Q4 2019 Earnings Call
Towards the fourth quarter 2019, linear and financial results. That's his time all participants are in listen only mode. After the speakers presentation will be a question answer session. If you require further assistance. Please press Star then zero.
I wouldn't electronic sell through scrubbers comps drugs traverse the you may begin.
Thank you.
Good morning to welcome to the Gentex Corporation fourth quarter 2019 earnings release Conference call I'm, Dr. Bursty, Gentex 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 Finance and CFO.
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Now I'll turn the call over to Steve Downing, who will give the fourth quarter 2019 financial summary, Steve. Thank you Josh.
For the fourth quarter of 2019, the company reported net sales of $443.8 million, a decrease of 2% compared to net sales of $453.4 million in the fourth quarter of 2018.
The decrease in revenue on a quarter over quarter basis was due in large part to the strike at general Motors, which negatively impacted sales in the quarter by approximately 5%.
In addition to the strike, creating headwinds that impacted the north American market. The rest of the world light vehicle production declined 5% on a quarter over quarter basis, when compared to the fourth quarter of 2018.
A 6% decline in Europe, and a 10% production decline and the Japan Korea market quarter over quarter more than offset a modest improvement in the China market versus the fourth quarter of 2018.
The fourth quarter has always been difficult to forecast because of inventory adjustments that our customers that often occur at year end, but in 2019. We were also estimating the impact that the strike would have on revenue and profitability for the quarter.
Throughout the year, we continued to experience exceptional growth of our full display mirror product, especially with our launch customer General Motors.
By the end of the year GM had become one of our larger customers in 2019, which means we were disproportionately impacted by the strike.
For the quarter revenue into down 2%, but we lost approximately 5% in the revenue due to the strike in essence, if the strike could not happen revenue would have been up 3% for the quarter.
In terms of light vehicle production global volumes were down over 5% for the quarter, but even if you remove the impact of the strike from those numbers that global production was still down over 4% in Q4 versus last year. This put our outperformance to market for the quarter at 7%.
For calendar year 2019, net sales increased 1% of 1.86 billion compared to 1.83 billion for calendar year 2018.
Our initial sales forecast for 2019 was based on a global light vehicle production forecast that assumed at approximate growth rate of 1%. However, the actual global vehicle production rates for calendar year, 2019 were down, 6%, which correlates to our very strong outperformance to market of 7% for the year.
The gross margin in the fourth quarter of 2019 was 36.5 per cent compared with a gross margin of 37.9% in the fourth quarter of 2018.
The impact of the strike at General Motors cause margin headwind of approximately 125 basis points due to the lower revenue and the resulting loss profitability. During the quarter. In addition to our inability to leverage fixed overhead costs due to the lower sales.
The gross margin during the quarter was also negatively impacted by approximately 30 basis points of incremental tariffs when compared to the fourth quarter of 2018.
The fourth quarter change in gross margin was driven by these two distinct situations of the strike and escalating tariff costs that negatively impacted gross margins by 155 basis points in the quarter.
Aside from these two issues the overall gross margin would've been slightly better than last year.
For calendar year 2019, the gross margin was 37% compared with a gross margin of 37.6% for calendar year 2018.
The gross margin for the year was negatively impacted by approximately 70 basis points from tariffs versus 2018.
Other factors that impacted the gross margin during the year included the company has an ability to leverage fixed overhead costs on the lower than expected sales levels and annual customer price reductions that were not fully offset by purchasing cost reductions.
Considering the very challenging global light vehicle production markets the strike and the fact that we were steel built still dealing with some of our own product related headwinds in 2019. The team has done an excellent job of maintaining a consistent gross margin from 2018.
All of our teams have been focused on offsetting annual customer price reductions addressing incremental tariff costs and finding ways to minimize the impact of fixed overhead pressures given the lower sales levels.
The primary areas that help bring about this improvement were better than expected purchasing cost reductions improved manufacturing efficiencies design changes that led to cost improvements and the success of our full display mirror.
As we look back and compare this year to 2018, one thing it's very clear if not for the incremental tariff costs in 2019, our gross margin would have been slightly higher than it was in 2018.
Operating expenses during the fourth quarter of 2019 were up 9% to $50.9 million when compared to operating expenses of 46.5 million in the fourth quarter of 2018.
For calendar year, 2019, operating expenses were $199.8 million up 10% compared to $182.3 million in calendar year 2018, which is in line with the company's original estimates for the year.
Net income for the fourth quarter 2019 was $99.5 million compared to net income of $106.3 million in the fourth quarter of 2018, primarily driven by the reduction in revenue as a result of the strike during the fourth quarter.
Net income for calendar year, 2019 was $424.7 million down 3% compared with net income of 437.9 million in the calendar year 18, primarily driven by lower vehicle production levels increases and tariffs and the impact of the strike.
Earnings per diluted share in the fourth quarter of 2019 were 39 cents compared with earnings per diluted share of 41 cents in the fourth quarter of 2018 for calendar year 2019 earnings per diluted share were $1.66, which was a 2% increase year over year compared with $1.60 tool for calendar year 2018.
