Gentex Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2023

There are 12 speakers on the call.

Operator

Welcome to the Gentex Reports First Quarter 2023 Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. Would now like to hand the conference over to your speaker today, Josh Woberski, Director, Investor Relations.

Speaker 1

Thank you. Good morning, and welcome to the Gentex Corporation First Quarter 2023 Earnings Release Conference Call. I'm Josh Wiebersky, Gentek's 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.

Speaker 2

This call is live on

Speaker 1

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. 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 Q1 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.

Speaker 1

Now I'll turn the call over to Steve Downey, who will get us started today.

Speaker 3

Thank you, Josh. For the Q1 of 2023, The company reported net sales of $550,800,000 compared to net sales of $468,300,000 in the Q1 of 2022, which was an 18% quarter over quarter increase and a new quarterly sales record for the company. For the Q1 of 2023, Global light vehicle production in North America, Europe, Japan, Korea and China increased approximately 6% when compared to the Q1 of 2022. 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. While light vehicle production is still below pre pandemic levels, demand for the company's products resulted in a 12% For the Q1 of 2023, the gross margin was 31.7% compared to a gross margin of 34.3 percent for the Q1 of last year.

Speaker 3

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

Speaker 4

compared to

Speaker 3

the Q4 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 price increases to customers that carried forward into this year. These tailwinds more than offset the potential margin decline coming from the one time benefit of cost recoveries in the 4th quarter and the higher labor costs that became necessary last year. 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. In the Q4 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 Q1 of this year. Gross margins hit a low point in 2022 during the Q3 when they fell to 29.8%.

Speaker 3

But in the Q4, we secured one time cost recoveries that improved margins to 31.2%. In the Q1 of 2023, we further improved gross margins to 31.7% even without the benefit of any one time cost recoveries. Our plan for margin recovery is based on a timeline that covers 2023 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 two quarters, I believe we are well on our way to accomplishing this plan. Operating expenses during the Q1 of 2023 increased by 8% to $61,500,000 compared to operating expenses of $57,100,000 in the Q1 of 2022.

Speaker 3

Operating expenses increased during the Q1 of 2023, primarily due to staffing and professional fees, which were partially offset by lower outbound freight Our operating expenses for the Q1 of 2023 are slightly below our forecasted range for the full year, but we plan for those expenses to ramp up throughout 2023 in support of our product development strategy, new business awards, VAVE initiatives and our expected growth rate for this year and next year. Income from operations for the Q1 of 2023 was 113 point $3,000,000 compared to income from operations of $103,300,000 for the Q1 of last year. During the Q1 of 2023, the company had an effective tax rate of 15.9%, which was primarily driven by the benefit of the foreign derived income deduction. Net income was $97,600,000 for the Q1 of 2023 compared to net income of $87,500,000 for the Q1 of last year. The increase in net income was primarily the result of Quarter over quarter increases in net sales and operating profits.

Speaker 3

Earnings per diluted share for the Q1 of 2023 were $0.42 compared to earnings per diluted share of $0.37 for the Q1 of last year. I will now hand the call over to Kevin for financial details.

Speaker 2

Thank you, Steve. Automotive net sales in the Q1 of 2023 were $537,400,000 a 17% increase when compared to $458,000,000 in the Q1 of 'twenty two and auto dimming mirror unit shipments increased 16% during the quarter compared to the Q1 of 'twenty two. Other net sales in the Q1 of 2023, which includes dimmable aircraft windows and fire protection products, were $13,300,000 compared to other net sales of $10,300,000 in the first Power protection sales increased by 10% for the Q1 and durable aircraft window sales increased by 118% for the Q1 of 2023, both compared to the Q1 of 2022. Share repurchases. During the Q1 of 2023, the company repurchased 1,000,000 shares of its common stock at an average price of $27.19 per share.

Speaker 2

As of March 31, 2023, The company has approximately 19,700,000 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 may 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. The balance sheet comparisons mentioned today are as of March 31, 'twenty three as compared to December 31, 'twenty two. Cash and cash equivalents were $215,500,000 compared to $214,800,000 Short term and long term investments combined were $229,400,000 up from $202,300,000 which includes fixed income investments as well as the company's equity and cost method investments.

Speaker 2

Accounts receivable was $332,900,000 up from $276,500,000 due to the higher level of sales during the Q1. Inventories were $401,800,000 down slightly from 404 $4,000,000 and accounts payable increased to $166,900,000 up from 151,700,000 Looking at preliminary cash flow items for the quarter. Q1 2023 cash flow from operations was $120,900,000 which was an increase from $115,900,000 in the Q1 of 'twenty two. CapEx for the Q1 was $42,800,000 I'll now hand the call over to Neil for a product update.

