Thank you. Good morning and welcome to the Gentex Corporation third quarter 2022 earnings release conference call. I'm Josh O'Berski, Gentex's Director of Investor Relations and I'm 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 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 Third 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 third quarter of 2022, the company reported net sales of $493.6 million compared to net sales of $399.6 million in the third quarter of last year, which was a 24% increase quarter-over-quarter. For the third quarter, global light vehicle production in North America, Europe, Japan, Korea and China increased approximately 26% when compared to the third quarter of last year. Light vehicle production in the company's primary markets of North America, Europe and Japan, Korea was up 22% on a quarter-over-quarter basis. Some of the supply chain issues that plagued the industry in the third quarter of last year have improved, and overall light vehicle production growth contributed to the company's quarter-over-quarter revenue growth. However, product mix for the third quarter and overall sales levels were still impacted by customer order adjustments, supply chain challenges and labor availability issues. Together, these headwinds resulted in unit shipments being approximately 750,000 units lower than our original forecast at the beginning of the quarter, which resulted in a revenue shortfall of about $35 million to $40 million. While there appears to be some improved stability in the light vehicle production environment and the overall supply chain, the company continues to experience significant customer order fluctuations on a week-to-week basis and difficulty in sourcing advanced electronic components for our most complex products. For the third quarter, the gross margin was 29.8% compared to a gross margin of 35.3% for the third quarter of last year. Gross margin was impacted on a quarter-over-quarter basis by raw material cost increases, unfavorable product mix and labor cost increases, and prior commitments to annual customer price reductions. The continuation of cost increases in raw materials as well as unfavorable product mix had the most significant impact on our margin profile during the third quarter. Additionally, while the overall improvement in sales levels helped offset fixed overhead costs during the third quarter, the increase in labor costs more than offset the gains in overhead absorption to create additional margin pressure. During the third quarter, product mix issues driven by component shortages in our advanced feature mirrors and lower sales to our Tier 2 customers contributed about 150 basis points of margin headwind that we believe will improve during the fourth quarter. The company is also making progress on cost escalation conversations with our customers, and we expect relief to begin during the fourth quarter, which should provide improvement in our margin profile as we move through 2023 and into 2024. Operating expenses during the third quarter increased by 15% to $60.4 million compared to operating expenses of $52.7 million in the third quarter of last year. Operating expenses increased during the third quarter, primarily due to staffing, professional fees, increased outbound freight expenses, and travel-related expenses. Our operating expense growth for the third quarter continues to support our product development strategy as well as previously sourced new program launches, product redesigns and support of component supply issues and our ongoing commitment to new technology areas. The increase in operating expenses was in line with our plan and represents the level of development needed to achieve the forecasted growth rate for the rest of this year and into 2023. Income from operations for the third quarter was $86.8 million compared to income from operations of $88.2 million for the third quarter of last year. During the third quarter, the company had an effective tax rate of 15.7%, which was primarily driven by the benefit of the foreign-derived intangible income deduction. Net income was $72.7 million for the third quarter compared to net income of $76.7 million for the third quarter of last year. The change in net income was primarily the result of the quarter-over-quarter changes in gross margins and operating profits. Earnings per diluted share for the third quarter were $0.31 compared to earnings per diluted share of $0.32 for the third quarter of 2021. I will now hand the call over to Kevin for a third quarter financial detail.