I'll now hand, the call over to Kevin for the fourth quarter financial details. Thank you Steve.
Auto Dimming mirror unit shipments increased 3% in the fourth quarter of 2019 compared with the fourth quarter of 2018, and also increased 3% for calendar year 2019, when compared to calendar year 18.
Automotive net sales in the fourth quarter of 2019 were 433.8 million down 2% compared with 442.8 million in the fourth quarter of 2018.
And for calendar year, 2019 were 1.81 billion up 1% compared to $1.79 billion in calendar 18.
Other net sales were 10 million in the fourth quarter of 2019 down 6% compared with 10.6 million in the fourth quarter of 18 and for calendar year 19 were up 13% to $48.4 million when compared with $42.9 million in calendar 18.
Now for a balance sheet update.
The following balance sheet items represent a comparison versus December 31 of 18, which are also included in todays press release cash and cash equivalents were 296.3 million up from 217 million, primarily due to cash flow.
Cash flow from operations and proceeds from stock option activity, which was partially offset by share repurchases dividend payments and capital expenditures short term investments were 140.4 million down from 169.4 million due to investment maturities and long term investments were 139.9 million ups.
Lately from $138 million.
Accounts receivable was 235.4 million up from 213.5 million, primarily due to the timing of sales in the quarter.
Inventories were 248.9 million up from 225.3 million, primarily as a result of increased raw material inventory.
Increases in raw materials are to support first quarter 2020 production and sales forecasts as well as higher levels of component inventory with longer lead times and accounts payable increased to 97.6 mine from 92.8 million.
Quickly for some cash flow highlights the fourth quarter 2019 cash flow from operations was 122 million down from 154.2 million in the fourth quarter of 18.
Driven by lower net income for the fourth quarter as a result of the strike as well as working capital fluctuations and for calendar year 2019 cash flow from operations was 506 million versus $552.4 million for 2018, primarily driven by decreases and net income and changes in working capital.
Capital expenditures for the fourth quarter of 2019, or 26.8 million compared with 17.2 million for the fourth quarter of 18.
And for calendar year 2019 capital expenditures were 84.6 million, which finished below our original estimates of 90 to 100 million and compared with 86 million for calendar year 18.
And depreciation and amortization for the fourth quarter 2019 was 25.3 million compared with 21.4 million in the fourth quarter of 18.
And for calendar year, 2019 at depreciation and amortization was 104.7 million compared with one or 2.2 million for calendar year 18.
Now for some details on share repurchases the company repurchased 2.4 million shares of its common stock during the fourth quarter of 2019 at an average price of 20 855 per share and for the year ended December 30, 119, the company repurchased 13.8 million shares of its common stock at an average price of 24 or six per share one rig.
During the share repurchase program as part of our overall capital allocation strategy. It's important to note that the company maintains a broad based stock option plan for employees as a key incentive to retain grow and reward them during the fourth quarter. The market cap of the company reached all time highs and the result of the stock price movement was an increase in the dilution rate of the options for.
Graham.
The company continues to believe that the share repurchase program that is in place currently not only offsets the impact of the options program for employees will also have a meaningful impact and increasing shareholder return.
And as of December 31 of 2019. The company has 20.1 million shares remaining available for repurchase and the previously announced plan ill now hand, the call over to the needle free products and CES update.
Thank you Kevin earlier this month Gentex displayed at the 2020 consumer electronics show.
The show has become our preferred platform for gentex to showcase or technologies and capabilities.
More importantly, this venue in format allows us to gauge our customers insurers in the new ideas and proof of concepts that we display enabling us to get access to the voice of the customer quickly and with direct feedback.
This year at CES was a landmark year in debuting new iterations of existing technology completely new technology concepts and products and even product design for a new vertical.
Our first area of new product concepts was designed to show the evolution of our full display mirror.
A functional prototypes of a touch screen version of our FDM was on display and included various features including pinched a zoo tilt pan brightness control and the integration of soft into the mere display.
In terms of the software interface, we showed severance several different examples of features that could be controlled by the mirror, but as you can imagine many of the example centered around Homelink and Homelink connect interface options.
We also introduced new seen enhancement features for a full display mirror products.
The first example of seen enhancement included active infrared elimination of the rewards seem to help improve visibility during nighttime driving.
The second software enhancements was a lean and line projection for the FDM to assist with revision by providing orientation and location of other vehicles.
This feature also assisted driver or passenger in the semi autonomous vehicle with better lean awareness and lane keeping information.
Additionally, we showed for the first time publicly a digital video recorder system implemented in a mirror.
The prototype were shown the prototype she was very similar to an OEM sourced program that we've been in launch with for the past 12 months.
This initial product combines the DVR system with our full display mirror and includes the ability to record from both a forward and reward facing camera.
The system is also designed to to include removal memory and is fully designed to meet OEM specifications.
Our next product area of focus was vision systems. The vision systems were shown on three separate vehicles to showcase our capabilities to engineer provide full systems integration in any of the following scenarios.
First traditional auto dimming mirrors second is a hybrid camera monitoring system solution that includes auto dimming outside mirrors with cameras located behind the glass of each outside mirror.