Speaker 5

Thank you, Kevin. In the Q1 of 2023, there were 18 net new nameplate launches of our interior next Your auditing mirrors and electronic features, net of previously disclosed future headwinds. The quarter was very strong in advanced feature launches with over 70% of the net launches Being advanced features, for the advanced features Full Display Mirror and HomeLink were a significant portion of those launches. Now for an update on Full Display Mirror. During the Q1 of 2023, we began shipping Full Display Mirror on 8 additional nameplates.

Speaker 5

These new vehicle nameplates are the Lexus RZ, the Maserati Gran Turismo, the Mazda CX90, The Nissan Rooks for the Japan market the Toyota DZ4X and the new Toyota Crown for the Japan market The Toyota Crown Kuger and the Toyota Grandia for China and other markets. The Mazda CX90 Full Display Mirror is our 1st FDM shipping to Mazda, so that we can drive greater penetration over the long term. At the conclusion of the Q1 of 2023, we have now launched We'll display here on 94 nameplates across all regions of the world. This product continues to see strong growth And it's been extremely well received by our customers and the consumers. As we look at the remainder of 2023, we're targeting at least 10 additional nameplate launches and we expect that our 2023 unit volume to be at least 300,000 units higher than our 2022 volume.

Speaker 5

Full Display Mirror has been in production for over 7 years now and in future quarters, we will only be providing nameplate updates, one that had a significant growth or strategic impact. We'll continue to provide updates on our unit shipments and the progress to the annual goal. During the Q1 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 Some of our development team will continue to remain focused on new iterations of products to help us achieve our gross margin initiatives. I'll now hand the call back over to Steve for guidance and closing remarks.

Speaker 3

Thanks, Neil. The company's current forecast Light vehicle production for the Q2 of 2023 and full years 2023 2024 are based on the mid April 2020 3 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 14% for the Q2 of 2023 as compared to light vehicle production for the Q2 of last here. 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.

Speaker 3

Revenue for the year is expected to be approximately $2,200,000,000 Gross margins for the year are expected to be between 32% 33%. Operating expenses are expected to be between $260,000,000 $270,000,000 Our estimated annual tax rate is forecasted to be between 15% 17%. Capital expenditures are expected to be between $200,000,000 $225,000,000 and depreciation and amortization is forecasted to be between $100,000,000 $110,000,000 for 2023. 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 $2,200,000,000 Overall, the Q1 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. 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 3

We believe these increases in headcount will provide our operations 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. 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. 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 plans. 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 6

Thanks, Steve.

Speaker 1

As you all know, we have entered into proxy season and yesterday we received Glass Lewis' summary report of our proxy and we believe we need to address one concerning area in their report. Gentex is disappointed in Glass Lewis' 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. Over the past 6 years, Gentex has remained focused on identifying and nominating qualified, Capable, intelligent thought leaders to our Board.

Speaker 1

During this time, we have onboarded 6 new members to our Board with a wide variety of backgrounds, capabilities and experience. Of these 6 new board members, 2 have improved the board's gender diversity and 2 have improved the board's racial diversity. The obvious conclusion here is that With 4 of our last 6 board member additions improving diversity, we believe we've shown commitment and action toward a more diverse representation on our board. Glass Lewis' 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, 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 1

This recommendation therefore seeks to support gender diversity by advising a vote against 1 of Gentex's female board members. 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. In summary, we believe that while Glass Lewis' goals for Board The recommendation against Ms. Brown shows a clear disconnect between their stated goals and any logical progress toward achieving said goal.

Speaker 1

In other words, we vehemently disagree with Glass Lewis' logic of upstanding votes for a qualified female candidate that has a successful record as a director for the company as a means of supporting or 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

Speaker 2

Thank you.

Operator

Our first question comes from Ron Yefsikow with Guggenheim Securities. You may proceed.

Speaker 7

Good morning, team. Just a couple of questions from me. How big of a benefit was mix this quarter thinking things on the product side like Lower base interior mirror shipments to China, maybe an increase in HomeLink and ITM and anything else you'd highlight?

Speaker 3

Yes, it's a combination. When we look at mix, we talk about 2 things. You have the overall mix of products, like you mentioned, how many advanced features versus base and outside versus 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 mix.

Speaker 7

Okay. And then second half of last year, You've 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 freight or is that something we should think about as a source of upside maybe later this year and into 2024?

