Good evening and thank you for being here. Welcome to Gentex's Fourth Quarter and Year End 2021 Financial Results Conference Call. All participants are currently in listen-only mode. After the presentation, we will have a question-and-answer session. I would now like to turn the call over to Josh O'Berski, Director of Investor Relations. Please proceed.

Thank you. Good morning and welcome to the Gentex Corporation fourth quarter 2021 earnings release conference call. I am Josh O'Berski, Gentex Director of Investor Relations and I am joined by Steve Downing, President and CEO; Neil Boehm, Vice President of Engineering and CTO; and Kevin Nash, Vice President of Finance and CFO. This call is live on the Internet and can be reached by going to the Gentex website and at 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 Fourth Quarter and Year End 2021 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, I'll turn the call over to Steve Downing, who will get us started today.

Thanks, Josh. For the fourth quarter of 2021, the company reported net sales of $419.8 million compared to net sales of $529.9 million for the fourth quarter of 2020. The company's revenue during the quarter was impacted by a 20% quarter-over-quarter reduction in light vehicle production in the company's primary markets of North America, Europe, Japan, and Korea. The industry-wide electronics component shortages further impacted the company's revenue negatively during the fourth quarter of 2021. During the quarter, the electronics component shortages primarily impacted the company's ability to meet customer demands for Full Display Mirrors, Integrated Toll Modules, and other advanced feature unit shipments. Until the fourth quarter of 2021, the combination of the company's conservative inventory position, along with significant efforts to redesign affected products allowed us to avoid having any meaningful shipment issues stemming from the industry-wide electronics component shortages. But in the fourth quarter, the shortages began to impact our customer shipments as well. During the fourth quarter, the company estimates that customer order changes, driven by lower light vehicle production and electronic component shortages, resulted in under shipments of about $85 million in revenue for the quarter. Obviously, impacting our customers by not being able to fully meet their demand is extremely disappointing. However, the team did a remarkable job of completing complicated redesigns in record time to avoid more significant customer shortages. Looking into 2022, we are forecasting growth in FDM based on pent-up demand, as well as several new FDM program launches, which we expect to accelerate our growth into 2023. The gross margin in the fourth quarter of 2021 was 34.3% compared with near record gross margins of 40.9% in the fourth quarter of 2020. The gross margin was primarily impacted by the lower quarter-over-quarter revenue, especially in the company's primary markets, as well as the loss revenue created by the electronics component shortages. Other factors impacting gross margin in the fourth quarter of 2021 were raw material cost increases, freight-related cost increases, labor cost increases driven by higher wages, and labor inefficiencies created by last-minute changes in customer demand and electronics component shortages. The fourth quarter of 2021 was the perfect storm of lower revenue, significantly higher material costs, higher shipping costs, and higher labor costs and inefficiencies that negatively impacted gross margins more than we originally forecasted. While many of these headwinds will continue into the first half of 2022, we believe we have the ability to offset some of the impacts to gross margins as we move throughout the year. Operating expenses during the fourth quarter of 2021 were up 3% to $56 million when compared to operating expenses of $54.3 million in the fourth quarter of 2020. Income from operations for the fourth quarter of 2021 was $88 million as compared to income from operations of $162.4 million for the fourth quarter of 2020. During the fourth quarter of 2021, the company had an effective tax rate of 5.8%, which was lower than our forecasted tax rate and was driven by increased benefits from the foreign-derived intangible income deduction and discrete benefits from stock-based compensation. In the fourth quarter of 2021, net income was $84.2 million as compared to net income of $143.3 million in the fourth quarter of 2020. Earnings per diluted share in the fourth quarter of 2021 were $0.35 as compared to earnings per diluted share of $0.58 in the fourth quarter of 2020. For calendar year 2021, the company's net sales were $1.73 billion, which was an increase of 3% compared to net sales of $1.68 billion in calendar year 2020 in a year where light vehicle production in the company's primary markets declined by 3%. For calendar year 2021, the gross margin was 35.8% compared with a gross margin of 35.9% for calendar year 2020. For calendar year 2021, operating expenses increased 2% to $209.9 million when compared to operating expenses of $205.9 million for calendar year 2020. For calendar year 2021, the company's effective tax rate was 13.3% as compared to an effective tax rate of 15.6% for calendar year 2020. Net income for calendar year 2021 was $360.8 million, up 4% compared with net income of $347.6 million in calendar year 2020. Earnings per diluted share for calendar year 2021 were $1.50 compared with earnings per diluted share of $1.41 in calendar year 2020, which represents a 6% increase on a year-over-year basis. I will now hand the call over to Kevin for fourth quarter financial details.