Third camera in the roof choose or GPS antenna.
This system utilizes our full display mirror as the focal point of the digital seeds.
This was showcased in our booth on both a mobile exceed 90, and an Aston Martin DBS Super luxury era.
As announced during CES, we're working with Aston Martin to bring this hybrid CMS solution to future vehicles.
The third vision system was a full CMS solution that utilizes cameras on the outside of the vehicle to replace traditional meters are version of the full CMS solution was deployed on a Cadillac Cts the in our booth.
This system included Gentex designed side view cameras and exterior pods to interior curved OLED displays and the third camera empowering our full display mirror.
Another new proof of concept shown at CES was a driver monitoring system that utilize the unique attributes of the mere location to monitor and alert based on the drivers gaze location of attention and level of distraction.
Our unique location in them, you're also opens the door to incorporate full cabin monitoring solutions in the future.
Utilizing our history and smoke detection systems, we displayed a new product concept that is actually a full program to a robust taxi company that will deploy gentex technology in the form of a cigarette smoke or beeping censored mint autonomous vehicle.
The sensor is located in the HVAC system of the vehicle and is designed to detect and alert the ruble taxi company in the event that a passenger violates the smoking policy in the autonomous vehicle.
Our next local area was a product offering that took us to completely new geography of vehicle as we showcased the new product concept for be pillar design.
This external be pillar concept incorporates one or more of the following gentex technologies, the mobile glass display technology and cameras are sensors for personal identification.
This product was conceptualized for use in an electric vehicle rideshare vehicle autonomous vehicle or even a privately owned vehicle to serve as a welcome feature and to provide key information to the driver passengers.
In terms of Dimmable glass, we showed several new concepts for automotive, including enhancement and further development tour Sunroofs.
New concepts, including driver and passenger side windows and a prototype windscreen visor concept.
We also announced new aerospace customer on that the Booth, we had a functional windows that we partnered with Airbus to develop.
Disorder sourcing represents our second aerospace customer and our second program were Gentex will be a tier one supplier.
Our last new Technology review was a new market for Gentex, we utilize our core competencies and partnered with a world leader in medicine, the Mayo clinic to co develop a cutting edge lighting system designed to revolutionize operating room lighting.
The system uses intelligence to remove glare from what surfaces maximized light on target areas and remove shadows cast from people are obstacles that block the intended path of lighting system.
In terms of new product innovation and development CES 2020 was a high watermark for the company in terms of the breadth and depth of the technology offerings and we're excited to see all these products resonate with our customers over the next two to three years.
I'll now hand, the call back over to Steve for 2020, 2021 guidance in closing remarks.
Thanks Neil.
Our forecasted guidance for calendar years, 2020, and 2021 are based on the mid January 2020, I just market production forecast for light vehicles produced in North America, Europe, Japan, Korea and China.
The current I just market light vehicle production forecast for these markets is expected to decrease approximately 1% for 2020.
With a 1% increase currently forecasted for 2021.
Based on the current 2020 vehicle production forecast the company estimates that net sales for the calendar year 2020 will be between 1.91 and $2 billion.
The company also estimates that the gross profit margin for calendar year, 2020 will be between 36 and 37%.
The gross margin estimate includes approximately $20 million an annual costs as a result of tariffs that were put in place beginning in 2018 and they have continued to increase throughout 2019.
The company has worked hard to mitigate the escalation of tariffs by significantly reducing our exposure. However, this still remains a meaningful costs both on imports of raw materials as well as on products sold into the China market.
The company estimates that operating expenses will be between 205 and $215 million for 2020.
We continue to invest heavily in technology as we fund the development of our current product portfolio and create iterations of those products that help keep these products, new and attractive to our customers.
We have also been investing heavily in the next wave of innovation many of which were shown for the first time at CES. This month and included new products for automotive aerospace and our newest developments and intelligent medical lighting.
The company currently is estimating at the annual effective tax rate to be between 15 and 17% for calendar year 2020.
Creation in the tax rate will occur from time to time and these are driven primarily by the impact of the FDI calculation R&D tax credits state tax rates as well as discrete benefits related to stock based compensation.
Over the last several years the company has been more disciplined about spending capital appropriately based on the overall business need the forecast for future growth economic conditions and upcoming product launches and we will continue to manage the business in this manner.
Based on that the company estimates that capital expenditures for 2020 will be between 85 and $95 million and that depreciation and amortization expense will be between 105 and $110 million for calendar year 2020.
Based on the mid January 2020, I, just market forecast for light vehicle production for calendar year 2021. The company currently expects 2021 revenue growth of approximately 3% to 8% above the 2020 revenue estimates.
While the current forecast for global light vehicle production appears to be stabilizing it certainly does not provide any tailwinds to our growth rate in 2020 or 2021.
Additionally, although there have been some improvements in global trade relations tariffs still remain on incoming materials and on our exports into the China market, which create headwinds to growth in the domestic China market and of the profitability of many of our products. So while the underlying market conditions continue to be difficult. We are optimistic about our ability to continue the true.
