Greetings. Welcome to the Gentherm Inc. Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference to your host Yijing Brentano, Senior Vice President of Investor Relations. Thank you. You may begin.

Thank you, and good morning, everyone. And thank you for joining us today. Gentherm's earnings results were released earlier this morning, and a copy of the release is available at gentherm.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Gentherm's website. During this call, we may make forward-looking statements within the meaning of Federal Securities laws. Statements reflect our current views with respect to future events and financial performance and actual results may differ materially. We undertake no obligation to update them, except as required by law. Please see Gentherm's earnings release and its SEC filings, including the latest 10-K and subsequent reports for discussions of our Risk Factors and other risks and uncertainties underlying such forward-looking statements. During the call, we may discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release or investor presentation. On the call with me today are Phil Eyler, President and Chief Executive Officer, and Matteo Anversa, Chief Financial Officer. During their comments, Phil and Matteo will be referring to a presentation deck that we have made available on our website at gentherm.com/events. After their prepared remarks, we will be pleased to take your questions. Now I'd like to turn the call over to Phil.

Thank you, Yijing. Good morning, everyone and thank you for joining us today. I'm pleased with the continued strong execution of the Gentherm team despite the unprecedented global supply chain disruptions and production volatility. The automotive industry continues to face semiconductor-related customer volume reductions and plant shutdowns, escalating freight costs, and other inflationary factors. In addition, all little changes in customer production levels are creating significant near-term challenges predominantly related to managing variable production costs. For example, light vehicle production in our key markets in the third quarter was 19% lower than what was expected just three months ago. While our automotive revenues declined 8% in the third quarter, excluding the impact of foreign currency translation compared to a year ago, we outperformed light vehicle production in our key markets by 15 percentage points. In addition, we continued our momentum on automotive awards securing $260 million in awards from global OEMs in the third quarter. On the cost front, we continued our disciplined approach to expense and working capital management, while increasing our R&D investments. In addition, we've been negotiating with our customers and suppliers on reimbursements and price increases to partially offset the near-term material cost changes that we're experiencing as a result of the supply disruptions. We are now starting to realize some financial benefits from these discussions. In spite of the significant supply chain headwinds and on a year-to-date basis, we delivered an adjusted EBITDA margin rate of 15.8% and generated $117 million in cash flow from operations, 60% more than the first nine months of 2020, and nearly 40% more than the first nine months of 2019. Matteo will provide more details on our financial results in a few minutes. Now, turning to the automotive highlights on Slide 4. In the third quarter, we launched our automotive solutions on 11 different vehicles across six OEMs including General Motors, Great Wall, and Nissan. We continue to see momentum on our CCS product and launched on the GM Hummer EV, Great Wall WEY, and the Nissan Infiniti QX60. On the technology front, I'm pleased to share that Gentherm was recognized in our partnership with Lear as a 2021 Automotive News PACEpilot Innovations to Watch award winner for the INTU Thermal Comfort seat powered by our ClimateSense Technology. Receiving this award is the outcome of our joint efforts that has resulted in a smart solution that delivers faster passenger comfort. On the Battery Performance Solutions front, the fastest growing product in our portfolio is our Cell Connecting technologies. Our production program with BMW scheduled to launch next year is progressing well. We also continue to win additional development projects with several customers around the world, including our very first prototype samples with embedded cell censoring. Just last week, we announced our partnership with Datang NXP Semiconductors to jointly develop a new cell connection system leveraging the unique capabilities of both companies. This first of its kind cell connection system will integrate the Datang NXP single-cell monitoring integrated circuit with the proprietary design of Gentherm's foil-based conductor