Thanks, Steve. Automotive net sales during the fourth quarter of 2021 were $409.6 million, which compared to $521.6 million in the fourth quarter of 2020. The 20% quarter-over-quarter reduction in light vehicle production in the company's primary markets led to an 18% reduction in quarter-over-quarter mirror unit shipments. For calendar year 2021, automotive net sales were $1.69 billion which was a 3% increase over 2020 and was driven by auto-dimming mirror unit shipment growth of 9% despite light vehicle production in the company's primary markets decreased by approximately 3% during the same period. This overall growth was highlighted by the company's auto-dimming exterior unit shipment growth of 21% year-over-year. Other net sales in the fourth quarter, which includes dimmable aircraft windows and fire protection products were $10.2 million, an increase of 23% compared to $8.3 million in the fourth quarter of 2020. Fire protection sales increased by 32% for the fourth quarter of 2021 when compared to the fourth quarter of 2020. Other net sales for calendar year 2021 were $33.9 million compared to $40 million in calendar year 2020. Fire protection sales increased by 10% year-over-year, while dimmable aircraft windows were down 48% in 2021 compared to calendar year 2020. The company expects that dimmable aircraft window sales will continue to be impacted until there is a more meaningful recovery of the aerospace industry and the Boeing 787 production levels. Share repurchases, the company repurchased 0.6 million shares of its common stock during the fourth quarter of 2021 at an average price of $34.18 per share. For the year ended December 31, the company repurchased 9.6 million shares of its common stock at an average price of $33.83 per share, for a total of $324.6 million. As of December 31, 2021, the company has 24.8 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. However, share repurchases may vary from time to time and will take into account macroeconomic issues, including the impact of the COVID-19 pandemic and electronic shortages, market trends, and other factors the company deems appropriate. Let's take a quick look at the balance sheet. Balance sheet items mentioned today are valued as of December 31, 2021 and are compared to December 31 of 2020 unless otherwise noted. Cash and cash equivalents were $263.3 million down from $423.4 million, primarily due to share repurchases, dividend payments, and capital expenditures that more than offset cash flow from operations. Short-term and long-term investments combined were $213.1 million, up from $189.2 million. Accounts receivable was $249.8 million, down from $284.9 million due to lower sales in the current period. Inventories were $316.3 million, which increased from $226.3 million. The majority of this change is in raw materials. Accounts payable increased to $98.3 million, up from $84.8 million, primarily increased raw material purchases. Quickly looking at the cash flow statement. For the fourth quarter, cash flow from operations was $69.1 million compared with $135.4 million in the fourth quarter of 2020. Operating cash flow was impacted by the lower net income quarter-over-quarter as well as shifts in working capital and deferred taxes. In calendar year 2021, cash flow from operations was $368.5 million, down from $464.5 million for calendar year 2020. CapEx for the fourth quarter was $30.8 million compared with $14.7 million for the fourth quarter of 2020 and calendar year 2021 capital expenditures were $75.1 million compared to capital expenditures of $51.7 million in 2020. Lastly, depreciation and amortization for the fourth quarter was $24 million compared to $26.3 million for the fourth quarter of 2020. Calendar year 2021 depreciation and amortization was $99.1 million compared to D&A for 2020 of $104.7 million. I'll now hand the call over to Neil for product update.

