenses of $60,400,000 in the Q3 of last year. Operating Expenses increased quarter over quarter primarily due to staffing and engineering related professional fees, which were partially offset by lower outbound freight expenses.

Speaker 2

Our operating expenses are trending in line with our expectations with increases primarily focused on R and D as we continue to add technical capabilities and bandwidth to support the increased level of launch activities, while also continuing to expand our research into new technologies. The amount of work that our team has accomplished in our advanced research areas is promising and will ultimately lay the groundwork for growth in future years. R and D expenses are expected to continue at an elevated pace for the rest of this year and throughout calendar year 2024 as we invest in innovative products and technologies, new business awards and VAVE initiatives for cost optimization of our bill of materials. Income from operations for the Q3 was $122,400,000 a 41% increase when compared to income from operations of 86 $800,000 for the Q3 of last year. During the Q3, 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 2

Net income for the 3rd quarter With $104,700,000 compared to net income of $72,700,000 for the Q3 of last year, which represents a 44% increase. 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 Q3 were $0.45 a 45% increase compared to earnings per diluted share of $0.31 for the Q3 of last year. I'll now hand the call over to Kevin for financial details.

Speaker 3

Thanks, Steve. Automotive net sales in the 3rd quarter were $564,500,000 a 17% increase compared with $480,900,000 in the Q3 of 2022. Auto dimming mirror unit shipments increased by 10% during the Q3 compared to the Q3 of 2022. Other net sales in the Q3, which includes dimmable aircraft windows and fire Protection products were $11,300,000 compared to other net sales of $12,700,000 in the Q3 of 'twenty two. Fire Protection sales decreased by $5,300,000 For the Q3 compared to Q3 of 2022, automobile aircraft window sales increased by $4,000,000 for the Q3 of 2023 compared to last year.

Speaker 3

Share repurchases. During the Q3 of 2023, the company repurchased 800,000 shares of its common stock at an average price of $32.41 per share. As of September 30, 23, the company has approximately 18,000,000 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, but share repurchases will vary from time to time and will take into account macroeconomic issues, market trends and other factors the company deems appropriate. Shifting over to the balance sheet.

Speaker 3

The balance sheet comparisons mentioned today are as of September 30, 2023 as compared to December 31, 2022. Cash and cash equivalents were $260,600,000 compared to $214,800,000 Short term and long term investments combined were 200 $90,100,000 up from $225,300,000 which includes fixed income investments as well as the company's equity and cost method investments. Accounts receivable was $351,100,000 up from $276,500,000 due to the increase in sales levels. Inventories were $395,500,000 down from $404,400,000 and accounts payable increased to $171,400,000 up from $151,700,000 Taking a look at preliminary cash flow items for the quarter year to date, Q3 of 2023 cash flow from operations was 125 $9,000,000 which was an increase from $47,100,000 in the Q3 of 2022. The increase was due to increases in net income and shifts in working capital.

Speaker 3

Year to date cash flow from operations was $367,700,000 an increase from $241,800,000 in 'twenty two also due to increase net income and changes in working capital. Capital expenditures for the Q3 were $31,100,000 compared with $50,500,000 for the Q3 of last year. There were approximately $15,000,000 worth of expenditures accrued but not paid as of September 30. And year to date capital expenditures were 121.4 and compare with $108,500,000 for year to date 2022. When including the accrued but unpaid capital expenditures, CapEx for the calendar year is approximately 136,000,000 And lastly, depreciation and amortization for the Q3 was $22,200,000 compared with $23,200,000 for the Q3 of 'twenty two.

Speaker 3

And Year to date D and A was $71,000,000 compared with $73,300,000 for year to date 'twenty two. I'll now hand the call over to Neil for a product update.

Speaker 4

Thank you, Kevin. In the Q3 of 2023, we again experienced a high level of product launches. For the quarter, there were 28 net new nameplate launches of our interior and Your auto dimming mirrors and electronic features net of previously disclosed product headwinds. Additionally, during the Q3, Over 70% of the net launches contained advanced features led by Full Display Mirror, HomeLink and advanced featured exterior mirrors. Now let's focus on Full Display Mirror.