Speaker 3

Yes. The labor costs in general and the gross margin still so a lot of the benefits happen in the overhead and operating Spend side because expedited freight, outbound to customers shows up in sales expense. So, a lot of times the increased labor We'll lower gross margins, but it does give you some leverage in OpEx. But we're facing, I'm looking at Kevin, about 100 point of margin headwind on a year over year basis based on the higher wages. We have seen over time start to drop and probably the quickest benefit though to your point has been the lower freight expense.

Speaker 3

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 goods side to get back to surface shipments versus air shipments, which is Obviously, going to help lower freight even more and then ultimately, it will end in lower over time.

Speaker 7

That's super helpful. And maybe just sneak in one more related to FDM for both you and Neil. Has your ability to secure new business wins been negatively impacted by the supply chain environment over the last several years? And With that starting to improve, do you think we could see an acceleration in new customer wins and announcements?

Speaker 5

Yes. I don't think the supply constraints have negatively impacted the customer awards side. I think it's been more just on being able to build enough parts and quantity and supply for the demand. As we come out of that from a supply constraint and as we move forward, Yes. We're not seeing I mean, we announced 94 launches that we've executed of Full Display Mirror.

Speaker 5

We see a continued growth And ramping the product and not just in launch execution, but also in volume. Yes.

Speaker 3

I'd say the single biggest impact wasn't in awards To Neil's point, it was more in take 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 for especially for FDM. So we're in a much better spot right now to support higher volumes than what we were this time last year.

Speaker 7

Super helpful color. Thanks guys and congrats on the quarter.

Speaker 1

Thanks, Ron. Thanks, Ron. Thank you.

Operator

Our next question comes from James Picariello with BNP Paribas, Exane.

Speaker 8

Hi. Good morning, everybody.

Speaker 1

Good morning, James.

Speaker 8

I wanted to ask about The Q1 unit volume shipments, right, at $12,700,000 a quarterly record For you guys, what really drove that? Or does that reflect kind of max capacity at Within your current footprint or is this kind of set the stage maybe for you've invested, Right. You've had capacity investments. Does this kind of set the stage for a new established bar going forward here for the rest of the year and beyond?

Speaker 3

Yes, we're not 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. So yes, we do have some additional equipment coming online this year, and then brick and mortar projects over the next 18 months 2 years are going to help us really kind of increase that overall capacity of the company.

Speaker 8

Got it. And just on that topic, Is your light assembly plant in China, I don't know if you want to call it a plant, but your footprint there, is that also helping? Did that help drive this quarter's unit volumes in any

Speaker 3

way? Yes. So we're absolutely executing final assembly now in the China market for the domestic China production and so that has helped with additional headcount 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 The geographical footprint of all of our products, making sure that we're able to get parts to and from our facilities here in a quicker way.

Speaker 8

Got it. And then just my last question would be on and my apologies if you had referenced this, but Just in terms of the chip supply, availability dynamic, and how that plays into Your ITM, your integrated toll module and of course FDM is capacity, is the chip capacity the constraint or is it more Just your own in house production and staffing capability now.

Speaker 3

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 those. We're not short shipping or constraining FDM shipments right now based off of internal constraints either.

Speaker 3

So we feel like as having survived obviously one of the larger quarters The largest quarter in company history and one of the largest from an FDM standpoint, we feel really good about how we're positioned to keep up with FDM demand throughout the year.

Speaker 8

Understood. Thanks. Nice guys.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from Luke Yunck with Baird. You may proceed.

Speaker 4

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 margin recovery initiatives at the company, Such as over time that you already discussed, but also things like scrap and yield loss that you're muscling up to address. In other words, maybe if you could just touch on the Part of this journey that's not just the price recovery part, the part that is within your control really?

Speaker 3

Yes. So like you mentioned, I mean, there's a Portion of that, that's going to be the price recovery piece. That's going to be an ongoing target through the rest of this year. 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 than what we've been overtime dollars than what we've been seeing in prior year despite the growth.

Speaker 3

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 and so that was not ideal operating in Q1. However, it does create the opportunity for us over the next 9 months to 12 months as these newer employees Become more comfortable, equipped and capable, we believe we can improve that scrap and yield loss category to Further drive margin profile improvement. And so 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 3 to 6 months before the newer team members feel comfortable in the environment and very capable and highly effective.

Speaker 3

So, we feel good about the team We put together and we know with a little bit of time and our operations team's dedication, we'll be able to make improvements in those areas as well.