Thank you, Kevin. Earlier this month, Gentex participated in-person at the 2022 Consumer Electronics Show. It was great to be back at the show and be able to demonstrate our product-driven strategies with some of our new products and technologies. This was our largest presence at CES yet and we displayed new products and concepts from all of our various technology areas. But for the call today, I'm going to focus on three primary areas of our booth: the Driver Monitoring Demonstrator, the Cadillac Escalade, and the Innovation Lab. The first item I'll go over is the Driver Monitoring Demonstrator. This incredible tool was developed by the Gentex team in order to demonstrate the power and capability of our driver monitoring solutions, which are based on the Guardian acquisition. In the demonstrator, we were able to show two different camera implementations. One was a driver-only focus camera that was located behind the mirror glass. The other solution was a cabin-based camera system that was mounted above the mirror in the overhead console area. In both of these camera implementations, we were able to demonstrate the operations of our AI-based algorithms used to determine the state or condition of the driver, their overall attentiveness, direction of eye gaze, head location, and readiness to take over control of the vehicle. The systems are also able to identify if the person was holding objects like a phone, and how many people were seated. In addition to these features, we were able to show how a depth map can be created by using structured light. This depth capability allows for the expansion of features and provides more accurate information regarding where things are physically located in the vehicle, their distance from the sensing system, and provides estimates on mass and other necessary information. The next item I'll discuss is the Cadillac Escalade. The Cadillac Escalade was one of three vehicles we had at the show and was positioned at the front of our booth. The Escalade contained multiple new features and technologies being demonstrated and showcased some of the great vehicle integration work our teams have been doing with our latest product innovations. As you approach the vehicle, you would see displays at the C pillar of the vehicle. These displays demonstrated how technology could be used to help communicate information about the vehicle status to a consumer approaching. Upon entering the vehicle, CES visitors were greeted by a new concept of our dimmable sunroof technology and a brand new product concept that turns a traditional flip down sun visor into a dimmable device. This was the first time we've shown in public our concept around a dimmable visor and the initial feedback was even better than we anticipated. People liked the idea of a visor that can be controlled to clear or darkened to different levels, depending on the glare they're trying to block. This dimmable sunroof concept was new and unique because it was designed into four independently dimmable areas so that passengers in each seat could select the level of light blocking to their preference. Our dimmable technology features best-in-class dynamic range, which is the ability to choose anywhere from fully clear to fully dark, and the Escalade provided the perfect demonstration of these advantages of our technology. The user interface for these dimming devices was seamlessly integrated into the vehicle center stack display. This helped people to envision what true integration could look like. The final feature I'll talk about today on the Escalade was our demonstration of a sensor system that could detect the heartbeat or breathing of a baby left in a rearward-facing child seat. This technology was part of the Guardian Optical Technologies' acquisition we completed in 2021 and it was also included in the Driver Monitoring Demonstrator that I discussed earlier. This technology demonstration clearly showed how our system could be implemented in a vehicle and use micro-vibrations to detect children left in the car, even when a camera-based system cannot see them directly. The final area to discuss was our Innovation Lab that was contained in a private area inside our booth. This innovation area was a great location for us to demonstrate products for the medical market, as well as our sensing systems that can be utilized by many different markets. The sensing system demonstrated in the Innovation Lab was the Vaporsens technology. Vaporsens was an acquisition Gentex completed in the spring of 2020 and we've been working hard to refine the core technology and adapt it to the multitude of use cases that exist for this technology. We still have work to do to develop the product and the core nano-sensing technology, but we're excited to see this tech evolve and come to the market in the coming years. For the medical area, we demonstrated three primary items: our RetiSpec partnership for early Alzheimer's detection; an updated surgical and medical office smart lighting control system, which is based on our partnership with Mayo Clinic; and the development and evolution of the wearable vision system we are partnering with eSight to develop and manufacture. eSight system is a unique opportunity for Gentex to work with a partner in developing the next generation of vision systems to help people with severe vision loss. Some of our core competencies like cameras, optics, and displays are all key components to help make this system successful. Now, for a quick update on launches for the fourth quarter of 2021. The fourth quarter 2021 was another strong launch quarter for the company with HomeLink and Full Display Mirror leading the way. We're excited to announce that during the quarter of 2021, we began shipping Full Display Mirror on five new vehicle nameplates. These new nameplates are the Infiniti QX60, the Lexus LX, the Lexus NX, the Toyota Wildlander for China, and the Toyota Tundra. For 2021, Gentex announced we began shipping Full Display Mirror on 18 vehicle nameplates and at the conclusion of 2021, Gentex was shipping Full Display Mirror on 65 new vehicle nameplates around the world. This growth in Full Display Mirror over the past few years demonstrates how both the OEMs and consumers value this technology. Despite all the challenges we face with shortages and shutdowns, the Gentex team has never been busier in launching products and developing new technologies for the future. The culture of innovation is strong at Gentex and we're excited to see all of the team's hard work come to market in the coming years. I'll now hand the call back over to Steve for guidance and closing remarks.