Kind of outgrowth versus the market for 2020, and 2021 based on our targeted growth rate of 3% to 8% per year.
This growth rate will be driven by increased penetration rates of our cormier products continued growth of our full display mirror product and launches of the new integrated pull module product.
The company remains committed to investing heavily in new technology in the area vision systems connected car and Dimmable glass.
As we look back on 2019, the industry will remember a year categorized and defined by global vehicle production declines of over 6% a strike that caused large disruptions and inefficiencies trade wars that created product availability concerns and cost pressures.
At Gentex, what we will remember that we found a way to grow despite industry headwinds that we stabilized our gross margin despite tariffs and supply constraints that we grew EPS for our shareholders, all while innovating and creating new products at the fastest pace in company history.
We learned a lot during 2019, and we're hopeful that perhaps 2020 will be slightly better environment to operate in but regardless of the backdrop, we're confident in our technology offering and the capability of our team to create growth and shareholder returns for years to come. Thank you for your time today and we can now proceed to questions.
Ladies and gentlemen, you have a question or comment at this time. Please press Star then the one key on your Touchtone telephone.
If your question has been answered question with yourself from the Q. Please press the pound.
Our first question comes from Chris Van Horn with B. Riley Fcr.
Good morning, Thanks for taking my call. Thanks, Chris.
So I just want to focus on C., yes, because because you had a lot going on there should a lot of new product and years past you've shown.
Kind of revolutionary products, if you will for the auto space and then you start to get awards and see those come to market.
In the following 12 to 18 months. So I'm just wondering you had the CMS Award. This year I didn't you showed a lot of new things around full dispute display mirror can you give more detail about what the pipeline looks like for some of those automotive related products and maybe some some more detail and timing.
Sure. So what was what was really unique about 2020 CS This year was.
A lot like you mentioned a lot of times, when we show something FCS even this year, we did it too I mean, there were two products in particular that we showed for the first time publicly but we already had source programs for and that would been the smoke vape sensor and also also the DVR product. So those even though their brand new products and we haven't really shown them to a lot of customers. Those are actually co developed with though.
So those are already in line and launch phase so those should be producing revenue in the next two to three years.
If you look beyond that and CMS as well as something that we obviously partnered with on Aston Martin.
But we continue to show full full capability on that product lineup that when we would expect to take a little longer in the reason why as an OEM has to make a strategic decision about how do they want to execute do they want to execute a CMS type product and then if so what does that design phase need to look like so some of those products are further out probably three to five years out before though generate revs.
Now some of them are here now and then obviously some of them like the new product on the medical lighting side, we think thats a two to three year development to finish up that development and get ready for launch.
Okay, Great and then and then kind of sticking at CES on the on the aerospace side.
Obviously big win with Airbus, but you also showed some other technologies and I'm wondering was that was that OEM driven was it a boeing or Airbus or even a business jet.
Driven decision to go down that product route or because you were developing other products for the aerospace market. You said look we've got some things we can kind of transfer over there and now you're going to go to market with those.
Yes, there were multiple multiple other technologies that we demonstrated between the smart lighting for beyond the medical but for aerospace as well as some of the sensing systems and those are more utilizing some of our core competencies competencies and demonstrating what could be done into that aerospace markets more driven actually through customer interest.
And then combining that with our capability there was the I'll call. It the to a mirror that we also demonstrated which was a reflective surface just like our full display mirror that had displays behind it that was actually an interest from an OEM.
On from an aerospace OEM that we worked with to develop the concept and then Archer trying to work further to enhance that and get that ready from a.
From an award perspective.
I think I think the interesting thing there is.
What we found with our aerospace customers once we get once we get down the product path and we are developing our our window capability with them what they start to see as the other things that we do at Gentex and so there were the interest wasn't necessarily specific to hate show US. These products was more about we love. The fact that Gentex comes in with unique concepts and is somewhat.
Disruptive in the space. So our goal in the Aerospace show and then at CES was to show some as disruptive concepts and then really start to put the technology foot forward beyond just dimmable glass, but into other areas that were we feel we have capabilities and for aerospace.
Okay, Great and then lastly from me.
We see the mirror shipments for full display mirror in 2019 was well above expectations.
Any sense on how that any sort of visibility and how that number might evolve over 2021, and 2022 or even 2020 as well.
I think if you look at the last three years.
The growth rate and you kind of you kind of average that growth rate out and then cast that forward thats kind of what our expectations look like over the next couple of years from a growth rate perspective.
We definitely we definitely this year is a big step up.
So we're not saying it's going to be the same number of units, but if you look at that average over three years, we think thats, a pretty good indication of where it should be in over the next two to three years.
Okay got it thanks, so much for the time thanks, Chris.
Our next question comes from James pick rule with Keybanc.
Hey, good morning, guys.
Morning.
First DM, how many nameplate do you expect to be on by the end of 2020 and with like with how many Oems. So I believe the numbers for for 2019 were five Elise across 38 nameplates.
That was what was shipping.
Estimated.
I think over the next over 2020 I want to say that we're adding we should be shipping on an additional two is it two or three Oems. We had this year I think we had two or three Oems this year.
