Good morning, and welcome to the Gentex Corporation first quarter 2022 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 first quarter 2022 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.

Thank you, Josh. For the first quarter of 2022, the company reported net sales of $468.3 million, compared to net sales of $483.7 million in the first quarter of 2021. For the first quarter of 2022, global light vehicle production decreased approximately 5% when compared to the first quarter of 2021. Additionally, light vehicle production in the company's primary markets of North America, Europe, and Japan, Korea, declined by 11% on a quarter-over-quarter basis. These declines were primarily a result of the ongoing industry-wide component shortages and global supply chain constraints. The company has been dealing with the impacts of component shortages and supply chain constraints since the beginning of 2021, which is why our forecast for the beginning of this year was more conservative than the original forecasts for light vehicle production. During the first quarter of 2022, we saw estimated light vehicle production declined by over 4% versus the beginning of the quarter. While the effects of the electronic component shortages improved slightly during the first quarter of this year, our concerns about the lingering impact on light vehicle production were well-founded. Our first quarter 2022 sales improved sequentially from the fourth quarter of 2021, but were still below the level suggested at the beginning of the quarter. Despite the lower than planned sales levels in the first quarter, the industry backdrop and the underproduction of light vehicles over the last year should create the opportunity for an improving sales environment as we move throughout the rest of 2022. For the first quarter of 2022, the gross margin was 34.3% compared to a gross margin of 37.9% for the first quarter of 2021. Gross margins were impacted in the quarter by raw material cost increases, elevated freight expenses, labor cost increases in response to a tight labor market, lower than expected sales levels and ongoing customer order volatility. Considering the inflationary pressures on our business right now, the gross margin was within 70 basis points of our annual guidance range for gross margin performance, despite the fact that sales for the first quarter are expected to be at the lowest level of the year. The company has active discussions with our customers about the inflationary aspects of our business and how to best formulate long-term collaborative relationships that provide the opportunity to minimize the impact of these inflationary pressures on our business model while preserving the ability to grow through the introduction of new innovative products. We fully expect that these discussions will extend throughout calendar year 2022 and even into 2023.

Thank you, Steve. Automotive net sales in the first quarter of 2022 were $458 million, compared to $475.6 million in the first quarter of 2021. Other net sales in the first quarter of 2022, which includes dimmable aircraft windows and fire protection products, were $10.3 million, compared to other net sales of $8.1 million in the first quarter of 2021. Fire protection sales increased by 46% for the first quarter of 2022, compared to the first quarter of 2021. Dimmable aircraft window sales decreased by 20% for the first quarter of 2022 compared to the first quarter of 2021. The company continues to expect that dimmable aircraft window sales will be negatively impacted until there is a more meaningful recovery of the aerospace industry and the Boeing 787 aircraft production levels improve. Share repurchases. During the first quarter of 2022, the company repurchased 2.44 million shares of its common stock at an average price of $29 per share, for a total of $71.3 million. As of March 31, 2022, the company has 22.4 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, but share repurchases may vary from time to time and will take into account macroeconomic issues, including the impact of the COVID-19 pandemic and supply constraints, market trends, and other factors that the company deems appropriate. Let's take a look at a few key balance sheet items. Cash and cash equivalents were $279.7 million, up from $262.3 million, primarily due to cash from operations and investment sales, which were partially offset by share repurchases, dividend payments, and capital expenditures. Short-term and long-term investments combined were $182.7 million, down from $213.1 million. Accounts receivable was $281.5 million, up from $249.8 million due to the sequential increase in sales. Inventories were $362.7 million, which increased from $316.3 million. The majority of this change is in raw materials. The company continues to take a conservative position related to raw materials inventory with ongoing supply chain issues and component shortage issues. In addition to customer order volatility, the company has taken on additional components of certain medium and long lead-time items to help manage risk. Lastly, accounts payable increased to $140.9 million, up from $98.3 million, primarily due to increased inventory purchases and capital expenditures.

Thank you, Kevin. In the first quarter of 2022, there were 21 net new nameplate launches of our interior and exterior auto-dimming mirrors and electronic features net of previously disclosed feature headwinds. There was a significant growth in launches of base interior auto-dimming mirrors for the quarter, with approximately 60% of the base mirrors launching in the China market. As we've talked about before, launching base auto-dimming mirrors is extremely important for our growth of features. They enable us to grow the content and scale across platforms. Now for an update on our Full Display Mirror product. At the completion of the first quarter of 2022, we started shipping Full Display Mirror on five additional nameplates. And we're excited to announce that in the first quarter of 2022, we began shipping Full Display Mirror to our 12th OEM Ferrari and our 13th OEM Ford. With Ferrari, we began shipping Full Display Mirror on the 812 and the SF90 Stradale. For Ford, we started shipments for the Ford Transit custom. As of the end of Q1 2022, we are shipping Full Display Mirror on 70 vehicle nameplates. Based on the demand for Full Display Mirror, we anticipate we will have approximately 10 additional nameplate launches and an additional OEM to announce over the remainder of 2022. In summary, even with the current challenges our industry is facing, our launches and product rollouts are strong and we believe we are positioning the company with a technology and product portfolio that will drive growth into the future.