Thanks Neil. The company's current forecasts for light vehicle production for 2022 and 2023 is based on the mid-January 2022 IHS market forecasts for light vehicle production in North America, Europe, Japan, Korea, and China. Based on this information, light vehicle production in these markets is expected to increase approximately 8% over the 2021 calendar year volumes. For calendar year 2023, light vehicle production for these markets is forecasted to increase by another 10% over the 2022 estimated volumes. Based on these light vehicle production forecasts, we are providing guidance estimates for calendar year 2022 for each of the following areas: Revenue for 2022 is expected to be between $1.87 billion and $2.02 billion. Gross margins for the year are expected to be between 35% and 36%. Operating expenses are currently forecasted to be approximately $230 million to $240 million. Our estimated annual tax rate, which assumes no change to the statutory rate, is forecasted to be between 15% and 17%. Capital expenditures for 2022 are expected to be between $150 million and $175 million and depreciation and amortization is forecasted to be between $100 million and $110 million. Additionally, based on the company's forecasts for light vehicle production for calendar year 2023, the company currently expects calendar 2023 revenue growth of approximately 15% to 20% above the 2022 revenue guidance. At the end of 2020, we talked about being cautiously optimistic about 2021 due to instability in our markets, potential supply issues, international trade concerns, and the potential long-term negative economic impacts from the pandemic. Unfortunately, many of these issues impacted the expected recovery of the global automotive industry and especially our primary markets in 2021. We come into 2022 anticipating that at least the first half of the year, we'll continue to see headwinds from supply and labor shortages that we believe will prevent light vehicle production from reaching the IHS estimates we discussed. We also anticipate that these headwinds will continue to cause some margin compression for 2022 due to higher material, transportation, and labor costs. Despite these challenges, we remain optimistic that 2022 will provide a more predictable operating environment where we can begin to focus on cost containment, and hope that the tailwinds created by improved light vehicle production levels over the next few years will combine with our improved product portfolio to create record sales levels for the company. That completes our prepared comments for today. Thank you for your time and we can now proceed to questions.

Our first question comes from Luke Junk from Baird. You may begin.

Good morning. Thank you for taking the questions. First, Steve, could you elaborate on your perspective that IHS's approach in the first half of the year is too aggressive? What feedback are you getting from customers regarding build schedules? More importantly, what are you currently observing concerning production costs, especially in light of the significant variability experienced in the second half of 2021?

Yes, I think our opinion on production is really driven by what we saw in the second half of the year. We think that instability, we know that a lot of the supply base is struggling not only with materials, but also with labor, availability of labor. And so we think there's going to be a lot of unannounced OEM issues over the next couple of months that are going to drive production that is not quite what OEMs would like it to be. And so we think the first half is going to be a lot more choppy than the back half of the year.

Okay, and then follow-up question is on gross margins. In your prepared remarks, your belief that you will be able to offset some of the impacts on gross margin as we move through the year, thinking about this from a modeling standpoint, in the very near term, should we expect gross margins to decline sequentially? Obviously, first quarter is usually a little weaker seasonally. And then as we move through the year, I don't know if you could put a finer point on where you think we might be able to exit the year relative to the full year range that you've provided? Thank you.

I don't expect a significant decline from Q4 to Q1. There's typically some challenges at the beginning of the year that might slightly affect Q1 and Q2. However, we believe the second half will perform better since we anticipate revenue growth throughout the year. Our analysis suggests that IHS could be overstated in the first half, leading to lower sales levels compared to the second half. The additional revenue we expect in the latter half should help stabilize our margins and enhance manufacturing efficiencies.

Great, I'll leave it there. Thank you.

Thanks, Luke.

Our next question comes from the line of David Kelley - Jefferies. You may begin.

Hey, good morning, guys. Thanks for taking my question. Maybe starting with the supply shortages and the under shipments in the quarter you noted, just hoping you could provide a bit more color on the drivers of that impact, was it broad-based? Was it isolated to a subset of your supply chain? And then as we think about the cadence throughout the quarter, did procurement visibility deteriorate by quarter end? Just trying to get a sense of what you're seeing into 2022 here?

The majority of the revenue shortfall was primarily due to OEM changes, which resulted in lower production levels, particularly in our main markets. The markets most affected were North America and Europe, which experienced significant year-over-year declines in production. We are looking at a revenue difference of approximately $90 million to $100 million compared to our expectations, with 80% of that stemming from OEM issues and about 20% from supply chain problems. Over the past year, Gentex has faced numerous supply challenges, but we have generally managed to overcome most of them. Currently, we are dealing with a few suppliers affecting our electronic components, and we do not anticipate a resolution to these issues in the next six months. Neil's team is actively working to ensure the availability of components and exploring alternative options for redesigning products to incorporate components that are more readily available. This effort has been ongoing for about 18 months, and we are continuously identifying potential concerns and working to mitigate risks by seeking alternatives.