to replace complex sensor cable harnesses. We see this partnership as an important milestone that will significantly advance electric vehicle battery performance, safety, longevity and improve user feedback. We're excited that OEMs and battery manufacturers are increasingly interested in our innovative mechanical structuring process because of the increased design flexibility and the ability to enhance overall safety of the lithium-ion battery pack. On the ClimateSense front, we continue to see growing interest from global OEM customers, and we're making great progress on advanced development projects. More importantly, our first production program is progressing very well. Our microclimate platform incorporates multiple thermal effectors including Next Generation CCS, net conditioning, footwell and surface heating, all coordinated by our electronics and software, which utilizes Gentherm's proprietary thermal physiology-based algorithm. As the transition to electric vehicles accelerates, Gentherm is perfectly positioned with our breadth of solutions including our core Climate Comfort products, ClimateSense, as well as our Battery Performance Solutions to help OEMs achieve their electrification goals by increasing vehicle range, energy savings, all while delivering a best-in-class personalized thermal experience. Now on to Slide 5 to discuss Automotive Awards. In the third quarter, we continued our business award momentum and secured $260 million in new program awards across 13 different OEM customers. Our global team won 70% of the opportunities available to us. Of note, our win rate was negatively impacted because we did not win one opportunity against an incumbent due to the very short time to launch. Importantly, I'm pleased to share that nearly 40% of our awards in the quarter were for electric vehicles. We won multiple CCS awards, including platform wins with the Dodge Ram 1500, Ford Explorer EV and the Lincoln Aviator EV. I'd like to congratulate our Stellantis customer business unit for winning both CCS and Seat Heater awards for the next-generation Ram 1500. I'm pleased to share that we are now the exclusive thermal seat provider for this platform as a result of this complex win. During the quarter, we received four steering wheel heater awards across multiple OEMs including the Buick Enclave, Ford Mustang, Great Wall WEY, VV7, and the Geely Lynk & Co eSUV. On the Battery Performance Solutions front, we continue to make progress in expanding our business winning air-cooling battery thermal management awards for the Hyundai Kona and Renault Sinuata. While our award dollars and win rate are lower in the third quarter compared to the first two quarters of the year, we continue to see strong momentum in coding activities leading into the fourth quarter. Now let's turn to Slide 6 for a discussion of our medical business. During the third quarter, we saw increased demand for our medical products, especially our flagship product, Blanketrol. I'm pleased to share that we secured a large Blanketrol purchase order to replace competitive devices at The Mayo Clinic in Rochester, Minnesota. In addition, we also secured a large upgrade award from Massachusetts General in Boston. These are just two examples of how we're driving market share growth in our medical business. In addition to growth in Blanketrol unit sales, we're also seeing increased demand from hospitals that are using our Hemotherm equipment to treat COVID patients. As an example, in the third quarter, HCA Healthcare in Nashville, Tennessee bought 20 Hemotherm devices for use throughout their network. In the third quarter, supply chain disruptions caused by parts shortages and production labor constraints impacted our ability to fulfill all of the strong customer demand in medical. We're working hard to address these constraints in order to meet the continued strong demand going forward. To summarize, I'm proud of the Gentherm team for consistently outperforming light vehicle production in the key markets we serve. Despite the headwinds in the global supply chain, we generated significantly higher cash flow compared to the third quarter of last year. While uncertainty remains about where production rates will be for the next 12 months, we believe, there is significant pent-up demand that will need to be met once the unprecedented supply chain constraints are resolved. I'm extremely proud of our team's agility, flexibility, and dedication to deliver on all of our commitments to our stakeholders in spite of these tremendous challenges. We will remain focused on operational execution, innovation, and cash flow generation, all of which position us well to continue to deliver over the long term. With that, I'll turn the call over to Matteo for a little more color on our financial results.