And I don't want to get the number of nameplates quite frankly, just so I don't have in front of me for sure three but.
Two to three OEM should launch this year and then obviously, we'll see some propagation of additional nameplates not only on those Oems, but on our existing Oems as well.
Okay, and if you do give us a unit volume.
For 2020, we'll just had 200000 units to that whatever number two.
The real forecast.
Well, we're joking that were joking ahead of the call that what we're going to say about that and Kevin obviously, a good idea Fi went with my at least half a million units.
Yes.
No.
If we just think about.
Maybe.
You have your 2020 guidance out, but like just sticking out 2021, big let's see.
Most reasonable scenario.
You know allows gentex to really start to deliver margin improvement again like what would.
Pieces.
Got it get the company back on track for that to happen.
I think I think first and foremost one of things we've been fighting through and we've been talking about quite a bit or the headwinds to our revenue. We had some legacy products that have been causing headwinds on the revenue side, and obviously that hurts on overall overhead exposure.
Stability and vehicle production would be perfect. We don't need we don't need massive growth in the number of vehicles produced but 6% headwind of vehicles produces obviously problematic.
As you look as you look beyond that you start talking about tariffs and things actually directly impact gross margin some stability in terms of trade relations.
Even on wind down or pull back and those would be incredibly helpful.
Beyond that it's about execution getting that growth rate above 5% is really where we start to see margin expansion.
Okay. That's helpful and then just.
What are you baking into your 2020 in terms of incremental tariff impact. While this year was about 17 and a half million dollars and what we had talked about on the prepared comments as right now we have about 20 million baked into the into the forecast 17, and a half is a cumulative all in number as opposed to incremental for 19 or that was the.
Total for 19, Yes, and then we're implementing 20 for that reason why we're estimating a little higher as because if you look at the second half of 19, there were increases in the tariffs mid 19, I think in May and June and so those are the second half run rate was a hair higher than the first half run rate.
Got it thanks guys.
Thank you.
Our next question comes from David Kelley with Jefferies.
Hey, Good morning, guys. Appreciate you taking my question I guess, you mentioned the legacy revenue headwinds.
Can you update us on what the full year 2019 impact of Smartbeam and driver assist was and then any color on.
How you're thinking about 2020 and the update on the timing of the Roebel Mobileye roll off would be really helpful. Yep.
Good question for 2019, it actually was about 275 basis points of headwind.
Two thirds of that was mobileye. The other third probably smartbeam and for 2020 were looking at it probably another 150 to 200 basis points of headwind and then.
One more year really have impact in 2021, probably closer to 75 to 100 basis points.
And then then will be done talking about it hopefully.
Okay.
Okay and that fall off in most of that fall off in 2021 is the last bit of Mobileye.
Okay perfect that answers my question and then I guess.
Maybe switching beer gears or that I mean.
Okay Fair sounds that does sound yet another busy earnings [laughter]. So the revenue guidance assumptions I mean, I think most to date at least our assuming global light vehicle production.
Built worsen.
Somewhere around.
The number seems to be minus two to minus four.
Are you planning for anything as it relates to 2020, some downside to that minus one that's that could be embedded in that revenue guidance as well or is this market spreads specific or something you are saying on the horizon that may be might provide some upside versus what some of the others are thinking out there.
I think I think we given what's happened in the last two years in particular, we tend to take have a little bit of a negative slant on the IRS estimates.
Generically not just in 2020, but so our model and we look at it we're probably a little more pessimistic than what those numbers suggest especially given what's going on in China, right now knowing that their shutdowns or happen and due to the virus and there's probably a couple of weeks of exposure. There if that continues so.
Not that we would be disproportionately impacted based on changes in China, but it definitely does affect where we've been growing over the last couple of years. So we do have some we do have to keep our eye on that beyond that what we're hopeful for is that if this if the markets just stable, even if it's slightly down but stable at gives us a great platform to operate in on the tough part is when you talk.
Strikes and some of the other inefficiencies that have happened, it's really tough to plan and it's very difficult obviously to get efficiencies when you're turning on and turning off lines and so one of the things that we're focused on and hopeful for as that even if the numbers are perfect at least there'll be more stable environment to operate.
Great Great really appreciate the color. Thank you. Thank you.
Our next question comes from David Leiker with Baird.
Good morning, Good morning, David David.
I was wondering first of all of the these year end adjustments dividends for I presume most of that is.
And with the business that you have as tier two suppliers that correct.
Yes, most of its with our tier one customers yep.
And.
Can you quantify it at all how big of a number that was it was it wasnt as big this year I mean, it wasnt a huge problem. It was more about the it was more about that the biggest impact was the strike in Q4.
Great.
And then I wanted to circle back a bit on.
The the commentary, though about the new launches and what 20.
20, 122 might look like is there any sense.
Is there any choppiness in any of that or does it look like your launch as you're going to be fairly even as as they come on line. The next couple of years.
You talked specifically about FDM or generically the FDM FDM no I don't think there'll be a lot of Lumpiness I mean, I think it'll be pretty well.