That's helpful. I have a quick follow-up on the last point. How are you approaching the electronics cost inflation this year, considering your negotiations with customers and potential pass-throughs are coming up? We've heard about semi-cost inflation and pricing pass-throughs further down the supply chain. I'm just curious about how you're considering the impact, or what may be reflected in the guidance.

Yes, if you look at our guidance on a year-over-year basis, from a material cost perspective, we are anticipating a headwind of about 250 to 300 basis points due to cost increases that began in the fourth quarter and were fully realized in 2022. On the revenue side, we also expect headwinds of around 100 to 150 basis points. This is what transitions us from a normal margin to what we are experiencing in 2022. As we have mentioned before, conversations with OEMs are just starting now. We expect these discussions to extend throughout the year as they involve a different type of conversation regarding reductions than we have had historically. Therefore, we anticipate that this headwind will persist this year, and while we hope for some positive outcomes, it will vary from OEM to OEM.

That's very helpful. If I could ask one more question, are there any impacts from labor shortages this quarter, or do you foresee that being more of a concern in 2022? Additionally, any insights on labor or wage inflation would be appreciated.

There is definitely wage inflation affecting our gross margin and operating margins. We are currently facing challenges with overall labor availability, which leads to the inefficiencies mentioned earlier. Labor shortages are primarily due to two factors: first, there are fewer people participating in the workforce, and second, many individuals are unavailable because of contact tracing or positive COVID tests. This situation has made it difficult to maintain stability and plan effectively due to the quarantine periods associated with those affected. Currently, around 10% more of the general workforce is unavailable on a daily basis compared to what we are accustomed to. This is challenging, especially since it translates to hundreds of people not being available each day, making it hard to manage as we would like.

Okay, got it. Thanks Steve and thanks Kevin. Appreciate it.

Thank you.

Our next question comes from the line of Josh Nichols from B. Riley. You may begin.

Yes, thanks for taking my question. I'm just curious, your thoughts, I mean, you have exposure to all the different auto OEMs, obviously. Do you think that we've kind of passed through the trough here when you look at the second half of 2021? And just thinking about the revenue cadence? Is that expected to kind of build as we move throughout the year? Or is it going to be a little bit more disproportionately, second half weighted whenever things start to ease up as you kind of mentioned in the commentary?

I believe that your assertion about growth building throughout the year aligns with our expectations. Looking at customer call-offs in Q1, there seems to be an increase over Q4 in terms of revenue. However, we are slightly more cautious about the industry's capacity to manage a rapid increase in overall volumes. The challenges facing the supply chain and OEMs don’t simply resolve with the new year. Therefore, we anticipate that it will take a bit more time for the industry to return to higher production levels. Additionally, Josh, did I address your question? I sensed there was more to your inquiry.

No, I think you got it.

Okay.

You mentioned earlier that some supply constraints are impacting FDM for the first time, but the company has clearly achieved significant success by adding numerous nameplates. Could you provide some insight into the pipeline for 2022 and 2023 regarding the addition of substantial new nameplates for that offering? Also, could you share your expectations for unit growth in that area for 2022, considering the high margin contribution it has?

Yes, Neil will discuss 2022. I'll reflect on 2021. The final volumes for FDM this year were much lower than we anticipated, primarily due to challenges both in the industry and with OEMs, as well as our inability to obtain the necessary components to meet demand. I estimate that we are short by about 150,000 to 200,000 units of FDM this year compared to our expectations based on demand at the beginning of the year. We do not foresee any changes in overall demand as we move into 2022 and 2023. We believe we will return to our previous growth rate, provided we can secure the components we need. We know there is interest from both OEMs and consumers. Thus, we expect a quicker return to growth in FDM, despite the impact of component shortages in 2021. Neil, would you like to add anything?

Yes. For 2022, there are several factors to consider, including volume and the availability of components, as well as whether customers will stick to our vehicle production schedule. We anticipate launching around 10 to 15 new nameplates this year. We mentioned last quarter that we've secured additional partnerships with OEMs, increasing the total to 14, and we expect the numbers 12, 13, and 14 to come to fruition over the next two and a half years. I am confident that at least one of these will launch this year, possibly two. Much of this will depend on timing in the latter half of the year, but we are looking forward to publicly announcing a couple of new customers and seeing the introduction of 10 to 15 new nameplates.