Thanks, Steve. Automotive net sales in the third quarter of '22 were $480.9 million, a 23% increase when compared to $391.3 million in the third quarter of '21. And auto-dimming mirror unit shipments increased 17% during the quarter compared to the third quarter of '21. Other net sales in the third quarter of '22, which includes dimmable aircraft windows and fire protection products, were $12.7 million compared to other net sales of $8.3 million in the third quarter of last year. Fire Protection sales increased by 78% for the third quarter of '22 compared to the third quarter of '21, and dimmable aircraft window sales decreased by 7% for the third quarter of '22 compared to the third quarter of '21. 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 third quarter, the company repurchased 0.9 million shares of its common stock at an average price of $26 per share for a total of $22.3 million. For the 9-month period ended September 30, the company repurchased 3.3 million shares of its common stock for a total of $93.5 million. As of September 30, 2022, the company has approximately 21.5 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 lingering impacts of the COVID-19 pandemic and supply constraints, market trends, and other factors the company deems appropriate. Shifting over to the balance sheet. The items mentioned today are valued as of September 30, 2022, and are compared to December 31 of '21, unless otherwise noted. Cash and cash equivalents were $222.9 million, down from $262.3 million, primarily due to capital expenditures and cash flow from operations. Short-term and long-term investments combined were $170.5 million, down from $213.1 million. This is primarily due to splitting out equity method investments of $39.7 million which were previously reported under long-term investments. Accounts receivable was $292.4 million, up from $249.8 million due to the timing of sales within the quarter. Inventories were $418.3 million, which increased from $316.3 million, primarily in raw materials. The company has continued to be proactive related to raw materials inventory with ongoing supply chain issues, component shortage issues in addition to significant customer order volatility, as well as our forecasted growth in the next 12 to 18 months. The company has taken on additional components of certain medium and long lead time items to help manage risk and meet customer demand. As previously mentioned, when the supply chain constraints start to alleviate and the component shortages begin to decline, the company will evaluate the proper levels of inventory at each commodity level. Accounts payable increased to $171.4 million, up from $98.3 million primarily due to increased inventory purchases and capital expenditures. Let's take a look at preliminary cash flow items for the quarter. Third quarter 2022 cash flow from operations was $47.1 million, which was the same as operating cash flow in the third quarter of '21. And year-to-date cash flow from operations was $236.4 million compared to $299.4 million in operating cash flow for year-to-date '21, which was driven primarily by the year-to-date change in net income. Capital expenditures for the third quarter were $50.5 million compared with $13 million for the third quarter of '21, and year-to-date capital expenditures were $108.5 million compared to $44.4 million for year-to-date CapEx in '21. And lastly, depreciation and amortization for the third quarter was $23.2 million compared with $23.6 million for the third quarter of last year. And year-to-date depreciation and amortization was $73.3 million compared with $75.1 million for calendar year '21. I'll now hand the call over to Neil for a product update.

Thank you, Kevin. For the third quarter of 2022, we experienced our highest total launch rate we've seen in the past 3 years. During the quarter, we had 50 launches of our interior and exterior auto-dimming mirrors and electronic features. Over 50% of the launches for the quarter were advanced feature launches with HomeLink, Full Display Mirror, and our digital video recorder mirror leading the way. Now for some updates on Full Display Mirror. We're excited to announce that during the third quarter, we began shipping our Full Display Mirror product to our 14th OEM, Hyundai on the new Palisade. Hyundai has been a great customer to work with on this exciting product and it's great to see this technology in their vehicle. In addition to the Hyundai Palisade, we began shipping Full Display Mirror on 3 other vehicle nameplates: the Cadillac LYRIQ, the Mercedes Metris, and the Subaru Outback. With these 4 new nameplates this quarter, we have now announced 79 nameplates that Full Display Mirror has been launched on. This technology continues to have growing interest and growth potential. We're excited to see how well this product is being received by our OEM customers and the end consumers. Also, in the third quarter of 2022, we began shipping our base auto-dimming mirror containing a digital video recorder in both the Toyota Yaris and the Yaris Cross for the Japanese market. These are our first launches of a base auto-dimming mirror with this DVR capability, and we believe this product has great potential to expand into other platforms as well as regions. This product is also the first Gentex DVR product that has an app available to allow the consumer to pull recorded information from the mirror to their phone, which creates a more consumer-friendly user experience. The teams at Gentex have been doing an outstanding job executing the high volume and extremely complex new launches that have been driving our new business growth, all while managing through the product redesigns that have been necessary due to component shortages that our industry has been facing. As we look forward, our launch rates continue to look strong. And as we continue and come out of this redesign cycle due to the component shortages, I'm excited about our ability to refocus all of our development efforts to new products and technologies. I'll now hand the call back over to Steve for guidance and closing remarks.

