Q1 2020 Earnings Call

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Oh, no went down in the conference over to your Speaker today Mr. Josh Bearskin. Thank you. Please go ahead Sir.

Good morning, and welcome to the Gentex Corporation first quarter 2020 earnings release Conference call I'm, Dr. Bearskin, 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 that Vice President Finance and CFO. This call's live on.

The internet by way of it I caught on the Gentex website at Www Dot Gentex Dot com.

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Now I'll turn the call over to Steve Downing, who will get US started today. Thank you Josh.

For the first quarter of 2020, the company reported net sales of $453.8 million, which was a decrease of 3% compared to net sales of $468.6 million in the first quarter of 2019.

The impact of the Kobin 19, pandemic, and the resulting shutdown or the automotive industry in various parts of Asia, Europe, and North America resulted in an estimated negative impact on net sales of approximately $40 million for the first quarter up 2020.

The company's decrease of 3% in sales was in comparison to global light vehicle production levels. They dropped 24% for the first quarter of 2020, when compared to the first quarter of 2019.

For the first two months of the quarter topline revenue growth was progressing inline with our forecast with modest negative impacts coming from reductions in China. As a result of the pandemic, but by mid March the pandemic was negatively affecting European Oems more significantly and then the North American production environment was brought to a grinding.

Halt.

The vast majority of the $40 million shortfall in sales occurred during the last two weeks of March.

For the first quarter a 2020, the gross margin was 34.5 per cent compared to a gross margin of 36.2% for the first quarter of 2019.

On a quarter over quarter basis, the gross margin wasn't impacted primarily by lost sales due to the pandemic an annual customer price reductions.

When compared to the first quarter of 2019 product mix improved which partially offset some of the sales losses and price reductions.

The improvement in product mix was primarily driven by full display mirror and exterior mirror.

The gross margin for the quarter held up well when considering the significance of the lost sales and how quickly and unexpectedly the demand from our customers changed.

During the first two months of the quarter. Our gross margin was on plan on pace to be in the range of our original annual guidance.

Operating expenses during the first quarter of 2020 were up 7% to $51.6 million when compared to operating expenses up $48 million and the first quarter of 2019.

The increase in operating expenses continues to be driven by head count and other resources focused on new product launches as well as research and development of new products.

C. S 2020 created significant interest in our existing and new technologies and we continue to believe in the long term value that our new product offerings and technologies will create for our customers and the resultant trajectory that this can create for our business.

In terms of execution to our budget operating expenses were in line with our original guidance, which were plan to increase at approximately the same rate sales for the year.

Income from operations for the first quarter of 2020 decreased 14% to $105 million when compared to income from operations of $121.6 million for the first quarter up 2019.

The reductions in operating income were largely due to lost sales stemming from the pandemic and the overall lower gross margins in the quarter.

Net income for the first quarter of 2020 decreased by 14% to $89.5 million when compared with net income of $104.3 million and the first quarter of 29 team.

The reduction in net income was from a loss sales due to the pandemic and the impact this had on gross margins.

Earnings per diluted share for the first quarter of 2020 decreased 10% to 36 cents when compared to 40 cents for the first quarter of 2019, primarily as a result of the impacts of the pandemic on net income, which were partially offset by the impact of share repurchases.

And the first quarter of 2020, the company announced a 4% increase and its dividend rate, marking 10 straight years of year over year dividend increases.

Also during the first quarter 2020, the company repurchased approximately 7 million shares of its common stock at an average price of $25.48 per share.

As of March 31st 2020, the company has 13 million shares remaining available for repurchase under the previously announced share repurchase plan I.

Ill now hand, the call over to Kevin for first quarter financial details. Thank you Steve.

Automotive net sales in the first quarter of 2020 were 439.9 million compared with automotive net sales of 455.8 million in the first quarter of 2019.

The 3% quarter over quarter decrease and automotive sales was driven primarily by 6% quarter over quarter decrease in interior auto dimming mirror unit shipments due to the 24% reduction in global light vehicle production.

Other net sales in the first quarter, which includes Dimmable aircraft Windows and fire protection products were 13.9 million, an increase of 9% compared to other net sales were 12.8 million and the first quarter of 29 team.

Balance sheet.