Speaker 4

Full Display Mirror continues to gain momentum with our customers through increased launches, which has been driven by consumers And that has led to increased volumes and take rates. In the Q3, Full Display Mirror volume performance continued to be strong. And through the 1st 9 months of 2023, we have shipped approximately 1,750,000 units. At the end of the second quarter, We increased our 2023 annual estimate of full display mirror unit shipments to be approximately 500,000 units higher in calendar 'twenty three compared to calendar year 'twenty two. Based on our current forecast, we believe our goal for 2023 is very achievable.

Speaker 4

If there aren't any significant impacts due to the ongoing strikes at our OEM customers. As we covered last quarter, Over the last 2 years, we've incurred significant product cost increases due to the state of the electronics market, supply chain issues and labor constraints. But we are now at a point where we're returning our focus on optimizing designs, looking for similar quality but lower cost components and leveraging the supply base in an effort to drive costs out of our bill of materials. As we enter the Q4 of 2023 and prepare our plans for 2024, The purchasing, development and launch teams have started the process of identifying components and products where we need to make a change to help in this effort. In some situations, this process will drive us to create new long term partnerships and some of our current suppliers may lose volume or be displaced completely.

Speaker 4

Our strategy is very simple. Work with key suppliers and partners to find win win scenarios. And if this means we need to move To or create new partners, then that's what we'll be executing. The first wave of these redesigned projects will be kicked off here in the 4th quarter and several more in early 2024. This activity is important for us to achieve the long term financial goals of the company and we'll be applying the appropriate resource focus to these projects to make them happen.

Speaker 4

I'll now hand the call back over to Steve for guidance and closing remarks.

Speaker 2

Thanks, Neil. The company's current forecast for light vehicle production for the Q4 of 2023 and full years 2023 2024 are based on the mid October 2023 S and 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 4% for the Q4 of 2023 as compared to light vehicle production for the Q4 of last year. For calendar year 2023, light vehicle production in these markets is forecasted to increase 9% compared to calendar year 2022. Q4 2023 calendar years 2023 2024 forecasted vehicle production volumes From S&P Global Mobility are shown in our press release from today.

Speaker 2

Based on this light vehicle production forecast, The company is providing updated guidance estimates for calendar year 2023. Revenue for 2023 is Operating expenses are still expected to be between $260,000,000 $270,000,000 Given year to date We are lowering the high end of our estimated annual tax rate for the year, which is now forecasted to be between 15% 15.5%. Given the long lead times of capital projects, capital expenditures are now expected to be between $200,000,000 $215,000,000 for the year and depreciation and amortization is expected to be between $95,000,000 $100,000,000 for the year. Additionally, based on the company's current forecast for light vehicle production for calendar year 2024, which is currently estimated to increase by 1% as compared to 2023, the company expects calendar year 2024 revenue to be between $2,450,000,000 $2,550,000,000 The company is on pace for record setting revenue this year, which has been aided by tailwinds from the relief of the supply chain constraints, along with strong demand for outside mirrors and advanced electronic features. Our outgrowth versus the market demonstrates that our product strategy is succeeding with our At the same time, progress on the path toward improved profitability continues as we execute the additional cost improvement initiatives That will enable us to accomplish our plan of reaching a 35% to 36% gross margin range by the end of 2024.

Speaker 2

While gross margin improvements have continued throughout 2023, the sequential improvement from the Q2 to the Q3 of this year was subdued by certain product mix issues that will hopefully subside as we move into the Q4 and next year. The Q4 will likely be impacted by the UAW strikes from both a revenue and margin perspective, but we remain confident in our ability to continue to grow revenue while improving our margin profile throughout the end of this year and into 2024. That completes our prepared comments for today and we can now proceed to questions.

Operator

Thank And our first question will come from the line of Luke Yunck from Baird. Your line is open.

Speaker 1

Good morning.

Operator

Luke, your line may be on mute. Luke, your line is on mute. We'll just come back to him later. Okay. One moment for our next question.