Speaker 2

One more nuance that Neil mentioned in his section of the call is the VAVE portion, right? So those redesign efforts intended to reduce bill of material cost Through reengineering product, not only helps with less material or more tooling or better tooling pricing, But it helps with the margin that way versus just lower component costs.

Speaker 3

Yes. And that will be really more like end of 2023 and taking us into 2024, the Focus on further improvement through VAVE activities. And that's why we talk about 2023 2024 as our total timeline to get back to that targeted margin profile.

Speaker 4

Thank you for that. And then my follow-up maybe for Neil, this will make the most sense. Bigger picture innovation Seems really now to be happening at a breakneck pace in the China market if we look at what was coming out at the Shanghai Auto Show this 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

Yes. For the Chinese market specific, that one changes really, really fast. And what you see and we talk a little bit about base mirrors, Executing base mirrors 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 some another handful of base mirrors launching and executing into the China market. With any of our That's the introduction that we have is get base mirrors in and then start adding features and content.

Speaker 5

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, and be more So there's a lot happening, a lot evolving in the space and 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 looking out that next phase.

Speaker 9

Thank you. I'll leave it there.

Speaker 1

Thanks, Luke. Thanks, Luke.

Operator

Thank you.

Speaker 1

Hey, John.

Operator

John Murphy, if your line is on mute, please unmute. Our next question comes from Josh Nichols with B. Riley.

Speaker 10

Yes. 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 Q1. 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 a more normalized gross margin profile for the end of next year that could further enhance it.

Speaker 3

Yes. No, you're absolutely right. There's a lot of work that's going to be going on throughout the end of the Q1 through the end of the year to further improve margins. So This is why we wanted to start off by talking about the progress that's going to happen over the course of the next really 18 to 21 months. It's hopefully may not be completely a linear improvement, but the goal is to continue to get better every quarter.

Speaker 3

And so, yes, 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 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 there 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 a little more time and probably be evenly smooth throughout the year as we settle those negotiations. And then beyond that, heading into 2024, We think at some point end of this year, beginning of next, we think we'll start to see some recessionary economics as it relates to pricing.

Speaker 3

So We're hopeful that we can kind of get back to a more normalized instead of cost increase environment into a de escalating environment for materials.

Speaker 10

Yes. Thanks for clarifying. And then I guess the last question for me, Growth in the Q1, right, coming in above, right, the percentage that you're looking, the 15% or so that you're looking for this year And then 14% light vehicle production expected in 2Q as well bodes well. I guess like how are you thinking about the second half versus the first half? Do you expect a material slowdown later this year?

Speaker 10

Or are you just Better visibility before potentially revisiting that.

Speaker 3

Yes, I think the upside is obviously there. The risk factor is what are we dealing with? Is So, 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 price vehicle market. And so one of the things that we're very optimistic about is for the first time in a while, we had very consistent orders. It was one of the first quarters and probably A little over 2 years where the order volatility from the customer base improved.

Speaker 3

It's been so long and so chaotic That it's been honestly really hard to plan at all. And so the team was able to 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, yes, I mean, there's definitely some upside there.

Speaker 3

The Q2 production environment is a little overstated because of the chaos happened last year in Q2 on the automotive on the auto light vehicle production side. So I don't know that it's going to correlate exactly. In other words, I don't know our outperformance is going to be stacked entirely on top of that 14 because there is the leading side of that, which is our sales are weeks ahead of when cars are built. But For the first time in a long time, you're starting to see OEMs 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.

Speaker 3

And This doesn't have a huge impact on the back half. 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 there is I would say there is an opportunity to do slightly better than what our forecast was. As the last But I think we're just hanging it.

Speaker 3

We're happy that we had a good great sales quarter. We're pretty optimistic about Q2 being good as well and we'll see what the second half brings.

Speaker 10

Well, fair enough. Thank you. Great to see the supply chain environment improving and the opportunity for

Operator

Our next question comes from Federico Morendi with Bank of America. You may proceed.

Speaker 6

Hey, guys. It's John Murphy. Can you hear me?

Speaker 11

We got you. Yes, sorry for

Speaker 6

the technical difficulties before. One thing you made a statement that's actually very 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 of the world these days. You need less people and have them do more and more. So it's very interesting. Could you outline what the overtime costs are?

Speaker 6

How bad scrap has been and yield loss has been maybe relative to history

Speaker 3

if you can't put dollar terms

Speaker 6

on that, just kind of give us an idea of like how much overtime you're running that might go away? How bad scrap is relative to history and yield has been versus history?