In terms of the balance sheet. The company ended the quarter in a very strong liquidity position and to bolster that the company drew down 75 million on its $150 million line of credit.

The company has an additional 75 million available to draw on as needed the draw down was it the cautionary stub given the volatile market, an unknown length and severity of the pandemic.

I'll highlight a few key balance sheet items as of March 31, as compared to December 31 of the 19.

Cash and cash equivalents were 278.5 million down slightly from 296.3 million, primarily due to the castle from operations and the proceeds from the $75 million draw and on a credit.

Which was more than offset by share repurchases dividends and capital expenditures.

Short term investments were 131 million down from 140.4 million.

The 131 million approximately 70 million arent city and investments that are scheduled to mature in the second quarter of 20 Twond.

Long term investments were 177.8 million up from 139.9 million.

Long term investments include FDIC insured cities Treasury notes as well as corporate and municipal debt.

The portfolio is currently well positioned with over 90% of the corporate and municipal holdings invested an a rated or better institutions.

Accounts receivable declined slightly to 233.6 million from 235.4 million.

All tier one and OEM customers in good standing as the they ended the quarter.

Inventories were 251 million up slightly from 248.9 million, primarily as a result of increased raw materials.

Our purchasing and supply chain teams continue to manage through supply chain stresses which have included in managing rolling shutdowns in our supply base managing run out situations on certain components.

None adjusting order volumes heading into the second quarter and balance of 2020 based on the current forecast.

Accounts payable increased to 100 million up slightly from 97.6 million and accrued liabilities were 163.9 million up from 74.3 million.

The increase was primarily due to the $75 million draw on the company's line of credit.

Looking at the cash flow statement. The first quarter 2020 Castle from operations was 151.3 million up from 133.8 million in the first quarter 2019.

Cash flow from operations was impacted by lower net income in the quarter, but was more than offset by fluctuations in working capital.

Capital expenditures for the quarter were 15.6 million compared with 16.8 million for the first quarter 19.

And depreciation amortization for the quarter was 26.3 million compared with 28.1 million in first quarter of 19, I'll now hand, the call over to Neil free product update.

Thanks, Kevin in the first quarter 2020, there were 12, new nameplate launches our interior auto dimming mirrors and electronic features net of previously disclosed feature headwinds.

Despite the troubling economic conditions net launch rate freeze side auto dimming mirrors and advanced features with the highest first quarter launch rate over the last three years.

During the quarter there was a good mix of both auto dimming inside mirrors and advanced features.

The base inside auto Dimming mirror launches included new models in all of our major markets. Despite the pandemic well advanced feature launches were led by new models for both Homelink and full display mirror.

Now for an update on our full display mirror product.

We're excited to announce that we're now shipping FDM on the Cadillac Cts five.

Landrover defender.

Lexus L M.

Chevy corvette.

And the Mitsubishi Ek wagon and E T X vehicle.

The newly launched FDM permits to be she is or seven OEM launch and represents another win with a Japanese OEM, which we believe speaks to the global appeal of this product for our customers.

Here's a comprehensive list of the Oems in the number of nameplates, we're currently shipping FDM.

General Motors, our initial launch customer has 19 different nameplate shipping.

Subaru Subaru is currently shipping on three nameplates.

Song, we're shipping on two nameplates.

For Toyota we have now shipping on eight nameplates.

Jaguar land Rover, we're currently shipping on for nameplates.

Aston Martin was announced earlier this year as our six OEM, but shipping will begin around mid year and.

In today's announcement of our seventh OEM Mitsubishi shipping on two names.

As we look forward to the second quarter and the balance of the calendar year, we realize that many of our customers expected launches a new vehicles may be affected by the pandemic. However, we are optimistic because we continue to see strong demand for our latest products like FDM and ITM and new products that we debuted at CES.

In summary, we're pleased to be able to show progress in the launches of additional full display mirror systems with our existing OEM customers and are very excited to introduce Mitsubishi as our latest FDM customer despite the difficult vehicle production environment that we're facing.

I'll now hand, the call back over to Steve for updated guidance in closing remarks. Thanks Neil.

The company is current forecasts for light vehicle production for 2020 is based on the mid April 2020, I just market forecast for light vehicle production in North America, Europe, Japan, Korea and China.