Operator

Our next question will come from the line of John Murphy from Bank of America. Your line is open.

Speaker 5

Good morning, guys. Just a question on the Q4 guide or implied EPS. It seems like there's a fairly wide range. And I'm just curious why that is as a result of Not knowing what's going on with the UAW strike, at the moment, hopefully it's getting resolved soon or is there something else that's going on?

Speaker 2

No, it's just about the UAW risk. I mean, obviously, as we're preparing this and working through it even last night, some of the news obviously could be encouraging. But At the same time, what we're having to estimate is assuming that the exposure to the Detroit 3 continues for a while longer. And so, that's what's in our estimates is making sure we consider that fact.

Speaker 5

Okay. And then just Second question, I mean, when you're seeing mix improve and then volumes rising, the opportunity set or the potential to get margins back Potentially faster than you're expecting seems a lot more plausible than it may have 6 months ago. As you think about the progression to your ultimate Gross margin targets. What are the key drivers to getting there? Are they internal or external?

Speaker 5

And if external gets much better Then you may expect right now as the strike gets resolved and volumes continue to surprise to the upside, could we get there potentially a little bit faster?

Speaker 2

Yes. I don't think we'll get there faster. And the reason why I say that is a lot of the you're absolutely right, John. The growth is the key and the sales volumes and mix have to be right. And so even assuming those factors, one of the things that we have to remember and one of the things we're working through and the reason for Neil's comments And the prepared comments was really focused on saying, hey, a lot of the products if content is coming, that's where a lot of the cost increases happen, we're on advanced feature products.

Speaker 2

So, whereas historically that's always been a great part of product mix, it also means we have some work to do to get that bill materials back in line with where we expect it to be in order for that to have the read through and the total financial performance that we were hoping for previously. So, whereas we have our plan, There is a lot of work and that's why Neil kind of made those comments during his prepared comments was about there's some work that needs to be done. In other words, just selling isn't going to be enough on its own. We have engineering work and obviously some bill of materials improvements that have to be made in order for us to achieve those.

Speaker 5

Okay, great. Thank you very much guys.

Operator

Thanks, John. Thank you. One moment for our next question. Our next question will come from the line of Josh Nichols from B. Riley.

Operator

Your line is open.

Speaker 6

Yes. Thanks for taking my question. Since we haven't talked about it in a little bit, clearly, you're benefiting from increased penetration rates For your interior and exterior auto dimming mirrors, any commentary about where that stands today? Or if not, could you at least kind of Discuss a little bit about what you're seeing in penetration rates in some of these emerging markets like China and how that compares to where you are with more established markets in the U. S.

Speaker 6

And Europe.

Speaker 2

Yes. I think if you look at outside mirrors especially, there's been a lot of growth in Asia, including the China market. But really outside mirror take rates have been increasing pretty much globally. And so we've done really well with that product line. And beyond that, I think the next biggest one you'd look at on the take rate side would be Full Display Mirror.

Speaker 2

Obviously, the number of launches that we've been talking about over the last couple of years Have grown significantly, but even inside of those programs that we've already launched, the take rates have changed quite a bit in that same time period, meaning that we're moving from typically moving from base auto dimming mirrors to full display mirrors. So both of those trends have been very positive for us over the last couple of years. And based on what we're seeing, we don't see that changing anytime soon.

Speaker 6

And then just to follow-up on that. Clearly, the full display mirrors have very nice ASP contribution relative to your other mirrors. How does it stand though on the margin? I know that there's been some cost pressures there. Is it above the corporate average Just curious how that's going to impact the business going forward because that's become an increasingly large percentage of the revenue growth.

Speaker 2

Yes. I would say right now we're actually slightly below corporate average. And the reason for that is some of the factors we had talked about just a couple of minutes ago with That was a lot of those products took the brunt of cost increases, especially on the high end electronic side. And so that's why we're going to be focused on a lot of those products as we move through this year and through next year, making sure that we're getting cost optimized designs in place to help get those back in line so that they're closer to corporate average margin profile. Like we said, there's an engineering effort that has to take place and then a launch effort and validation.