Speaker 3

Yes. So 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 certain amount of employees You like that over time and there's a certain amount of it that helps you take advantage of CapEx and your footprint.

Speaker 3

Unfortunately, over the last 18 months, it's been way beyond that. And so, that's why we look at over time as one of the key drivers of savings, over the next 12 months.

Speaker 2

Yes. So I think really to just tailor in on that, if you look at that incremental headcount, which is probably about we've added close to 400 to 500 Teammates on the hourly production side over the last year, if we were that short, we were trying to build have sales in this $450,000,000 to $500,000,000 range a quarter. We are really running incentives at last year at this time that we're paying 2x to 2.5x overtime premium. Until then, you're getting a lot less a lot more cost from a unit perspective. And so at this time, we have just straight over time primarily That's happening because of the higher headcount.

Speaker 2

Once you improve productivity, you get down to normal 45 hour work weeks. That's really what where the opportunity exists.

Speaker 6

Got it. And the yield loss, I mean, how bad are yields as a result of that or other inefficiencies?

Speaker 3

Yes, they're not it's not like horrible, but when you're talking about the last couple of percentage points of yield or yield loss in this case. On a revenue of this size, you start to talk about a couple of $1,000,000 or a few $1,000,000 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 side.

Speaker 6

Okay. And then just lastly on the international shipments, can you tell us how many or what portion is in China at this point And maybe what it was last year in Q1, just so we have an idea, because it does sound like that's a huge opportunity for you over time.

Speaker 2

It's Right around 8% to 10% of total shipments, total revenue for the company. Shipments continue to be higher because it is a higher mix of base. So that's probably closer to the 10%. Revenue is probably closer to 8.5%. But it's really driven by the outside mirror growth It's driven in a lot of the growth with Tesla and then some of the other EV manufacturers growing outside mirror volumes in that market.

Speaker 2

But it's still kind of that 9% of revenue because it's primarily base mirrors.

Speaker 3

That's very helpful.

Speaker 8

Thank you guys.

Speaker 1

Thanks, John.

Speaker 8

Thanks, John.

Operator

Thank you. Our next question comes from David Whiston with Morningstar. You may proceed.

Speaker 9

Thanks. Good morning. For Steve, I think you were hinting in an accounting difference. I just wanted to clarify, is expedited freight in COGS and then regular freight is in SG and A?

Speaker 3

No, it's the shipment the shipment the incoming is in bill material, so it's in COGS. But when you're shipping to your customer, it's in selling expense.

Speaker 8

Yes.

Speaker 3

Okay. So So when we're talking about freight improvements, when we're talking freight improvements, you're talking about freight on the incoming side, which will improve gross margins, but The selling expense will show up in operating costs, not in bill materials.

Speaker 9

Okay. And the press release you called out you had an improvement in both, you said?

Speaker 3

Yes. Yes, we did have improvements in both, yes.

Speaker 9

Okay. On the press release, you called out an increase in staffing and also in professional fees. Is 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 3

Yes. 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.

Speaker 9

Okay. And then I guess just One more question. In terms of the as you know, the ongoing macro uncertainties and it's kind of a mixed signal. Some Things are good, some things are bad, but are your customers still really focused on very next Stage type of products that we haven't seen in vehicles before like much larger dimmable surfaces, are they being a bit more cautious Now I'm just focusing more on the present due to macro fears.

Speaker 3

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 The office, it's actually increased the R and D from an R and D standpoint, the ability to talk about new product development and execution. I'd say that was one of the hardest things during the pandemic. It was when people were working from home, it was really tough to show a prototype of a brand new product or discuss even the theory of what a vehicle of the future could look like. So that was a difficult selling environment. I would say that part has improved a lot.

Speaker 3

We're getting back to customer visits and we've had a lot of OEMs coming to Zealand to visit, see our R and D facilities and some of our new product concepts. So, we haven't seen any negative headwinds yet due to recessionary fears in terms of new R and D or product efforts.

Speaker 9

Okay. And just lastly on the airplane window growth, it was really good. Is that primarily more Airbus production starting or any growth from Boeing?

Speaker 3

There was a lot of Boeing there. We were always cautious about putting that percentage in because it was pretty much 0 This time last year, so it did improve a lot, which is a good sign. But we are we're 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

Operator

Thank you. And this concludes the Q and A session. I'd now like to turn it back over to Josh O'Berski for any closing remarks.

Speaker 1

This concludes our call. Thank you everyone for your time and questions and have a great weekend.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Gentex Q1 2023
00:00 / 00:00