Pretty spread out throughout the year.
As Jim how close is Jim the being fully launched with your product.
I would say I would I'm trying to put in a percentage I would guess, they're probably about 80% of the way there in terms of number of vehicles and nameplates.
You say over the next couple of years, you'll have some of those nameplates that we launched on a few years ago start to roll off and become new vehicle. So.
You'll you'll see I mean, what would look like a loss as they design a vehicle and replace it with something else.
Right now right now we feel really comfortable about where we're at with MGM launch now it's more about less about the number of vehicles are on right now, it's about take rates and penetration of that product into the GM lineup.
Just on my next question.
I'm guessing you're seeing pick take rates at GM of those product set those vehicles that have launch that just continuing to see take rates are where were you what kind of take rates are you seeing on the vehicles that you have ft Oman.
Depends on which level of vehicle obviously in some of the vehicles like the Cadillac lineup, you're seeing upwards in the high Ninetys and then if you're in the more of the volume vehicles, you're in the mid Twentys to mid 30% range.
That is that consistent across the other customers or as a higher at GM than others.
That was really high at GM. If you look at like Landrover for instance, we do very well on land Rover vehicles, I would say probably in the 70, 80% range is kind of where we're at on on the land Rover lineup beyond that it depends on the OEM and it really in their strategy and which vehicle. It is so.
I would say on on average when we get a customer we kind of expect to be somewhere in the 30% to 40% range is kind of a good rule of thumb.
Okay.
Thats all that I really wanted to dig sort of thank you. Thank you. Thanks, David Thank you.
Our next question comes from John Murphy with Bank of America.
Good morning, guys.
Actually John just just wanted to.
Sort of thing about the 2020 guide here I mean, you're looking for revenue up about 5% at the midpoint mid should we think about units at the growing it at the same rate.
Or could they actually grow a little bit faster and some of these legacy legacy products, just create a little bit more pressure on revenue premier trying to understand how you're thinking about the revenue in the units for next year.
Actually we think given given the headwinds on the production side and I've kind of take on that we wouldn't expect units to be above revenue, we actually think that with the growth in FDM, you're going to continue to see kind of dollar content increase on that side and so we think units will probably be a little lower growth rate than revenue.
Okay, and maybe just a follow up on that I mean, we looked at the fourth quarter I mean, the revenue Premier when you simply Jake automotive revenue divided by the total shipments was was I think you down about 5% me is that a lot as I have a lot to do with GM strike in a sort of an anomaly.
Or is that something is or something else going on there on legacy products below this.
It was primarily due to GM, because if you think about them as a content FDM as a big part of it Homelink, which is not included in that number it's a modular base, but then secondarily the driver assist primarily mobileye as its highest one of our higher ASP products. So the combination of both of those.
Drove ASP decline while on the other the other thing I would I would add there as we see growth rate in the quarter was very high end. So those are below average ASP and so whenever you have always see growth rates much higher than IC growth rates, you're going to see your NFC ASP deterioration, but like we always talk about that tends to be a good signal for long term for margins to.
Realty.
Got it and then that actually leads to my next question on on the gross margins I mean, basically looking for flat to down year over year tariffs, you're highlighting as a headwind is there any anything else that would be sort of wait I mean with that kind of revenue growth you'd you'd expect there to be some pretty good gross margin uplift.
I think just in general you have normal annual customer price reductions and what we know to be like little tougher market from a supply standpoint to get cost reductions at a supply base.
But the biggest the biggest factor you point out there are the tariffs and what we're seeing as we grow in China for instance, and those tariffs on our products that we export into China.
Do drive this tariff costs higher not only the thing we always and I'm talking about of the incoming it we talked about a lot from the supply community.
But for us about half of those tariffs on our exports back into the China market. So.
As we hopefully we'll see a rebound in the China production levels, we would expect those tariffs to move proportionally with that what we hope to be a growth rate back into China.
Got it that's helpful. And then as we think about sort of the mutations easy Airbus Windows as well as what you're working on the Mayo clinic with the operating room lighting.
Do any of those roam on.
In the 2021 timeframe are these really sort of two to five years out and how should we think about the revenue and gross margin opportunity there.
Yes from a timing side the.
Aerospace window side, we'll start rolling in beginning part of next year and then the we'll talk about the medical lighting. That's that's two to three years of development and then you are probably closer to four to five years out before that would actually contribute anything.
Got it I mean, and the economics on both of those as far as margins I would imagine will be significantly higher than your corporate average that a fair statement.
Thats the hope.
Okay.
Then just lastly on the Capex I mean, what has happened here I mean, it seems like you guys are executing and putting in lines and everything that you need.
I mean, where there's something going on in the past, where where there was sort of just maybe a slight lack of discipline in capex spending or is there something else that you're kind of secret sauce or uncover year as you're being a lot more efficient.
Yes, I think I think there is a combination I think one of the things we've worked really hard on as a management team. The last few years is making sure. We're planning out further that allows you to spend more efficiently you're not rushing the buildings facilities and lines in place.