Speaker 2

And so they don't have an immediate impact, but we know it sets the stage very well for the next 18 months to 2, 3 years in terms of total financial performance.

Speaker 6

And then last question for me, then I'll let someone else Take a turn, but I know obviously hard to frame, right, the UAW impact that's still going on, some good potential news right from Ford. We'll see That spills over to the other automakers in the U. S. But fair to say that, while there's a relatively large or wider guidance Range for 4Q that you're not anticipating any impact for 2024. So still that 10% growth that you're forecasting, there's nothing really built in for any Headwinds there that's more back to normal operating environment.

Speaker 6

Is that true?

Speaker 2

Yes, that's our assumption. So If we're looking at a if this year comes in anywhere close to S and P's estimate for 4th quarter auto production and a 1% growth rate above that in 20 We feel pretty comfortable we can produce the numbers inside of that revenue range.

Speaker 6

Great. Thank you.

Speaker 3

Thanks, Josh.

Operator

One moment for our next question. And our next question will come from the line of Mark Delaney from Goldman Sachs. Your line is open.

Speaker 7

Yes, good morning. Thanks very much for taking the questions. First, I was hoping you could double click a little bit more in-depth around both price and cost. You talked about perhaps Maybe to go after some of the input costs that you've been seeing and some of the inflation that your company has been dealing with maybe is subsiding. If you talk a little bit more broadly as you think about 2024, but then extend that as well as how you're thinking about pricing and as you start to negotiate with your OEM customers, 1st, you've been able to secure some recoveries just as the pricing dynamic at perhaps more difficult in 2024, in particular some of these OEMs have higher labor costs now and How does that maybe net with the margin improvement targets that you laid out?

Speaker 7

Thanks.

Speaker 2

Yes. Thanks, Mark. What I would say is on the recovery side, We've been working really hard on that over the last 18 months and the team has done an amazing job of positioning us well with OEMs to negotiate most of those deals. There's still some residuals that will happen in Q4 and beyond, but we've we're probably 80% of the way through that with our customers. And that's why we now are talking about the focus, which we had always known would be wave 2 of our work in improving margins was going to be focused on internal costs and supplier costs.

Speaker 2

So, our focus there has been like to Neil's point isn't just, purely economics all the time. It's also engineering our way into more cost And so the team, has been already actively working in the space. The next 18 months though is going to become a lot more effort and focus on redesigns and on making sure that we have the right product partners from a supplier standpoint and cost efficient solutions. So It is going to become more difficult in the 2nd year of going after it because this isn't just a negotiation piece. This is going to be a lot of engineering work that's required in order to accomplish these improvements.

Speaker 7

Okay. Got it. And Maybe you could also talk a little bit more on what you're seeing by key region in terms of the production schedules and particularly internationally in In areas like Europe and China, one of the other Tier 1s talked about seeing some potential macroeconomic impact on European and China schedules and Especially as you guys have a 2024 target out there, we better understand what the trajectory and the production schedules may be as you look at those key regions? Thanks. Yes.

Speaker 2

I think for sure, if you look at Europe, I mean, it's historically, it's tended to trend Pretty similarly with North American market in terms of macroeconomic issues. And so I wouldn't see any real change And Europe versus what we're seeing already in North America and that's really affected mostly by interest rates currently. So what's the underlying The condition of the country in the region where you're participating and then what is the lasting impact of cost of money and how does that impact consumers' buying habits. And so I think those will be the biggest factors both in North America and Europe. China is a little different.

Speaker 2

There's been an extreme amount of volatility in that marketplace. I mean, we've done well through that, But we also understand that there's a lot of pressure on the OEMs right now. There's some concerns around profitability with those OEMs. And so that's One of the things that we look at and pay a lot of attention to is what is the financial stability of the customer base as well. And I think our biggest Concern there would be in the China market, not in the rest of the world.

Operator

Thank you. One moment for our next question. Our next question will come from the line of James Picariello from BNP Paribas. Your line is open.