Thanks, Neil. The company's current forecast for light vehicle production for the fourth quarter of 2022 and full years 2022 and 2023 are based on the mid-October 2022 S&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 3% for the fourth quarter as compared to light vehicle production for the fourth quarter of last year. For calendar year 2022, light vehicle production in these markets is forecasted to increase 5% when compared to calendar year 2021. The company believes that revenue will remain difficult to forecast for the remainder of the year as a result of high levels of volatility in customer orders and vehicle production volumes, electronic supply chain constraints, labor shortages, and overall economic uncertainty. Based on the updated light vehicle production forecast as well as year-to-date financials, the company is updating certain guidance estimates for calendar year 2022 to the following: Revenue for the year is expected to be between $1.9 billion and $1.95 billion. Gross margins for the year are expected to be between 32% and 33%. Operating expenses are expected to be between $235 million and $240 million. Our estimated annual tax rate, which assumes no changes to the statutory rate, is forecasted to be between 14% and 15%. Capital expenditures are expected to be between $140 million and $150 million, and depreciation and amortization is forecasted to be between $100 million and $105 million. Additionally, based on the company's current 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 new 2022 revenue guidance of $1.9 billion and $1.95 billion. Overall, the third quarter was impacted by the perfect storm of component supply issues that included both scarcity and cost increases, product mix issues, labor shortages and customer order volatility. While we are disappointed with this quarter's financial performance, we are confident in our ability to work through these issues and improve the gross margin profile as we move through the fourth quarter and into next year. Beginning in the fourth quarter, we expect to see improvements to margins that will be driven by the benefit of the company's first rounds of cost escalation negotiations with customers to address ongoing commodity, freight, and labor pricing pressure. These improvements should continue throughout next year and into 2024 as we work to offset cost increases with updated pricing. The plan we have developed and are executing to address these issues is consistent with our patient approach that we described previously and seeks to balance the need for pricing increases with our desire to continue to grow the business through new technology deployment at our customers. As the fourth quarter begins and we transition into 2023, we remain confident in our ability to grow the business and improve margins while at the same time expanding our technology portfolio. As we work to accomplish these objectives, we will continue to take a balanced, long-term approach to these challenges and believe that this plan will get us back to our targeted margin profile by the end of 2024. That completes our prepared comments for today. Thank you for your time and we can now proceed to questions.

I want to ask about the new term and a bigger picture question. First, in the near term, just wondering if you can help us unpack your sequential gross margin expectations as we go into the fourth quarter as implied by the updated full year guidance. Specifically, are the initial cost recoveries that you’re contemplating already agreed to in the P&L sitting here in October? And conversely, what lessons should we take away from the third quarter in terms of things that could still pressure the margin sequentially?

The current financials for the start of the fourth quarter do not yet reflect the benefits of the price increases, which will be finalized in the coming months and should take effect during the quarter. Regarding your second question about lessons from the third quarter that might impact us, the main concern is not just the bill material increases but also potential mix issues. In Q3, we highlighted a 150 basis point impact related to the mix. We faced significant component challenges with FDM during that quarter, resulting in a larger shortfall in units than we anticipated. Typically, this mix issue affects base auto-dimming mirrors, which have a lower margin profile. While we did see strong growth, particularly in the China market, we also experienced some margin pressure from base auto-dimming mirrors that exceeded our expected business percentage.

Steve, I'd like to follow up on the impact of component shortages on FDM. Either you or Neil could address this. I'm curious about the impact on FDM shipments for this year and if there's any way to quantify that. More importantly, as we look ahead to 2023, is it possible that we could see a catch-up effect on FDM shipments next year if the necessary components become more available? In other words, what do you anticipate the take rates will be next year compared to your current level of FDM shipments?