The company's forecast also takes into account the fact that many of our customers are in full or partial shutdown with some of our customers not scheduled to resume operations until mid may or later.

Based on this information light vehicle production forecasts and our primary regions for the second quarter are expected to declined 42% from last year and for calendar year 2020 are forecasted to declined 20% compared to 2019.

Based on this light vehicle production forecast the company's current estimate is that net sales for 2020 will be approximately 1.58 to 1.67 billion for the year, which represents a 10% to 15% reduction when compared with 2019.

Based on these lower sales we are currently forecasting a gross margin and a 34% to 35% range for the calendar year.

Gross margins for the second quarter are expected to be the lowest of the year due to the significant impact of sales that have occurred so far in the month of April.

But will be largely dependent on the rate at which our customers begin to emerge from their shutdowns and at what volume they produce.

As volumes hopefully build through the second quarter ended the third and fourth quarter. We are optimistic that margins will reach their high point in the back half of the year.

In an effort to size the company appropriately given the new lower sales levels. The company has also lowering guidance for operating expenses by $10 million to between 195 and $205 million for the year.

This lower level of operating expenses will be achieved through a combination of head count reductions and other cost control initiatives that are already underway at the company.

The bottom end of the tax rate guidance has been increased by one percentage point to reflect the anticipated lower discrete benefits from stock option exercises of our employees and the reduced FDI benefits due to the geographical mix changes within our customer base due to the impact of covert 19.

In an effort to preserve capital and lower future expenses. The company has undergone a significant effort to lower capital expenditures for the year.

We have reduced our capital expenditure guidance for the year by $25 million, which means our new projection for Capex for 2020 is between 60 and $70 million.

Based on the changes to our Capex budget, we now estimate that our depreciation and amortization for 2020 will be approximately $3 million less than previously forecasted and we'll end the year between 102 and $107 million.

Based on the difficulty in uncertainty of global light vehicle production data for 2021 company as withdrawing its revenue guidance for 2021 until better data becomes available.

Despite the fact that we're withdrawing guidance for 2021, the company remains confident and its ability to continue to outperform the underlying market.

Over the last several weeks Cobot 19 has created unprecedented circumstances for our industries, which included massive changes to production levels that our customers.

Our industry has also been significantly influenced by federal state and local governments and each of the countries where our customers operate.

Unfortunately, many of these changes have come with little or no advanced warning, which makes it very difficult to forecast sales or build a sustainable operating model.

Our focus over the last few weeks was directed at protecting our employees, while still supporting our global customer base from our centralized manufacturing footprint.

Over the coming months, we will continue to work to ensure that our cost structure accurately reflects industry production changes and new business realities.

Our overall commitment to new product research and development will remain one of our top priorities for investment even as we look to optimize our cost structure.

We remain optimistic that we can continue to provide above market returns for our shareholders by leveraging our current product strategy and through the execution of our lean organizational structure, which provides the speed and agility necessary to respond quickly to and manage through this new business environment.

Thank you for your time today and we can now proceed to questions.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please stand by what we compile that you've been a roster.

Our first question comes from Chris Van Horn with B. Riley FBR. Your line is now open.

Good morning, everyone. Thanks for taking my call.

Congrats.

So there's been various reports about how the production restarts are going to happen in the timing dependent on and there seem to be dependent on region as well can you just given give us an update on your conversations with your customers by region, and what you're kind of seeing real time.

Yes. So if you start if you will kind of follow the flow of the pandemic itself.

Thats the logical restart it's kind of when it's started and then moved out of different regions, but for US what we're seeing for instance, in China and Korea.

<unk> really didnt shut down that much on there are some modest changes to the production levels and that's the pandemic was moving through the country, China, Obviously went to a hard stop bonds and has restarted for the most part so we're seeing increase in orders and the Asian market, especially China and Korea, obviously, Japan's going through it right now.

Now so were we are expecting some impacts over the next few months in the in the Japanese market, but right now. They are currently building at that most of the factories that we supply.

Europe like the U.S. has gone through a pretty significant hard stop as well the expectation from a lot of our customers in Europe, and North America that restarts happening early may through mid may those are going to be pretty slow ramp ups, starting maybe with single shifts or lower volumes, then hopefully getting back to higher production level.