Speaker 8

Hi, good morning guys.

Speaker 3

Good morning.

Speaker 8

Just wondering if you could speak to the rising or the increasing Still increasing raw material costs. That was called out as a headwind for us in the quarter. Yes. And in particular on chip, semi's pricing, what the backdrop looks like there as we think about next year? And then my follow-up question would be to Neil.

Speaker 8

My apologies, I had to join the call late And I just caught the tail end of the redesign effort. If we could just elaborate a little bit on that, I might have a follow-up to the redesign topic as well. Thanks.

Speaker 3

Sure. Go ahead. Yes. So on the chip pricing, that's really something that We had some already negotiated stuff that happened in the first towards the end of Q1, really in Q2. So we didn't see the full brunt of that headwind really into the Q3.

Speaker 3

So it was something that was we had briefly talked about it last quarter, but it kind of offset some of the other positive things that we had going on. So I think that was just a little bit of The noise on the build materials side, but it's really it's not nearly as much as what we had already brought, but kind of offsetting some of the positive things that we saw, Really balancing through the Q3.

Speaker 8

Yes.

Speaker 9

And we still are

Speaker 4

seeing a couple of suppliers that are still asking for some So part of my prepared comments was around looking at products and components and finding Alternate solutions or design strategies as the next day. So as we get into Q4 here and into 2024, We're in the process of identifying the products and the components that we need to focus on in order to help remove cost out of the building material, especially As Steve had mentioned a little bit ago, especially on some of the higher content products like Full Display Mirror, where you have a lot more technology, those are the areas that Took a lot more financial burden with the cost increases over the last 2 years.

Speaker 8

Got it. That's helpful. But can that Can the redesign effort, could that potentially lead to additional RD and E and just resource investment on behalf of you guys to really take that to the finish line or is that strategy and the investments that are needed pretty well contained?

Speaker 2

Yes, absolutely. I mean, there's definitely a step up in terms of the R and D requirements in order to achieve those. It is contained inside of our guidance. And really what we're talking about is a redirection. And as we move into 2024, The growth in both the top line but also in the engineering base of the business, a good portion of that's going to be focused on redesign efforts.

Speaker 8

Got it. Okay. Thank you.

Operator

You bet. Thank you. One moment for next question. And our next question comes from the line of Ryan Brinkman from JPMorgan. Your line is open.

Speaker 4

Thanks for taking my questions.

Speaker 10

I see you're essentially reiterating the full year Look, despite the headwind from UAW strikes, so are you able to quantify the impact to date from the strikes? What is maybe embedded in the updated guide for the full year. And then the guide remains unchanged versus the time of 2Q earnings. Something had to track better right by an equivalent amount to offset the strike headwind. So what would you say tracked better?

Speaker 10

Or did you maybe contemplate some strike impact? Or how should we think about this factor?

Speaker 2

Well, I'd say and we'll start with Q3. It was a very modest impact in Q3. If you look at the plants that were impacted and the portions of OEMs, Very modest impact to us. As we've moved through as Q3 or Q4 started, basically we are running sub $1,000,000 a week impact, Obviously, with the latest announcements over the last few days, including some of the GM plant shutdowns, those are plants that are more to us. And so we've gotten to the range where we could be talking about if things didn't change from where they're at right now, dollars 2,000,000 to $2,500,000 a week in lost revenue It's about what we would be facing.

Speaker 2

And so as we move forward, obviously, depending on the breadth and scope of the shutdowns, We'll determine how much and how long will ultimately drive what the total impact is to the company. And so we do believe we're well inside of that range With the guidance that we gave, if you look at our if you look at the normal cyclical nature of Q3 move to Q4, By the end of the year, you'd normally expect a little bit of trail off around the holidays. But normally, October is a very strong month and there's been no reason to believe that's not consistent. We've actually been doing very well and staying very busy throughout October despite some of these challenges. The question will become how long does this run?

Speaker 2

Is it beyond October through November, in which OEMs are able to settle the disagreement.