Yes. So I'll start kind of with the number side, and I'm sure Neil will have some comments on kind of what's happening behind the scenes on the availability of components and what that trend is. This year, we're probably by the time Q4 wraps up if we don't have any more significant issues, I would say this year is going to end up about 150,000 to 200,000 units light of where it would have been if we hadn't had the component issues. So we're putting up obviously record numbers on FDM shipments this year, and that growth has been pretty astounding. It would have been even better if we had availability of components. So that will kind of help you understand the impact has been throughout the year and what we're expecting throughout Q4 in terms of FDM shipment availability due to component issues. Neil, you want to jump in on that.

Yes, I believe the team has been doing an excellent job sourcing parts, working on replacements, and redesigning or creating new components for the product. Looking ahead to next year, we might face some challenges with a few parts. However, as we approach the second quarter of next year, I expect these issues to start improving, leading to less strain on the availability of the parts we've been having difficulties with. Therefore, I am optimistic about our production capabilities for the second half of next year.

And Luke, I'm sorry, I did forget to answer 1 part of your question. The question is, heading into next year, what do we expect for volumes. Yes, we do think there will be some catch-up from parts that we missed this year. One thing we did experience throughout this year was we had several launch customers call and ask to increase demand versus their original forecast. Unfortunately, given the component issues, we weren't able to support those higher volumes. So if component issues were to improve, we do think there's some tailwind based on the desire for that product that could happen into next year.

Just a first question on can you hear me?

Yes, sir.

On the revenue guide, at the midpoint of the range, it remains largely unchanged and has been tightened. There was a miss of 700,000 units in the third quarter. You mentioned FDM, and there will still be a shortfall of 100,000 units compared to your earlier expectations. Despite the challenges in the third quarter and the issues you’ve pointed out regarding product mix, the revenue number hasn’t decreased significantly. I understand that costs are rising and you’re adjusting for that, but there hasn’t been much change in the revenue midpoint. What leads you to believe you can recover this in the fourth quarter? Or is there something else happening with the S&P Global mobility schedules that could introduce some risk to these figures?

Yes. If you look at our expectations and observations, I want to clarify that I mean S&P Global mobility. It will take at least five years for this to become easier to say. As we analyze the data heading into Q4, we see some additional risk, particularly regarding components. We also believe that vehicle volumes will pose a challenge for the industry to meet production levels in Q4. Additionally, we anticipate that towards the end of the year, particularly between Thanksgiving and the holidays, production tends to ease. This is especially true when production has been as strained as it has been over the past year. In summary, both OEMs and the supply base have been working incredibly hard to reach these production levels, and we think there will be at least a brief pause at the end of the year for everyone to take a rest.

Okay. And then the second thing on the component shortages. Obviously, this is persistent. You’ve been running through these issues, and so has the whole industry for a while. I mean if you’re going through these redesigns, how are you kind of ensuring supply going forward as you’re working through the redesigns? And even if this chip shortage in aggregate continues into next year, which it sounds like it’s going to, do you have the ability to kind of sidestep it with these redesigns and maybe get back on track with new chip supply elsewhere or redesign that allows you to overcome it?

So I'll go first and Neil will correct any misstatements of mine. But I think the one advantage of the redesigns is it's really hard to get guaranteed commitments. I mean, when we're redesigning the new components, the team has worked really hard to try to get those commitments from the supply base. What we've experienced for the last 18 months has made us a little more jaded in terms of whether or not we actually believe those commitments will play out in reality. But the one advantage of having multiple designs, for instance, let's say we have an FDM and we've maybe redesigned it once or at least twice, in particular, a part number. We now have several different building materials that are approved and validated with OEM. This means if even if the new components were to fall short, we're still securing parts under both designs because they have common corporate uses. This also gives us more flexibility to be able to help an OEM by having multiple part numbers and multiple circuit designs that we can revert back to if other components become a problem.

Okay, helpful. And then just lastly on Forex. I mean, I got to imagine it's a benefit both on translation but probably even on an economic basis. Can you kind of elucidate what maybe you saw in the third quarter, what you expect going forward?

Actually, it was a slight negative on the top line, probably 25 to 30 basis points. So most of our stuff is denominated in the U.S. but we do have some in RMB and euro. So there was a slight negative on the top line and on the purchasing side as well but it was probably 25 to 50 basis points on that.