Some of it as us just trying to manage to the market that we're in and being being cognizant of what's happening from a growth rate perspective, knowing that if we want to protect margins. We gotta. We got also protect for overhead issues and as overhead issues are compounded when you have lower growth rate periods and so Fortunately the last few years, we've been focused on that that allowed us to have quite a bit of.
Margin stability this year, whereas if we had overspent without the with a single digit low single digit growth rate would have been a really difficult to absorb that extra overhead. So.
Part of it is being disciplined part of it as they want to say necessarily as a lack of disciplined before but there's definitely some things that we looked at and said we should be able to do better than that and so we've been focused on that as a team for the last couple of years and Thats now it's become part of our DNA.
Great. That's awesome. Thank you very much.
Thank you.
Our next question comes from Ryan Brinkman with JP Morgan.
Hi, Thanks for taking my question.
Maybe just to start with another one high on the new medical business that you're pursuing how are you thinking about the various used cases for the product and and how are you thinking about the associated.
Total addressable market you know to the extent that you've done that work and in can share.
Yes, so what's what was interesting.
What was interesting about the product concept and the partnership with mail was it was focused on a problem statement that they have been working on and trying to solve for a long time, which was.
General lack of technology intelligence on the ability for surgeons and operating room staff to really execute well in that environment, obviously, our history with machine vision and control and lighting and automotive was a good building block that we began with and started to make enhancements to that product.
The real the real use case, there the available market. There's obviously a number of operating rooms. The system itself a scalable in other words, there kind of pods that you can put their ceiling mounted flush so with the ceiling. So you can scale based off of the need to that operating room in terms of one of the things that we're excited about longer term as if with the machine and the intelligence system you.
Can go to a fewer number of lighting pause and start to address not only operating rooms, but general care facilities.
Dentist's office to orthodontists appoint doctors' offices, its theres a lot of available market outside of just the traditional operating room and so when we look at the scalability of this system.
We think theres plenty of market available we know there's a lot of work to do them get this through not only the development phase to make sure. It works as well as we think it should but then also through the clinical trial process and then also FDA approvals, but when you start talking about all the steps, that's where we come up at that three to five year kind of window, but weve.
At this point in the development phase a couple of years into this we don't see any reason why we can't go ahead and complete that development cycle. All the technical hurdles that we saw at the beginning we've gotten through most of those I know there will be a lot more as we continue that evolution and development, but it's pretty exciting because it is a very scalable system and you can literally go from one or two pods up the.
And our 12 per room, depending on the need.
Okay. Thanks, and then when it comes to the development cost to support the medical business or the beep sense or the new camera monitoring systems et cetera to what extent have these costs already been running through your R&D line and then as a follow up im not sure how much you can or want to disclose but are there other kind of like left field to things that you are work.
On that are also already reflected in current R&D that we don't yet know about similar to the medical revelation what percent of your E. R&D would you say is associated with new automotive and non automotive product categories that you are not already in today.
Sure. So I would say the vast majority of the cost increases that we've been talking about all over the last two years and step up in R&D spending those are already running through on the medical supporting aerospace and medical I'd say, we're 80% of that already know or is there might be some small some small increases to that that would drive R&D higher as we move through these next couple of years.
But at this isn't like this is going to double R&D spend or even be a huge mover to that's already reflected in our current spend and to answer your question on the other yes, theres always some crazy ideas that we're working on that are pretty far out there that are already in the budget as well, we usually don't talk about them until we feel like we have a market or a partner a customer.
And the reason why is.
The vast majority of these ideas and up kind of evolved failing are evolving and becoming something different.
Just one on the medical side, we felt really good about where we were with our partnership with mail and that the relationship that we've developed with them and we felt like it was the right time to kind of show that to help kind of get the market aware of what we're working on and what what we think could be coming down the pike in the next couple of years.
Got it Thanks, and then just lastly from me you mentioned that you're basing your outlook for global light vehicle production minus 1%. Upon I, just I know thats consistent with your historical practice a few suppliers earlier this week, though assumed global production more like minus 3% in 2020 bit below like Jeff.
Just curious how you're thinking about the trend in global production. This year do you think theres upside or downside to various regions and then maybe just what the latest you're seeing on the ground in China is.
I'd say, we would tend to agree with that that theres, probably more downside risks than upside potential.
So we kind of build our forecast around that looking at you go through some situational conditioning and look at and say, okay. What is it what if it if it's down an extra percent or two on what is our forecast look like we believe that our guidance range encapsulates a couple of points I'll point or two more of downside, obviously, we would love to see it just stable or flat or even.
A slight uptick, but we're not necessarily dependent on that depending on where those where those headwinds or uplifts come from it may or may not help us I mean, we are very geographically.
Kind of nuance, so you've got to be careful of just looking at vehicle production. What we look at is where what where we are growing in the most in those primary markets, especially the more mature markets, where average vehicle sale prices are higher and then also looking at what segmentation of vehicles those headwinds or challenges our CFO.
I think from if it's coming from a segment vehicles is probably not going to impact us as much if at CD any obviously, we're going to have a disproportionate exposure to those those level vehicles.