Speaker 10

Okay, great. Thanks. And Relative to the reference in the release and then in the prepared remarks too about the last several quarters having improved significantly from a supply chain perspective, And I think this is benefiting gross margin in a couple of different ways. You've got mix improvement because I think earlier some of Your shortages were impacting your more advanced higher profit features. Then you've got the leverage of the fixed portion of COGS and the higher sales that that allows And maybe you've got some lower premium freight logistics in there too.

Speaker 10

How would you sort of bucket those areas of supply chain related margin tailwind. And then how important is any one of these areas continued improvement there to continuing to progress toward the targeted 35% to 36% by the end of next year or are there areas more important like, I don't know, manufacturing cost efficiencies, I heard on the call today about some sort of vendor cost reduction program, etcetera. What's the right way to think about that?

Speaker 2

Well, yes, I think the single biggest impact given the improvement in the supply side has been really freight and duties and tariff related, especially expedited freight costs like you mentioned. So that was the single largest impact. Part of Pricing from the supply base, but really it's more so focused on how much expediting freight we had to do in order to keep up with demand from base when things were constrained. So that's improved significantly. So that's obviously helped provide a tailwind to margin profile.

Speaker 2

As we talk about moving into next Q4 and really next year, if you look at the key focus areas, it's going to be really the higher sales levels And then obviously, improved bill of material costs. And then lastly, the factors that we mentioned on the operational side. So you're going to be talking about Total throughput, scrap and yield loss costs and then limiting the amount of overtime. And so if we can handle those areas, those will be the key areas beyond Obviously, maintaining product mix and the higher sales level, beyond that though operationally, once we achieve those targets, that's what's going to equip us to be able to get back 35%, 36% range by the end of next year.

Speaker 10

Very helpful. Thank you.

Operator

One moment for our next question. And our next question will come from the line of Ron Yefsico From Guggenheim, your line is open.

Speaker 9

Yes. Good morning and thanks for taking my questions. I guess, just first, were there any retros or out of period pricing benefits this quarter just as we think about Modeling.

Speaker 3

There was a few million, probably about $4,000,000 or $5,000,000 in kind of recoveries in the quarter Related to settlements of negotiations.

Speaker 2

Not all of it was one time in nature, but sure.

Speaker 6

Okay.

Speaker 9

Okay. Are you using the strike to help build up some slack in the system or kind of buffer And your supply chain and maybe shifting back to some more favorable modes of freight for both inbound and outbound and or reduce

Speaker 8

over time?

Speaker 2

That was exactly the plan. Depending on the length and severity of the strike is to use This has an opportunity to replenish finished goods inventory back to more sustainable levels, and also obviously, hopefully, Find a way to get production scheduling back in line so that we can limit over time and some of the reactionary expenses that you face given customer order changes.

Speaker 9

Okay. Yes, that's helpful. And then just high level like Europe and North American production was down Something in the range of 10% to 12% sequentially. But your revenues, like kind of adjusting for the pricing commentary you gave, are roughly flat Quarter over quarter, I guess, the key takeaway is FDM take rates are moving higher Or overall product take rates or kind of what would you how would you bridge the gap? Those are your 2 core markets or 2 largest markets and

Speaker 6

you still have roughly flat revenue performance.

Speaker 2

Yes, you're exactly right. If you look at continued growth in FDM, obviously, there's been some tailwinds on outside mirrors as well. Overall product content, even though volumes have dropped some in that space, like if you look at what the overall dollar content has done very well during that time period, allowing that over outperformance versus the market.

Speaker 9

Okay. That's super helpful. I'll hop back in the queue.

Speaker 2

Thanks, Rob.

Operator

Thank you. One moment for our next question. And our next question will come from the line of Luke Junk from Baird. Your line is open. If your phone is on speaker, please pick it up.

Operator

All right. And I see no further questions in the queue. I'd like to turn the call back over to Josh O'Berski for closing remarks. All right.

Speaker 1

Well, that concludes our call. Thank you everyone for the time and questions. We'll look forward to chatting in the near future. Have a great weekend.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

Powered by Quartr