Thank you, Phil, and thank you to everyone joining the call today. So let me turn to Slide 7, to focus on the items that most significantly impacted our third quarter results. For the quarter, product revenue decreased by 6% compared to the same period last year, and if we adjust for the impact of FX, our overall product revenue decreased by 7%. Starting with the Automotive segment, revenue was $233 million, down by 7% compared to the third quarter of 2020 and adjusting for the impact of foreign currency translation, automotive revenue decreased by 8%. In comparison, according to IHS latest data, light vehicle production for our key markets of North America, Europe, China, Japan and Korea decreased by approximately 23% over the prior year quarter. As Phil mentioned earlier, we outperformed light vehicle production by approximately 15 percentage points. The majority of our product lines were impacted by the OEM shutdowns related to the semiconductor shortage. Specifically, CCS revenues decreased 7% driven by lower production volume of Stellantis and GM trucks and SUVs. Seat Heater revenue decreased 16% due to lower production of GM trucks and SUVs as well as lower production volume with Ford, Stellantis and BMW. Electronics revenue decreased 20% due to the lower deliveries of the memory seat module to Ford as a result of their production shutdowns. This decline was partially offset by higher RV-related sales. These negative effects were partially offset by higher sales in the other product lines, specifically, steering wheel heater revenue increased by 9% due to higher volumes with Tesla model X and Y and Great Wall. Automotive cable revenue increased by 3% due to higher volume with Bosch. BPS revenues increased by 6% due to higher sales of the 48-volt Mercedes C class and the BMW E MINI, and other automotive revenue increased by 22% due to higher sales of neck conditioners. If we move to medical, revenues increased by 6% due to higher Blanketrol and Hemotherm sales, as Phil just mentioned earlier. Moving to the gross margin. Gross margin rate for the third quarter was 28.5% and this compares to 31.8% in the year-ago period. The 330 basis point decrease was driven by the negative impact from industry-wide supply chain disruptions, annual customer price reductions, as well as wage and material inflation. These were partially offset by cost recoveries from customers and supplier cost reductions. We estimate that the impact of the supply chain disruptions in the quarter resulted in approximately $29 million in lost revenue for Gentherm, and $9 million in higher cost of goods sold due to higher material cost, lost productivity at the factories, and increased premium freight, partially offset by $4.5 million in cost recoveries from customers. Moving to operating expenses, which were $48.7 million in the quarter, compared to $44.1 million in the prior year period. The 2021 third quarter amount included $0.7 million of restructuring charges compared to $0.3 million in last year's third quarter. So if we adjust for restructuring and acquisition expenses in both periods, operating expenses were $47.9 million, up from $43.8 million in the third quarter of 2020. The year-over-year increase of approximately 9% was primarily driven by higher research and development cost, as we increased investment in ClimateSense and Battery Performance Solutions, higher SG&A due to the reversal of the temporary austerity measures taken last year to mitigate the impact of COVID, partially offset by higher R&D income. Adjusted EBITDA in the quarter was $30.5 million, compared to $50.1 million in the prior year period. Finally, adjusted diluted earnings per share in the quarter was $0.51 a share, compared to $0.91 per share in the third quarter of last year. Our effective tax rate was 22.9%. So now moving to the balance sheet on Slide 8. Our cash position at the end of the quarter was $195 million, up sequentially from $187 million in the prior quarter. The increase of $8 million was the result of $24 million free cash flow generation, partially offset by repayment of the revolver and cash expenditures related to acquisition and technology investments. A $24 million free cash flow generation in the third quarter compares to $19 million in the prior year period, and the $5 million year-over-year increase was driven by higher cash flow from operating activities, partially offset by higher capital expenditures. Notably, as Phil mentioned earlier, year-to-date, we generated $117 million in cash flow from operations and $88 million in free cash flow significantly strengthening our balance sheet. As of September 30th, net debt decreased sequentially by $70 million and total debt stood at $40 million, and we closed the third quarter in a net cash position of $155 million. Based on the trailing 12 months consolidated adjusted EBITDA ended September 30th, we had $440 million of remaining availability on our line of credit, up from $432 million at the end of the second quarter. Total available liquidity as of September 30th was $635 million, up from $618 million at the end of June. So now let me turn to Slide 9 for the 2021 guidance. Let me start by saying that the semiconductor shortages and related customer volume reductions continue to be extremely volatile, creating significant challenges in the foreseeable future. Based on our performance in the third quarter of 2021, the latest light vehicle production forecast, and the best information that we currently have from our customers and suppliers, we are updating the guidance that we last provided on September 14th. We are now expecting product revenues to be in the range of $1.02 billion to $1.05 billion assuming FX remains at the current levels. The mid-point of our guidance range implies an organic growth rate of approximately 11%. Additionally, we now expect adjusted EBITDA margin rate to be in the range of 14% to 15%. Our effective tax rate for 2021 is expected to be between 20% and 22%. Capital expenditures are now expected to be in the range of $40 million to $50 million. And with that, I'll turn the call back to the operator to begin the Q&A session.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Luke Junk with Baird. Please proceed with your question.