Yes, we are expecting or what our customers are talking about by the end of May beginning in June.

Obviously, there are some you a w. conversations that came out this morning that may change with what the Detroit three year planning from a restarted production.

But we're still waiting for anticipate anticipating additional information from them and this week.

Okay got it and then kind of on that on the on that same vein. How is your supply chain holding up and have you seen disruption on on things that you're that you're taking in house.

Yes, I mean, there was obviously, obviously anything coming from China, a few weeks ago was was stopped.

So that was a problem luckily given our balance sheet, we tend to carry a slightly higher inventory levels.

And that has helped us whether most of the supply issues.

We do see rolling changes happening like Kevin mentioned in his comments a lot of it's coming from suppliers in southeast Asia.

Where countries are starting to go into shutdown modes in various parts of the world Mexico, There's definitely some supply constraints that are happening Fortunately for us we don't see anything that really impacts us at least through the end of May.

So we're watching it closely and trying to work with our supply base to make sure that we have continual flow product, we don't see anything that should impact sales in the short term.

Okay got it and then last for me how are the new business conversations going I imagine you can still have those remotely.

Imagine there's still some expectations that there'll be some return to demand and certainly your technologies are going to want to be.

Part of that that snap back. So how is those conversations going yeah, I would say the conversations themselves are going really well on in terms of the customers are still going through the core processes and looking at the business development plans that we've had in place the biggest issue or the thing that were most concerned about isn't the level of conversation, it's more about the realization that.

Over the next several months.

Oems are going to have some budget concerns and those budget goods concerns are going to drive changes to the launch rate of products. So some Oems have already made statements about pushing out new launches are delaying though slightly certainly there is budgets going to become a bigger concern for every OEM. So one of the things were watching their as what our engineering resources going to look like at our customers are they going to.

Able to launch all the all the vehicles and all the new product concepts that they've worked on together so.

As of right now all those conversations are still on go on and moving quite well, but we're also not naive to think that over the next several months theres going to be theres going to have to be a pull back and the availability of resources with some of our customers.

Okay got it thanks, so much for the time, thanks, Chris Chris.

Thank you. Our next question comes from Ryan Brinkman with JP Morgan Your line is now.

Hi, Good morning, Thanks, just a follow up I guess on supporting your global customers from Michigan as a restart production.

Firstly can you talk about what manufacturing if any of taking place in Zealand today and then secondly are you able to quantify you mentioned the inventory that's out there in the field overseas given it seems that you have to sort of the last major market to be hit by the virus. The last pick at the calming down might be the last thought to come back up your China I think it's already back online.

Probably set to be next how confident are you and your ability to support that sort of different.

Restart to production in different regions that at different times.

Sure Yeah. So the state of Michigan has been on a lock down.

And I really since the late March and so one of the things that we've been focused on is making sure. We're following our states orders and mandates.

What we're doing as well.

Just building a central items that are necessary and we're doing that through a volunteer staff and so.

As many people as can be homeware, having them stay home.

Really just looking for volunteers and meet those necessary orders, we've taken some of the inventory stuff that's on surface shipments to our customers out of there. So we're happy to go to air freight uncertain times to try to meet meet those demands. So it's not the most efficient shipping situation right now.

But we're very confident with the volunteer staff. We had the team has stepped up and we're very comfortable that we can meet all of our customers' orders with that volunteer team.

Obviously, we've done a lot of things differently in our manufacturing floor, including distribution of PV Ito, our employees to try to make sure we're ensuring their safety without causing our customers, obviously problems or or downtime.

Okay. That's helpful. Thanks, and then just finally from me with regard to the buyback.

We'll move on of course totally manageable in the context of your liquidity.

But I guess I'm, just curious about how youre viewing this from here on out what approach might you take going forward should we expect you to maybe paused the aggressive approach post the revolver draw or do you intend to continue to be opportunistic.

I think what you'll see us do as we were up where we expected to be passed the mid year point on terms of repurchases sell our planned in Q2 as to be more conservative with repurchases. However.

What we're always watching as what does the cash flow of business look like more managing really well in sight and side of our targeted cash position that we defined about a year and a half ago.