Meaning the purchase on the cost side offset the theoretical benefit on the revenue side for a net negative. Is that a fair way to characterize it?

Yes.

This is Gavin Kennedy on for David Kelly. Just starting with the gross margin drivers in the quarter, you noted 150 basis points of mix in Tier 2 headwinds. Can you walk us through the other impacts that you were seeing this quarter and the other moving parts there for the margins?

Yes. The biggest one that we've been talking about all year really is the raw material cost increases. And that was about 300 basis points of headwind. And then in addition to that, the labor headwinds of about 100 basis points. So when you combine all that together, that's about the main driver. There were some puts and takes inside of that but those are the biggest ones that are moving down versus last year.

All right, that makes sense. And then as a follow-up, your guidance implies a meaningful ramp-up in the Q4. Do you expect to fully offset input cost headwinds in the quarter via pass-throughs? Are there any retroactive recoveries that might provide a one-time benefit in Q4?

Yes, there is some one-time benefit from the recoveries that Steve mentioned earlier. We are looking at how some of that applies to 2022 as well as 2023 and 2024 with pricing changes. This will positively impact the Q4 margin specifically. Additionally, the mix was relatively weak towards base mirrors in the quarter, mainly because growth in China outpaced the rest of the market. We expect some of that to improve in Q4.

But if you look at our year-to-date gross margin performance, the full year range is very similar to where our year-to-date is. So it's not a meaningful step up in Q4 that helps us get to that full year guidance. In other words, if we hit Q4 inside of that full year guidance range, that's what it takes to hit that for the full year.

Wanted to ask first on raw materials. I saw in the release, you discussed a quarter-over-quarter increase in raw material prices. It seemed to be in the context of comparing to the third quarter of ‘21. A basket of automotive commodities that we look at is down 42% versus 3Q last year. It’s down 27% versus 2Q this year. I think our index is heavily weighted towards steel, which you don’t really buy and doesn’t take into account some of your more esoteric, PGM or coding exposures or whatnot but still sort of surprised that you’re still experiencing the higher commodities. Can you talk a little bit about what your exposures are there that are hurting your margin or if maybe the spot prices have started to move in the right direction already but there’s some kind of lag factor or hedging that might be offsetting the impact on the P&L as of now? Based on what you know today, what is your expectation for how raw materials may impact the margin going forward?

Yes, that's a good question. This goes back to the last nine months when we adopted a patient, wait-and-see strategy to better understand the supply base and materials market. We were concerned about approaching OEMs too soon without fully grasping the cost situation. With our income statement and balance sheet allowing us to wait, we aimed to hold off until we were about 80% through the cost increases to provide a clearer picture to our customers, avoiding repeated conversations on the matter. By the halfway point of Q3, we felt we had a solid understanding of the situation. As I mentioned, we are about 80% through those cost increases, so we started engaging in Q3, focusing on resolving most of these issues in Q4 to prepare for both Q4 and 2023. There has been a lot of data we needed to catch up on with OEMs, accompanied by numerous discussions concerning the verification of cost impacts and how to structure contracts to offset some of those costs. We were intentionally cautious in requesting financial support from the supply base. Now that we are in this phase, we are confident and comfortable with the data we are presenting. We believe we will achieve success over the next 18 months in resolving these issues.

When we initially discussed this during the third quarter of 2021, you seemed to feel you could be patient. You're in a strong position with investment-grade status and better margins compared to others who are heavily leveraged and have low credit ratings. Those companies are facing demands for annual price reductions from customers in a world where inflation is at 2%. You can balance that out with productivity gains in a higher inflation environment. Those suppliers were in a crisis, while you had the luxury to wait. Looking back, do you still believe that was the right strategy, or do you think you can recover from it? I heard Ford earlier this week expressing more understanding than ever, acknowledging the suppliers' concerns, and then they raised $1 billion. Will that be part of your arrangements as well, or do automakers view an investment-grade supplier with a solid gross margin differently compared to a distressed supplier they need to support, which could lead to complications?