First wanted to ask about the guidance, and specifically, I don't know if you'd be able to outline any swing factors within the range. Just trying to think of what range of outcomes you're contemplating in the fourth quarter as we look at the low-end versus the high-end of guidance?

Hey, Luke, let me jump in real quick first and just kind of frame it and then we'll try to answer the specifics there. But I think it's pretty clear that the story of Q3 and then leading into the guidance for the remainder of the year is it's really around the supply chain volatility and especially related to semiconductors and customer cancellations. I really want to emphasize that consumer and OEM demand continues to be very strong and growing for our product, for our thermal solutions product. We believe once the supply chain challenges are resolved, we're going to return to considerable revenue recovery and growth. I believe a return to high-teen EBITDA margin rates. If you take a quick look at Q4 of 2020, Q1 of 2021, I think those are solid proof points of what we can deliver and what we expect to return to. But with that, let me just give a quick view of what's transpiring for us specifically in the industry. Looking back at Q3, the industry expectation and at that time the customer information we were getting that we would expect to see a recovery in Q4. But certainly late Q3, up to the current moment, we've seen a rapid deterioration in the supply chain situation, especially related to semiconductors. And driven heavily for us by customer order cancellations. Customer volatility and shutdowns are even at a higher rate in Q4 than we've seen previously. This is even though our customer orders are really running high, and we feel we have to continue to assume that these cancellations will go on for the foreseeable future for us. Based on this, we really believe the IHS forecast for the fourth quarter is overstated. In addition, we're experiencing even higher volatility from our own semiconductor suppliers on our side. In fact, one of them very recently informed us of a supply gap to be expected in Q4, which could have a significant impact on our Q4 revenue as well. So our guidance is based on all these points that I just mentioned, which is, as of now the best information we have. We're continuously monitoring this, as you can imagine, really proud of our operations and supply chain team and global employees, led by Rafael Barkas, they continually find creative solutions that help us keep running. Although we expect this to continue for the foreseeable future, the information we're receiving from customers and our semiconductor suppliers would indicate that in 2022, we should return to a gradual improvement and possibly a recovery by the second half of 2022. So keep our fingers crossed that that maintains and now that we see things start to turn around next year.

So look specifically trying to narrow down your question on the fourth quarter. So let me give you a little bit of color on what our thinking is. So if you look at the mid-point of the annual guidance that we provided, it would imply a fourth quarter revenue that will be slightly below what we have experienced in the third quarter, for the reasons that Phil just mentioned. So it would imply a revenue of about $235 million, with an adjusted EBITDA rate of about 10% for the fourth quarter. So if you compare what we are expecting for the fourth quarter compared to the third, I think in terms of profitability, in addition to the decremental margin that you will normally expect in relation to the decremental revenue, we also expect to have higher costs net of recoveries in the fourth quarter compared to the third, particularly as it relates to spot buy and premium freight. An important point to note is that the recoveries that we received in the third quarter actually reflect a cumulative amount from the negotiations that occurred at the start at a couple of quarters ago. We also follow purposely the sequence as we try to go to our customer with the best and most complete information that we can have, in order to maximize the amount of the recoveries itself. So that's a little bit the dynamics that are happening as far as the gross margin is concerned. And then one last comment I would make on the OpEx side, in line with what we have seen and also mentioned in prior calls, we are expecting the fourth quarter OpEx to be slightly above the third quarter and is going to be primarily again, around R&D, as we continue to invest in Battery Performance Solutions, in ClimateSense, and making sure that we have a successful launch on these awards that we secured in the prior quarters.