So anything north of $500 million and cash is kind of what our target is and as long as we are holding up there than we are going to continue to be opportunistic when we look at the share price and what's going on in the market conditions and what our trajectory of our future business looks like so.

Even though we were aggressive in the first quarter and will likely slow down a little in the second thats not to say that were done for the year.

Great. Thanks, a lot.

Thank you.

Our next question comes from James Picariello, with Keybanc capital markets. Your line is no.

Hey, good morning, guys good morning.

So.

How should we how should we think about gross gross profit decrementals as we as we progress through the second quarter, because I mean, it does seem pretty clear that you're not looking to dramatically cut as generic or R&D because of the new product launches and investing for the future, which I completely get so just curious there.

And then.

Right.

The year.

This is uniquely challenging environments mix, meaning positively treatments exosphere. Thanks.

Okay. So you broke up a little at the end to will hit your first question quickly. If you look at decremental margins.

He gets the change from the 36 to last year to 34 or five this year most of that was driven by the by the two weeks of of lost sales that we struggled with at the end of the quarter. If you look at April you can kind of extrapolate basically April is kind of continued what the last two weeks of March look like with very low levels.

Sales. So if you imagine the entire month of April kind of being at that lower level like the last few weeks of March where you can kind of get to estimate rough estimate of what of what revenue and then and then you can extrapolate kind of that profitability from there on the real question in the quarter is what is may look like how quickly our customers when it come back online.

What volumes will they be producing and then and then from there if it's at returns somewhat to normal you would expect the second quarter to still be quite a bit lower than what than what first quarter was both in sales and profitability.

And so when you look when you look at the full year and you look at the impact of Q1, and you see 170 basis point headwind that was really tied to about a $40 million drop if we hadn't had that $40 million loss and sales we would have expected it to be right in the heart of our guidance for the year and so you can kind of extrapolate what that 40 million dollar impact had on overall Decrementals and then what it what up.

Bigger impact in second quarter will look like on gross profit.

And then James you kind of broke up on that second part if you wouldn't mind just sit in that one more time.

Yes, just how would you care to characterize mix for the year within this.

Within the obvious production challenges for the market does mix lean positively for Gentex this year.

Well, if you look a year over year basis, it's tough to predict what's going to get built in the second half in terms of what what dollar content of vehicles will be built what we what we've seen so far in Q1 was a very positive mix.

If you look at overall, we see that done while in Q1, FDM did really well even despite the economic challenges. So those are those are positive for us versus our base auto dimming.

Mirrors and so when we look at when we look at what we're predicting in the second half, it's really difficult to understand exactly what the impact that pandemic will have on on mix.

But what we know so far as that mix has been solid so far through Q1 and now we're hopeful that that will continue into the second half of the year.

Got it and then just within the revenue guidance, there's there's a clear outperformance baked in FDM is an obvious driver I saw it ITM was more of a ramp up.

For next year, so just would be interested any clarification, there and then.

Yes exterior domestic shipments once again held in exceptionally well.

So just curious you know if you could maybe help generalize or or bucket, where the outperformance is.

Deriving from for the year.

Yes, I think the key their ITM, you're absolutely right. It seems more of a ramp up next year than it is this year in terms of volumes. So really the majority of that growth is coming from our performance and has been coming from performance and outside mirrors, but really really mainly driven by FDM performance.

Got it thanks, guys. Thank you for instance.

Thank you. Our next question comes from John Murphy with Bank of America. Your line is now open.

Good morning, guys.

I guess first question on on on the ramp back up.

Obviously, there there's estimates on the timing to start but nobody really knows how it's going to work. So I'm just curious if.

If you think about too early to mid May is kind of the rough timeframe is most automakers looking at.

What's that got pushed back too early June.

Mid June.

How do you.

The reflects or get restarted yourself I mean, once your ability to say listen.

That may be data is not realistic we're pushing is back to June what are the steps that you have to go through to get up often running and how flexible are you to deal with what is unquestionably is going to be a variable start we don't know yet.

I think the good news is for us than what probably makes us more achievable given our our centralized manufacturing footprint is it's not going to be a hard restart because we're already we've already been up and operational to support our international customers. So now it's about achieving scale. So.

You assume that your 30, 40% operational.