I think there are many questions to address, so I’ll go through them one at a time. First, we still believe our strategy is correct, though only time will tell. I can share that we took our time and have not faced the resistance you might expect if we were being outright rejected. Additionally, we are operating in a constrained environment, with most original equipment manufacturers recognizing the need to negotiate favorable deals to ensure supply. This is also an issue we face with our suppliers. We're not going to receive all the parts we desire, much like the OEMs who also struggle to obtain their needed parts from suppliers. There is a natural tendency to establish agreements that benefit both the supplier and the OEM, which remains our focus. This involves not only addressing material cost increases but also long-term sourcing and contracts. Our approach is not solely about covering our costs immediately; it’s about balancing the need for short-term profitability for our shareholders while also securing product awards that will support growth over the next three to five years. We are not taking a shortsighted stance. While we acknowledge the pressing cost issues that need addressing now, we are also considering opportunities over the next few years that could help us grow the business and alleviate cost challenges through increased volume and growth opportunities. We believe this approach is the most comprehensive and suitable for who we are. It's clear that when an OEM is on the verge of insolvency, they are motivated to provide cash immediately to prevent that situation. This will continue to be a focus for us throughout 2023.

Just to touch on the margin point again. The full year guidance kind of implies a pretty healthy step up in gross margins for 4Q of like 300 bps plus. One, how much of that is coming from price increases versus mix? And then second part of the question is just how much of this customer base is going to have these increases that come through in 4Q versus how much may be remaining for early part of ‘23 that could result in a potential further step up for next year?

Yes. As Steve mentioned, right, we have a couple of different pronged approaches. One of them is approaching them about the cost inflation that we've seen to date and through from really the start of this last year through now. We would expect some of that to hit the fourth quarter, so call it 100 to 150 basis points maybe in that range. The rest of it, as we talked about, mix was a little bit weak, so the rest of it is going to come through mix. If sales improve, we hope to offset that with our normal leverage cadence to get to that sequential improvement in margin. But as Steve mentioned, our year-to-date gross margin is in that 32% range already. So we just have to see a sequential improvement from the overall product portfolio and a little bit from the recovery side. As you head into '23, again, this conversation is active in one-time recoveries and then price changes as we move into '23 and even beyond potentially. We're going to balance that as we said, right? We're looking for growth longer term and not just satisfying our needs today. Our teams have been working through that and balancing that approach to help get that long-term philosophy.

Yes. I mean, it’s fair to assume that, right, there’s not going to be any price cuts that you typically see in the first quarter, given what’s going on with the supply chain and component price increases. But just thinking about next year…

That's correct.

Yes. Yes. I’m thinking about next year, you reaffirmed, right, the growth outlook, again, much higher than the market. I’m just curious, given that there’s so much that’s going on with a slowing economy, rising fuel prices, interest rates but juxtaposing that is inventory levels that remain well below historical levels that would probably support or prevent any big slowdown that you might have previously with price cuts and inventory issues. So I’m just curious your thoughts about how you handicap that going into the next year and the puts and takes to the risk and opportunities to the top line guide for next year.

Yes, you're absolutely correct. This is quite intriguing. I often joke that if this situation weren’t real, it would be fascinating to analyze from a macroeconomic perspective. Unfortunately, it is real. You have a lot of factors influencing the light vehicle production sector right now, with very low inventories and high demand. However, there are significant challenges ahead, particularly from rising interest rates. I believe these negative factors will not have a significant impact until the latter half of next year, as the first half will be focused on meeting current demand and restoring inventories. The real risk for next year lies in the sales performance during the latter half. Currently, the S&P Global Mobility forecast has been revised down significantly from what it was six months ago for 2023. Despite this decrease in expected light vehicle production for next year, we remain confident in our forecast. We require only a 4% to 5% increase in light vehicle production to achieve our goal of 15% to 20% growth, indicating we anticipate a 10% to 12% outperformance compared to the market. Even if the market remains flat for any reason, we expect to see that outperformance, driven by the strength of our product portfolio.

You’ve mentioned labor shortages several times today. I was wondering, are those shortages at Gentex? Are they affecting customers, upstream, or throughout the entire process?