Thank you both for that. That was some really great color. Next question wanted to ask about this quarter's awards. Phil has mentioned both in the press release, and in your comments on the call here that 40% of those awards were for electric vehicles. I'm just wondering if you could expand on what you're seeing in terms of specific products, packaging sector is similar to that. Essentially the question is, are you seeing a higher hit rate in more content per week on EVs or is it maybe too soon to tease that?

Yes. I think well, first of all, the quarter, the number of opportunities in front of us was a little bit lighter in the quarter just to get to the specific award number. And that's a result of OEMs kind of pushing off some of the decisions. I think a lot of that's based on their own resource constraints with the supply disruptions. Q4 looks pretty good, and the early part of next year, the pipeline of awards looks good. Definitely, as you say, a lot of EV opportunities in front of us. We're seeing a higher uptake of our climate solutions and a higher content for vehicles both on EVs. There is this continuum that OEMs are looking at kind of a transition from certainly more thermal devices in the vehicle to help them manage the power consumption. That leads all the way up to ClimateSense. Obviously that's the path we're actively working towards. But things we're seeing, for example, seeing more cars with interior heated door panels and armrests, definitely higher rates of the seat comfort product and the steering wheels. All these are helping them to reduce the amount of power needed for the HVAC system. So that's certainly the place. And of course, Battery Performance products self-connecting and battery heating, we mentioned air cooling products. So those all give us an added bit of content going forward.

And then, if I could just squeeze one more in, it's now been three months since you disclosed the first ClimateSense commercial contract. Just wondering Phil if you could expand on your comments on the reaction that you're seeing in the market now, the customer has stepped forward and looking to commercialize that product. And in terms of your own capability set, also wondering to what extent you have capacity to take on additional development contracts, let's say to the extent that there is interest in the market?

Let me begin with the production contract we are currently developing. The momentum for this project is significantly increasing with our customer. Recently, we hosted 20 top executives from this customer at our tech center for an in-depth look at the product, and we received outstanding feedback. They are very enthusiastic about it and anticipate that it will be a key feature in their vehicle upon launch. We couldn't be happier with how this project is progressing. Regarding the development project, you are correct. Now that we have this production project that is demanding many resources, we need to execute it flawlessly and prioritize opportunities based on the level of interest and potential benefits from these customers. Fortunately, we have two customers who are actively engaged in development projects, conducting testing evaluations, and there seems to be promising prospects there. This is maxing out our resources, but we are still working on showcasing our solutions to other customers and aim to establish a steady flow over time. Overall, things are unfolding exactly as we had hoped for ClimateSense at this stage.

Okay, Phil. Thank you for all of that color. I'll go ahead and leave it there.

Thank you, Luke.

Thanks, Luke.

Our next question comes from the line of Ryan Sigdahl with Craig-Hallum Capital Group. Please proceed with your question.

Thanks for taking my questions. Phil, you mentioned there's a more conservative industry production outlook for Q4 relative to IHS, helpful context there. Any sense for 2022 IHS forecasting about 10% production growth, any directional thoughts at least relative to what you're seeing across the industry?

Well, we kind of have this immediate short-term view, which is pretty tainted by repetitive constant order cancellations from our customers, and it's not slowing down into Q4. So that makes it very difficult for us to forecast how this is going to transition into the early part of 2022. It's really too early for me to speculate on what vehicle production might look like. I can tell you that we get information obviously from our customers and from our semiconductor suppliers. We're trying to triangulate that. There appears to be optimism heading into 2022 especially on the back half of 2022, and a gradual increase. We have to be careful. We've heard that before. I'm a little bit cautious. But I can tell you what we're thinking and how we're gearing up is that we're going to make sure once the floodgates open, we're ready to deliver. We have been very cautious about keeping our labor in place, keeping our facilities primed for when this volume kicks up. The feedback we're getting from our OEM customers is that their consumers continue to want our product and expect this to continue to grow. We have also done consumer studies on our own, and the results on those are phenomenal. The folks who have our product in their vehicles basically refuse to have a vehicle without it going forward. So I think we're in a really good position, and we just have to be careful that we don't overreact on the cost side given the current situation and are ready to come out of the gates running.

