Sherry House: This is going to be very strong margins for the company.
Peter Rawlinson: John, this is a technology company play.
John Murphy: Yes, no, I understand. Okay, that’s great.
Peter Rawlinson: This isn’t an automotive supplier type of contract. This is a technology play.
John Murphy: Okay, that’s very interesting. And then just second…
Sherry House: It’s also very thoughtfully constructed such that the dollars coming in are anticipated to cover our costs as we go through the development cycle with them.
John Murphy: Yes. No, it seems like there’s a lot of opportunity here and need for this. Just a second question in the SG&A step-up, Sherry. I mean, you didn’t mention marketing dollars increasing as far as that step-up. But I would imagine those probably had some impact on the step-up in SG&A, or am I misinterpreting something? Because it just seems like we’re seeing a lot more commercials and there’s talk about this. So just curious what that marketing spend was and how much it stepped up or didn’t.
Sherry House: Yes. So marketing is certainly part of the SG&A. We stayed largely within the bounds that we had budgeted and planned for Q2. And as we have said last quarter, we really took a targeted approach. And so we’re really thoughtful about where those dollars are spent that we’re going to get the largest ROI. Now that we’re seeing those targeted dollars providing ROI, we plan to put more dollars into the targeted marketing spend, and then additionally, as we said, capitalize it through the incorporation and reinstatement of our original pricing program. As you go forward the next couple of quarters, I would guide that SG&A will continue to be up somewhat, particularly as we are investing in infrastructure. So this company is growing.
It’s growing globally and there’s important IT, G&A and launch costs associated with opening into some of these new markets, particularly marketing, that is going to happen. I don’t expect this to be significant but it could be up 15%, 20% as you look forward on a year-over-year basis. If you look at a year-over-year basis, say, maybe up 15% to 20% on SG&A.
John Murphy: That’s very helpful. I got a bunch more but I’ll follow up later.
Operator: Our next question comes from the line of Steven Fox with Fox Advisors.
Steven Fox: Two questions from me also, if I could. First of all, when we think about the rightsizing or slowing down of the manufacturing, given these lower deliveries than maybe you would have expected a year ago, how much further could you go if, say, you’re growing sales but maybe not by as much as you think? Like what are the backstops you have to sort of continue to narrow the gross profit losses? And then I had a follow-up.
Sherry House: Okay. So you had a question on manufacturing specifically, and then additionally, you had a question on gross margin more generally. So in manufacturing specifically, we were able to see some significant efficiencies due to productivity initiatives and the workforce reduction that we did earlier in the year. So we’re sitting in a good position relative to that. We don’t see a lot of creep-up in manufacturing labor as we exit the year. Might be a little bit as we transition into our new general assembly hall and we move to the logistics center that’s going to be on site. So we are being very thoughtful about the stage turning on of the new equipment with phase 2. So as we are in 2023, at this point, we’re really only accepting that we’d be turning on depreciation expense associated with the new general assembly hall and the warehouse, which would be essentially the internal logistics center.