Thanks. Thanks for clarifying that. And then last question for me and then I'll pass the baton. You've been right to kind of fade the IHS numbers right and be a little bit more conservative. But I'm curious about what you're seeing that gives you some more confidence that the second half is really going to be kind of a key inflection point. Is there specific supply that’s coming online from some of the chip manufacturers? Or what are you hearing when have you talked to OEMs that gives you the confidence that we're going to see this inflection spec map for this year?

Yes, we definitely have some additional capacity, particularly on the electronic side, which we believe will start to positively impact supply in the second half. That’s why we mentioned early last year that we anticipated this would be a challenge throughout 2021 and likely into early 2022. We still maintain that view. While it won't resolve all issues, we feel more confident because different components are available that aren't as constrained. It's about transitioning to these new components, completing the redesigns, and expanding our supply base to meet customer demand. We recognize we've missed out on revenue due to our inability to satisfy customer demand, alongside the broader industry challenges. By the end of Q4, we did notice a significant increase in the industry's pace, though we think it won't be as aggressive as we expect for the first half.

Thanks guys. That's it for me.

Thank you.

Thank you.

Our next question comes from the line of David Whiston from Morningstar. You may begin.

Thanks. Good morning guys.

Good morning David.

Good morning.

First question is on the recently signed infrastructure bill in the U.S. I've read that that requires headlights and very similar to your DFL tech to be approved in two years. I was just curious what kind of potential Gentex could DFL be in the U.S. because of this legislation?

Yes, I think in regards to where our product has been going over the last few years with the standalone smart beam product, it's gradually been getting replaced as we've talked about, I think, for a couple years now. So, it is exciting that that technology is finally coming to the market since it's been available in Europe for multiple years. To see it actually come here is great, but I don't see that it's going to have a great impact on us at this point.

Yes, unfortunately, it's about 10 years too late.

It's too bad. And then on the new cabin monitoring tech you showed at CES, I was just curious across your customer base, someone, for example, like GM, would they perhaps not be very interested in this tech because they already have some monitoring technology as part of their Super Cruise package?

So, I think what's interesting about the tech and what we were showing is what they have in Super Cruise is similar on the base system that Neil described in his tech conversation. But what we showed on the advanced side is very different than what anyone is doing right now. And so, even though there is always some resistance when you have an embedded product currently, the upside is all OEMs are looking for what the future in this area can look like. And we believe we showed something very compelling, both from a geography standpoint, which is different than what GM is executing in Super Cruise. But also on the advanced features that we can offer by doing full cabin monitoring, not just driver monitoring.

Okay. And on chips, I mean, we actually in the press see some articles from time-to-time about how there's actually going to be a big supply glut in a few years and everyone's adding capacity. I guess my question to you is that really a bad thing for autos? Doesn't sound bad to me, but I was curious on your reaction.

No, honestly, the reason for the material cost increases that everyone is experiencing is due to the shortage. A new benchmark is being established on the supply side regarding the values of electronic components. Once we have enough capacity or once the market is oversaturated, the balance of power will shift to the buyers of those components, which is not the case right now. I completely agree with you; this situation provides more design flexibility and certainly improves planning capabilities. More importantly, it begins to alter the overall economics regarding the value of a component.

Okay, thanks, guys.

Thank you.

Our next question will come from the line of John Murphy from Bank of America. You may begin.

Good morning, guys. How are you?

Good John.

Good morning.

First question on the CapEx outlook. It's more than double year-over-year versus 2021 and just curious what's going on there?

Yes, well, first 2021 ended about $25 million less than what our plan was. And really it's kind of crazy, but it was also about availability of even equipment. We just we had placed orders, honestly couldn't take delivery of some of the CapEx that we had planned for this year, just due to shortages. So, part of that is just $25 million or so moving from 2021 into 2022. And the other thing I think it's important to look at is the last three years, given the issues we've really been very careful on our CapEx spend. And so historically, if you go back over, let's say, a 10-year period, you would say we averaged around $100 million a year in CapEx on a much smaller business. Back then we've been very focused on being disciplined over the last few years, but now with the growth rates into 2022 and into 2023, we have some capacity issues that we want to address through some buildings, but then also there's levels of automation that will help with the efficiency, and obviously, some of the labor challenges. And then more importantly, just building that capacity. And obviously, with some of the new products and the new product portfolio, those require CapEx to get those ready for operations as well.

So, how should we think about sort of run rate CapEx, after sort of this this catch up in 2022? I mean, we're talking something $125 million, $150 million?

Yes, I'd say no, we're probably more like after 2022, if you look at 2023 and beyond, we'll probably be more in the $120 million to $130 million range.