Switching over to the auto awards, you mentioned Next-Gen, Dodge Ram, CCS and Seat Heater awards and exclusivity across that. How does that compare to the previous program? And then is the CCS, is that an active heat cooler that will be back?

That's a ventilated solution. We have the CCS previously; we did not have the heat only. So now we've taken that entire package for the ramp.

Got it. One other one on the auto awards, you mentioned one award stayed with an incumbent, which impacted the win rate, but seems a bit surprising I guess to go from call it 90-ish percent down to 70% from that one award. Is there anything else to call out there?

Yes, it was a good size award that excluding that we would have been well north of 80%. That quotation was with a new customer. We kind of shoehorned our way into that discussion with the customer, got them excited about our product, and they allowed us to quote kind of last minute. We did a great job. They loved the product, they loved our pricing, but in the end, they looked at their timeline and said that they didn't have resources and really, they didn't feel like that at the time in the development process to move to us. The good news is we've really improved our relationship with that customer. I think it's going to produce opportunities going forward, but we're very transparent if we don't win an award. We keep track of that.

And Phil, maybe a point of clarification, is that a dollar value win rate or is that just a pure quantity of opportunities?

Yes, dollar value.

Got it. Last one for me. And then I'll turn it over to others. You have a growing and large amount of net cash on the balance sheet, any updated plans on how you plan to utilize that?

Well, yes, I mean, we kind of have following our same strategy. Number one is to make sure we're cautious and protective of the balance sheet, because the world is so volatile as we all see. So that's priority number one. As I mentioned, we're definitely on the lookout for potential acquisitions that could help us accelerate our growth within our focused growth strategy in the core areas that we're working on. That continues; we're very active there, and we're hopeful that we can find some potential partners that we could fold in, that would help us add to our technology portfolio, expand our scale a little bit and certainly look at regional expansion. Those are all areas we're looking at and pretty excited that we're in the position that we can move on things like that. Certainly, we're watching the stock price, and if it makes sense, we'll execute on our approved buyback authorization.

Our next question comes from the line of Matt Koranda with ROTH Capital. Please proceed with your question.

So Phil, I believe you mentioned earlier that there might be a supply gap from a semiconductor supplier that could affect the fourth quarter revenue. I wanted to confirm whether that is included in the lower end of the revenue forecast for the fourth quarter. Additionally, could you provide more details on which component is facing the most difficulties?

Yes. First part it is built into the low-end. I can't give you a whole lot of detail, but it's clearly a critical semiconductor in one of our ECUs that we use. We're actively working with that supplier trying to find solutions. We're looking at redesign and alternative chips and engaging with our customer as well. They're scouring their landscape to find solutions; there are some options that are starting to pop up, but it's a little bit too early to tell if we're going to be able to fill that void.

Okay, that's helpful. And then any other detail on other components where you're seeing the most tightness, I guess in your supply chain would be helpful?

Not really that many to be honest with you in terms of our supply tightness, and obviously, we're seeing inflationary pressures. A lack of willingness by some suppliers to negotiate price balance and value improvements right now. Everybody is swamped with just trying to keep things moving. Those are the biggest pressures we're seeing, but not a whole lot. Most of it is semiconductor-related.

Sure, that makes sense. I have one question regarding the guidance, specifically about the adjusted EBITDA margin reduction. Matteo, could you clarify how much of this is due to gross margin erosion versus increased operating expenses? I recall you mentioned a rise in R&D spending tied to your new programs, so I'd appreciate any insights on that. Additionally, you categorized the gross margin challenges in your release into three main areas: supply chain, price reductions, and wage and material inflation. It would be helpful if you could break down what's influencing the gross margin outlook included in the remaining guidance for the fourth quarter.