Thank you, Neil. The company has current forecasts for light vehicle production for the second quarter of 2022 and full years 2022 and 2023 based on the mid-April forecasts for light vehicle production in North America, Europe, Japan, Korea, and China. Light vehicle production in these markets is expected to be flat for the second quarter of 2022 compared to light vehicle production for the second quarter of 2021. The forecast for light vehicle production in our primary markets is forecasted to increase 4% when compared to calendar year 2021. The company continues to expect that revenue will remain difficult to forecast for the remainder of the year as a result of high levels of volatility and customer orders and vehicle production volumes, electronic supply chain constraints, the Ukraine-Russia conflict, labor shortages, and overall economic uncertainty. Based on the previously mentioned light vehicle production forecast, the company is making no changes to its previously provided guidance for calendar year 2022. 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. Additionally, based on the company's forecast for light vehicle production for calendar year 2023, the company still expects calendar year 2023 revenue growth of approximately 15% to 20% above the 2022 revenue guidance. While we are optimistic given the sales level achieved during the first quarter and what we expect to be increased revenue levels throughout the remainder of the year, we have also seen increased levels of volatility and customer orders in recent weeks, stemming from the electronic supply chain shortages and OEM shutdowns. The company has devoted significant resources to product reengineering that has allowed us to maintain consistent supply to our customers and clear the path for better revenue levels throughout 2022 and 2023.

Hi, good morning, and thanks for taking the questions. Wondering if you could help us unpack flat sequential gross margins this quarter. Typically, you'd be looking at gross margin compression in the first quarter due to the timing of annual price decreases, which was not the case this quarter. What other strings were you able to pull to operationally drive that result? Thank you.

Go ahead, Kevin.

Yes. So sequentially, the real improvement was in sales levels. We did have some price downs from customers, which is typical, but our fixed overhead levels improved from the fourth quarter to the first quarter. And then we were able to offset some of the pricing reductions that we did have, but it was primarily based on overhead, if you go from Q4 to Q1 margin.

Okay. Second question, with respect to the Full Display Mirror specifically, assuming that improvements in chip supplies begin to materialize in the second half, are you able to play a little more offense in the near-term? Are there any cost considerations in terms of streamlining production?

Yes. I think right now, the only thing suppressing FDM demand is our ability to get components. So if indeed this does start to get better in the second half of this year, then you would see some positive pressure on FDM volumes in the back half of the year.

And thanks for that. If I could just squeeze one more question in this morning, a cost-related question. Given that your production is concentrated in Zeeland, to what extent would any loosening in the freight market help the company, both quantitatively in terms of dollar costs currently in the P&L and qualitatively in terms of your day-to-day operations as well? Thank you.

If you look at the freight costs on the incoming side that has caused us pain really over the last two years, we'd see a tailwind there. On the sales expense side, we've incurred additional freight that we've seen over the last two years. If that were to happen, it would provide some offset to some of the cost increases that we've seen recently.

Thanks. Good morning. I guess, first on the press release, you called out some increase in headcounts around hiring for R&D. What talent are you looking for there?

The majority of what we referenced there was specifically looking for increased expenses on the software and electronics design side. There’s a lot of effort in product redesigns due to component shortages. This has driven a portion of the increase in headcount.

And I know one new market for you is nano sensing. Do you have adequate talent there from the acquisitions you made, or do you need to add more people in that area?

The teams have been looking at additional talent acquisition. There have been some increases in headcount in both of those locations to help us expedite the development of both of those technologies.

And on unit volume this quarter, the international side outside North America got hit a lot harder. Is that primarily due to the German plant shutdowns from no wire harnesses from Ukraine, or was it just other things like the chip shortage?

The European impact was definitely heavily impacted by the wire harness issues from Ukraine. The rest of the regions got hit primarily by underlying economic issues and component issues.

Congrats on the solid start to the year. Could we just confirm what's baked into the full year guide? And is the company's internal range aligned with what IHS is now projecting?

You're exactly right. We feel like our conservative approach has set us up well to hit those numbers.

Got it. So just to clarify then, your light vehicle production assumption would be closer to where IHS is now and then the positive offset would be better mix?

Yes, correct. We think Q3 should be one of our biggest quarters and our internal forecast would indicate a return to a normal cadence this year. We truly believe that Q1 will be the smallest quarter.

You mentioned that your product based on vehicle mix and wins is running much stronger. Were there any notable wins in the quarter that we should be thinking about?

On the OEC side that stands out, especially with Tesla, has helped to grow our outside mirror business. They package the product very well, and it's led to a lot of growth for us.

And that's not just glass, but more on the glass side, they're doing the final assembly, right? Is there potential there as well?

We hope to increase our business with them in the future.

I wanted to check in on the progress of the commercial negotiations relative to producing for cost inflation you saw earlier. How has your progress been recovering those higher costs?

In Q1, there was no benefit from cost recovery from our customers. It’s going to take us throughout most of this year and into next year to negotiate those deals with our customers.

Does it make more sense if costs are increasing to pursue more formalized cost recovery mechanisms?

Every supplier has to pick their strategy, and we believe this is the best plan for us. We’re looking to continue our strong relationships with our customers while addressing these cost challenges.

I was hoping you could also speak to the FDM revenue and how much you think FDM can generate this year?

At those types of volumes, you could expect FDM to generate close to probably $250 million to a little north of $300 million in revenue.

What's the margin contribution of FDM relative to the corporate average?

Historically, it's roughly in line with the corporate average margin profile, but currently, it’s trending a little lower than corporate average due to cost constraints.

A lot of increases have been in areas that are supporting the final assembly. We're taking a more conservative approach as customer orders are increasing.

Thank you, everyone, for the time this morning and for your questions. This concludes our call. Have a great weekend.