They're everywhere, and they definitely have impacted us as well. It's been a very tight labor market in West Michigan. Honestly, even with the changes in salaries and wages, it has been a very constrained market to get the team put together and the size we need to support this level of sales. From an operational standpoint, we're running a tremendous amount of overtime right now to hit these sales levels. Obviously, that's been part of the headwind that Kevin described on the labor side that's impacted margins.

And for you guys directly, is the labor need more on the hourly side or salary side?

It's both, but definitely, the hourly side is what is the biggest risk factor in driving the gross margin deterioration. The operating expense side, I have seen a step up in terms of higher salaries and wages on operating expenses as well. We're holding together pretty well there because there our ability to outsource and use contractors to help offset. Obviously, on the manufacturing side, that's not as easy.

And I’ve been hearing from dealers this week that they’re not really expecting any kind of major recovery in Toyota, Honda inventory until middle of next year. I’m just curious what you’re hearing from them and what you’re thinking on that.

Yes. I mean, they're pretty quiet about what they communicate in terms of how they're going to get production levels back up to the inventory to meet some inventory needs or at least once that they have. This is purely speaking from our gut based on what we're seeing, but I would tend to agree. I don't think you're probably going to see any meaningful recovery in inventory levels until the summer. If it does happen, it's because that's bad news on the sales side. I believe that our position over the past six months has led to a slight slowdown in cash flow as we work to secure and increase our inventory levels. In terms of our growth prospects and the demand for our products, we would agree with your assessment. The main concern is the deterioration of our gross margins. It's important to remind our shareholders that we have navigated similar situations before. In 2008 and 2009, our margins declined, but we successfully rebuilt them in 2012 and 2013. This issue has occurred again, dropping to around 32%. We know how to enhance our income statement to create value and improve our margin profile. We believe this is a strategic time to invest in Gentex if you're considering a long-term position.

The bridge to the intact 15% to 20% revenue growth rate for next year, I just want to revisit that. Originally, that range was pegged to LVP growth of, I think, 10%. Now we’re looking at a 4% industry assumption. So can you kind of unpack how you’re thinking about what still informs the confidence? I imagine recovery pricing embedded in your net price, certainly helps better mix from improved trip supply and your redesign work, it probably adds another layer. But yes, I just want to get your take on that.

Yes. In addition to the factors you mentioned, I would say the single largest piece that adds confidence to our forecast is the amount of FDM that we had to say that we couldn't ship and produce this year. And how many OEMs we had to say we couldn't increase take rates because of the constraints on the raw material side. When we look at the LVP forecast, what we're seeing from our take rate standpoint and the things we had to say no to. We feel really good about the desire for our products, especially FDM and OECs as we head into next year. Typically, you would see our forecast move a little bit closer in line with the changes in LVP. I think heading into next year, we feel really comfortable with the demand for our products.

Got it. So I mean just on the customer recovery story line. I mean, your typical price down is something like 2% to 3%. What could your net pricing be for next year in terms of how successful these recovery negotiations could trend?

I would say what we're modeling right now and what we believe needs to happen to hit the financial performance we're talking about is a net positive 50 to 100 basis points.

The implied guidance for the fourth quarter has a gross margin level of around 34%. Can you clarify how we should view the gross margin trajectory for next year? What is the expected exit rate for the fourth quarter in 2023? This will help ensure we set an appropriate benchmark for progress.

If you actually look at our Q4, we would actually be slightly below that in terms of what we think Q4 guidance is. If you look at our year-to-date gross margin performance, the full year range is very similar to where our year-to-date is. So it's not a meaningful step up in Q4 that helps us get to that full year guidance. In other words, if we hit Q4 inside of that full year guidance range, that's what it takes to hit that for the full year.

Our first question comes from Luke Junk with Baird.

Thank you, everyone, for your time and questions today. As you may know, we will be at SEMA in Las Vegas next week and we would welcome investors to join us in our booth. If you're interested in attending, please let me know. And that said, this concludes our call. We wish everyone a great weekend.

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