Sure. Let me start maybe from the last part of your question, just taking the third quarter numbers. So the 330 basis point decline in the gross margin rate year-over-year, when you compare the third quarter of 2021 versus the third quarter of 2020. Let me start with the negatives. The supply chain disruptions accounted for almost 390 basis points. This includes obviously the decremental margin and decremental revenue, plus the higher cost of goods sold, as I mentioned in my prepared remarks due to premium freight, lost productivity at the factories, and the spot buys. We had the usual annual customer price reduction, which is about 190 basis points, and then wage and material inflation, which is about 70 basis points. These are the negatives, and then these were partially offset by the recoveries that I mentioned, which is about 170 basis points. We had other supplier cost reductions, which accounted for about 100 basis points positive. That gives you the landscape of what happened in the third quarter gross margin rate. I would stress the fact that if you exclude the impact, the net impact of the supply chain disruptions from these results, we would have actually achieved a gross margin rate between 30% and 31%, which is what Phil mentioned, in one of the earlier question, what you would expect, and what we actually proved that we can deliver in a more normal environment. So this is the breakdown for the third quarter. As far as the fourth quarter is concerned, I think the primary driver of the reduction in the EBITDA rate is around again centered on the gross margin rate. That's primarily due to the reasons that I just mentioned. Reiterating one point I made earlier, we expect in the fourth quarter to have, when you look at the cost of premium freight, lack of productivity at the factories and spot buys, net of the recoveries, this cost will be a little higher in the fourth quarter compared to the third, just due to the timing of the recoveries. Overall, we have been able to recover approximately 50% of our non-inflationary costs. We are working through with suppliers and customers to hold or increase this level of recoveries moving forward.

Thank you. Our next question comes from the line of Scott Stember with CL King. Please proceed with your question.

Phil, you said that fourth quarter IHS, you view obviously think that they're being overly aggressive probably. What are you baking into your guidance how far off do you think they could be at the end of the day, in particular, when you take into account some of these supply gaps that you talked about?

Well, I think it's difficult to say exactly where we think it's worse than third-quarter kind of the way we're thinking about it. That's all based on the orders we're looking at, the rate of order cancellations we're seeing, the abrupt cancellations kind of building that in. So I would use slightly worse than third-quarter as a proxy for our thinking.

Okay, got it. Lastly on negotiations for price increases, I know this is always a difficult process over the years, do you feel that you will be able to get all the relief that you need, eventually?

Unlikely to get all of it. We're gradually chipping away and trying to get more, taking a four-pronged approach to it, Scott. One is obviously reimbursements for one-time costs, such as expedited freight and spot buys. Those tend to be a little bit easier and more discreet. Definitely looking at selective customers and methodologies to get price increases for inflationary pressure, that's much harder to do, especially given our contractual obligations to customers in certain cases. Where we can, we're using that. The last two areas that are a little more long-term but areas we find to be a little more successful would revolve around negotiating lower annual price reductions in the next years. That's something that customers are more open to discussing and then achieving better terms on New Business Awards. What that means is possibly higher prices, leading to better margins on those and better terms overall. Those are the four ways we're approaching it. It's a lot of difficulties in the discussion, which have led us to only be about 50% successful so far. I expect that to start opening up, especially as the situation starts easing. The automotive customer purchasing organizations are under a lot of pressure, just trying to keep their plants running. Setting up meetings to discuss these complex recovery discussions is not easy.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Phil Eyler for closing remarks.

Great. Thanks everyone for joining our call today. The results of the third quarter I believe demonstrate our continued focus on innovation, operational excellence, and cash flow generation. While we expect continued industry headwinds for the foreseeable future, our momentum in new awards, along with expanding demand for our new technologies and our continued focus on productivity position us really well to deliver significant long-term shareholder value. We appreciate your interest and support and look forward to keeping you apprised of our progress.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.