Got it. Okay. Super helpful. Next, regarding the IHS schedules, when we consider the light vehicle production forecasts with a 17% increase in North America and 18% in Europe that you anticipate, is that where you see the most risk? Just trying to understand.

Yes, that's correct. When we examine those large markets, they haven't maintained those production levels for quite some time. Therefore, we anticipate significant challenges in returning to that level in a short timeframe.

Would you consider those really to be more like 10% increases, and when you're adjusting those two, it appears that supporting a 10% or more increase in the chip industry right now is unlikely. So, how do you adjust your thought process on that?

Yes, if you look at the overall markets, the IHS data shows a growth rate of around 8% to 9% for 2022. We believe that's more likely to be around 5% to 6%.

With the bulk coming out of North America and Europe?

Most of it coming out of North America and Europe. A little bit Japan and Korea.

Okay, understood. Regarding Driver Monitoring Systems and cabin monitoring, there are many competitors in the market. You have a distinct advantage by being inside the vehicle, which provides a unique perspective. I'm curious about how many competitors you see and what you believe sets you apart. With the technology you have, particularly in the mirror segment, you are in a very unique position. As you consider entering this larger pool of competition, how do you view that aspect of your business moving forward?

That's a great question. When we decided to pursue the Guardian acquisition and evaluate our competitive advantage, we considered market availability. The basic version of a system that only uses a camera focused on the driver has a lot of competitors. That's not the space where we want to compete. Our focus is on high-end systems, particularly in terms of concealment of cameras and IR emitters, either in mirror locations or overhead. Additionally, we are interested in advanced features. Neil elaborated on the advancements, such as the capability to detect micro-vibrations in a rearward-facing car seat, which is a unique aspect of what Guardian was developing. This involves using structured light to sense very small vibrations within the vehicle's cabin. This technology allows for numerous features that a standard vision system cannot provide. Thus, our competition will not only be based on geographical placement and the ability to conceal cameras and emitters but also on offering a more advanced feature set.

Lastly, regarding the discussions on raw materials, it's somewhat unclear how hedging pass-throughs are affecting the automakers amid rising raw material costs, and whether we might see a return to normalization. Has there been any change or new discussions? My understanding is that historically, before 2008 and 2009, the bulk of raw material risk was more on the supplier side. However, during that period, automakers started taking on more of that risk. Now, it seems they are starting to push back a bit due to the significant developments in autonomous and electric vehicles, as they require assistance both financially and operationally. I’m curious to know if there’s any shift in this dynamic or if it remains consistent.

No, it's definitely changing. Since our last call, we have started to engage with OEMs on this issue. In my 20 years at Gentex, I have seldom had this kind of conversation. This is new territory for us as a company. OEMs are starting to define their positions regarding the supply base. Many Tier 1 suppliers will struggle to absorb increases in raw materials and labor costs without OEM support. It will be interesting to see which OEMs provide support to the supply base and which ones resist. In a constrained environment, those OEMs that collaborate better with suppliers are likely to secure more access to inventory and components. Each OEM will determine their stance, and we are beginning discussions acknowledging that we cannot absorb all these cost increases without assistance from an OEM.

Just one follow-up on that. Have you ever thought about a contract that could ultimately be passed through to the end consumer? The automakers are at a point where they can theoretically raise prices to offset costs, but you are in a difficult position without that flexibility. Is there any discussion about linking prices to the final selling price for consumers? That could be ideal for moving up the supply chain to reach consumers, but it's complicated. Any thoughts or discussions on that?

I wouldn't characterize it as discussions. There's been a lot of speculation and ideas shared. As a supplier, we've engaged in many talks with OEMs about how we can collaborate to tackle this issue. However, I wouldn't say there have been any concrete conversations about such ideas. Currently, everyone seems to be in the phase of generating ideas and trying to avoid conflict, while seeking a solution that works for both us and the OEMs. It's interesting to note that over these past 18 months, OEMs appear to have gained a better understanding of consumer expectations, recognizing that there's more pricing power than they may have previously realized, especially given the challenges in vehicle production. This necessitates maximizing profitability on each vehicle. OEMs seem to have successfully shifted their perspective on vehicle pricing and how to enhance that value for consumers.

Yes, let's just hope that sticks with them.

Exactly.

Well, thank you so much guys. Take care.

Thank you.

Thank you. Our next question comes from the line of Mark Delaney from Goldman Sachs. You may begin.