I see thank you.
Thanks, Ron.
Our next question comes from David Watson with Morningstar.
Thanks, Good morning.
It is.
Kevin.
I think earlier you were talking about inventories at the higher raw materials due to some longer lead time.
Products coming and also some higher production coming if I heard right can you just are you able to be a bit more specific as to what those products are among customers have higher production.
Now from a customer perspective, but it's really the general statement around FDM and the costs of the components related to FDM displays electronics, all the things associated with that and building up for what was a shortfall in Q4.
Because of the strike and then build back and what we're seeing kind of going into into Q1, one in the put you as an example, like an LCD right now you're talking about eight months of lead time to get those components. So in the strike happen and it happened that quickly we've already got the components on the on site orders for our customers, but then it comes with zero sales for five weeks so.
Obviously, you're in the store inventory starts to change pretty quickly when that happens.
Okay.
We had a little bit of sewing and use China trade relations recently.
I know you talked about a dollar tariff headwind, but.
I missed the first one of the call. So I apologize if you mentioned this but the.
Any anything you can say on on.
Basis points back I know, you're talking to 110 minutes before.
Thats kind of where we're at an all in is around 100 basis points of total exposure in 2019, we're modeling in about $20 million worth of impact for 2020.
Which is around the same impact now as Steve also mentioned as if things grow in China, which we hope.
Tariffs actually do incrementally get a little bit worse versus what the mix was in 2019 because of all of our imports into the China market.
Our tariff rates there are.
At this point about half of what the total tariff exposure is.
Okay. Thanks, guys, Thanks, Dave shipments.
Our next question comes from runs that go with Craig Hallum capital.
Hey, guys.
Right.
Leads to a virus related disruptions going on in China here.
In any impact to either component supply, you asked or or shipments into China.
Yes, not so much on our shipments into China, but on the incoming supply side, you definitely see some things happening there I mean, nothing nothing thats catastrophic like it was during the natural disasters from a few years ago, but.
More problems just getting components a on time.
Finally, definitely especially during the trade like during some of the trade disputes there were some slow down in the processing at ports and how things were happening. So something we were keeping our eye on more importantly for us in order to offset a lot of those terrorists. We've had some change in supplier locations and all and ultimately some change in suppliers to help find areas, where we can get sourced outside of those.
Outside of those areas would be impacted by tariff. So some of it was things that happened to us. Some of that were things. We are actively trying to pursue in order to us get cost down. So those continue to happen. They are not definitely not as bad right now as what they have been so we continue to watch it in Euro is always a little careful to.
Count your chickens on me just nervous that somehow some changes and then theres a disruption and given the complexity of our industry in the supply base, it's something we always keep our eye on.
And as you talk about will be suppliers in locations is that primarily to other regions in China or is that outside of the country. And then secondly, you mentioned you talked to what kind of higher lead time for building some inventory components, but is there any thing related to kind of is the situation in China on what you're also building some inventory components.
[music].
No no nothing thats going on in China, that's causing that build in inventory it was really.
Really there's a lot of components that come from China that we use and FDM products for instance in some of our other products that as the strike happen we needed to have those parts in order in the late fall in order to have them here.
Oftentimes 12 to 16 weeks ahead of when your own you over those deliveries to your customer and so we have those parts already in house and already coming and then when you have five weeks stoppage of of ex Partes, you're selling your customer you see the inventory level swell and you're not stopping the incoming supply very much because you know yet the ramp back up.
Or be prepared to ramp back up.
Late fourth quarter early Q1 to help support your customers. So thats whats really driving the increase in inventory.
And then you get a second part of that question.
Oh, yes, the other part of the vast majority of those when we moved we're moving changing either the existing supplier to a different location. They had outside of China in order to get away from the tariff situation.
In some cases actually changing the sourcing to a different supplier outside of China.
Got it.
Last one for me and maybe I missed that earlier, but did you guys give the new nameplate launches you had in the quarter like you normally do and then also within that kind of breakout between advanced features geographic regions products et cetera.
No. We didn't go through it just Neal section was long enough and who is about ready to pass out after cover and all that said, we decide to give him a break but basically the launches for full display mirror in Q4 were right in line with what our estimates were so theres a couple of them. We didn't we weren't going to mention by name because they havent shown up on the customers websites, yet or are they havent made an announcement of them but.
We've we've gone through our launch we've gone through our launch phase and have begun the shipping process. It just hasn't hit the marketplace ship.
Got it and then everything else fair to say it's.
Finally in line with kind of similar quarters previously or was there yes, exactly the normal the normal kind of product launches.
Usually somewhere above 50% of the product launches, we do or some type of an advanced feature.
Continued growth and even despite the things that are going on continued growth in China and market for us with our base mirror applications. So all in all pretty pretty similar quarter to what we've had in the past.
Great. That's it for me good luck guys. Thank you very much shrinks.
No I'm not showing any further questions at this time look turn the call back over to our hosts.
Great. Thank you everyone for your timing questions. This concludes our call have a great weekend.
Ladies and gentlemen. This concludes todays presentation you may now disconnect have a wonderful day.