Yes. Good morning and thanks very much for taking the questions. First, I want to ask them the sunroof, you spoke about it as part of your comments about the CES tradeshow. Could you go into more depth and when you could see that being used in the market for production vehicles?

Sure, the development of the product has progressed over the past few years through CES, where we have showcased various dimming devices. We've expanded this technology into sunroofs derived from aerospace window innovations. There is still considerable work to be done in vehicle integration and collaboration with customers. I would estimate that within the next three to four years, we should start seeing this technology available in the marketplace. It's an exciting development, and the consumer demand for it is growing. The ability for consumers to have individual control over different seating areas, adjusting between clear and dark settings, is highly beneficial and has yielded very positive feedback.

Yes, that’s helpful. Thanks. And then in terms of cash flow for this year, could you talk about the use of cash and how you think about maybe balancing that, I mean we spoke already on your CapEx plans? But in terms of using free cash flow, how do you think about things like buybacks versus M&A? And are there more tuck-ins that - or are even larger acquisitions, maybe considering the ampersand Guardian, you augmenting the product portfolio so interested in? What the outlook for a potential acquisition is going to be? Thanks.

Yes. So, if you look at the playbook, we've been executing the last couple years to your point, we've been enhancing our R&D portfolio with the small acquisitions that we put in place, we've got teams working on product development for virtualization. But again, that doesn't detract a lot from a free cash flow perspective. So, we plan to stick right to the plan as we did this year, we're spending $325 million on CapEx cash flow should sales come up, the operating cash flow doesn't change, the matrix doesn't change. CapEx is up a little bit, as Steve already alluded to, but that leaves a significant amount for kind of executing share repurchases on a systematic basis throughout the year. And then if there is an opportunity that presents itself from either a bolt-on or a small technology acquisition, we continue to look and our teams are very focused on that and developed over the last few years. So, the same offensive plays as we ran in 2021 will apply to 2022.

So, just to clarify quickly, when Kevin said the $300 million to $325 million, he was talking about repurchases, not CapEx.

Understood. Thank you.

Our next question will come from Ryan Brinkman from JPMorgan. Your line is open.

Hi. Thank you for taking my question. In the release, you mentioned that Full Display and Integrated Toll Module have been more affected by the chip shortage compared to your lower feature products. I'm interested in understanding how this product mix might influence your margin guidance for 2022. I recognize that the overall reduction in customer production due to the chip shortage will lead to less fixed cost leverage. Therefore, it seems the chip shortage is impacting your margins in multiple ways. Specifically regarding your product mix, is this a significant factor in your margin guidance? Additionally, when do you anticipate that supply constraints on some of these higher-feature products will be resolved?

Well, as Steve alluded to, right, the first half of the year with FDM and ITM constraints kind of rolled off Q4 that we see that in the first half of the year, hopefully freeing up in the back half. What we're seeing is great growth in other products, like we did in Q4 with outside mirror growth throughout 2021 into 2022. But when you put all that into the mix calculation, we're seeing about a 50 to 100 basis point headwind from the mix side, if you look at the overall product mix and shipping base mirrors versus the advanced feature stuff.

Okay, that's very helpful. Thank you. And then you mentioned, I think, in response to one of the previous questions that the conversations with customers had already begun with regard to the recovery of these non-commodity supply chain costs that were talked about on the third quarter. Based upon those early discussions, do you have any thoughts on what percentage of that cost increase that you might potentially be able to recover in those discussions?

Yes, it's challenging to assess the situation from that perspective just yet. As you can imagine, we're initially engaging with some of the more difficult relationships, so this may not accurately represent how all discussions will unfold. We're starting with the most challenging cases. It's difficult to quantify the increase as a percentage because, as we mentioned earlier, our approach is long-term. We are not going to impose a strict timeline or specific demands. Instead, we are focusing on the overall business landscape, new growth opportunities, and our existing commitments, seeking a solution that works for the OEMs over several years. Currently, I can say that about half of our discussions are relatively constructive. OEMs are keen on gathering data and understanding our insights, and the initial phase is largely educational as we help them comprehend our perspective. I believe the next two to three months will be crucial in establishing a collaborative agreement on how to move forward together.

Very helpful. Thank you.

Thanks Ryan.

Thank you. I'm not showing any further questions in the queue. I'll turn it back over to Josh for any closing remarks.

Great. Thank you, everyone, for your time and the questions today. We look forward to meeting with you in 2022 and hope you have a great weekend. This concludes our call.

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