Maybe 50 at times, depending on the staffing that you have for exports on the ability to scale and move back into a 80% 90% production rate of capacity. We believe we can handle quite well.

From an internal standpoint, because that's just about making sure we have the people the staffing and all that PB either necessary to keep our employees save.

The incoming part side from an inventory standpoint, as something that our teams are very good at doing obviously, you're dependent on your supply base, so making sure that we're giving them ample notice and that were being clear about our expectations and that we leave time for for transportation, which has become a little tougher in this and this current environment.

So are you seeing April you guys are depending on the day or the week operating somewhere between 30% to 50% can you is that.

But youre going to indicating there yes, absolutely.

Okay. Great couple of the first couple of weeks. The first couple of weeks of April were almost nothing because there.

China was still was still down bout ready to come back up and and so they were very very minimal operations in early April but right now that's about the rate we're running at.

Okay, that's very helpful.

And then just a second question.

You kind of go through these tough times, often elucidates some cost opportunities going forward as you get aggressive on cutting costs and some that cost is not return.

As you ramp back up to normal using theres any potential for uncovering some some cost it might not need to return as you ramp back up hopefully completely in the third and fourth quarter. This year that might help margins ultimately long Rob.

All we absolutely believe there's a lot of theres a lot of difficult things that we're going to need to do over the coming months to make sure that we're sizing this business to what to what the future looks like one things for sure as we know what's not going to this year and probably the beginning at 21 is that going to look like our initial budget plans for 2020 and.

We're estimating close to a 2 billion dollar and revenue company.

As we are going through that process of getting our size back in line with what the current business is there will absolutely be costs that don't return that we eliminate and that don't return to the business. Some of those include things that people support nice to has quite honestly things that things that people get comfortable with or that we.

Gotten comfortable with that we're going to have to live without for awhile and then what happens out of that as a discipline and that business.

The business level that won't just walk back into the cost structure of the company and so.

Longer term, yes. Some of these are very difficult times, but in terms of about three to five year window. We believe they are opportunities to get better and to get your costs in line for the long around.

Okay. That's helpful and then just lastly.

How are the discussions going with your automaker partners as far as pricing has there been any kind of step up in price concessions at that they're looking for.

Are there any other actions.

He said that some programs might be delayed talk to call. At this point. So that leaves me that out for second, but I mean as far as price concessions or even conversely, sort of a more collaborative environment.

Actually might be somewhat better I mean is it a little bit more combative, where they're looking for more help on price or are they kind of play ball and being pretty collaboratives, because they obviously need you.

No I think I think there's always a theres always a step up and intensity of price reduction conversations anytime something like this happens is kind of natural part of the of the business cycle, probably the one that you watch the most and what's happening the most with a lot of customers is really talking about payment terms.

Obviously, everyone is trying to us trying to keep their hands on as much cash as humanly possible. So one of the conversations you have as about price itself and then the other you have is about what are your payment terms and how do you make sure that the liquidity for our customers is there on that they have access to the cash they need and obviously payment terms become a large part of that discussion.

Okay. That's very helpful. Thank you guys. Thank you.

Thank you. Our next question comes from David Kelley with Jefferies. Your line is now open.

Hi, This is Gavin Kennedy on for David.

A question on the Opex guide it looks like you cut less than sales and you referenced new product launches in R&D I was just curious if you could provide some more color on the moving parts to the guide and if theres any other significant drivers we should consider there.

Yes, I think on the Opex side, what you always have to consider is in the you all parse your only getting partial year credit for that Opex improvement when you do make changes to head count and the other cost savings initiatives. There are also upfront costs at times in order to achieve those so the net savings on the Opex side as what we guided to.

What we actually flow through the income statement during the year, but there longer term the that number would look bigger if you were to annualize that and say into 2021. So thats why you see a percentage of opex change that slightly less than the impact of sales.

But it's also driven by a bottom up analysis about what technology is what our commitments to our customers in terms of while hitting launches and what type of engineering staff is going to be required in order to make that happen. So thats really a balance there between the input of what's happening on the top line of the business and what are the requirements from an engineering standpoint to deliver products for our customers.

And then one one other thing this is Kevin that is important to note that some of the things Steve mentioned earlier about inefficiencies in the supply chain.

Having to go off of the Ocean do airfreight to our customers that as a cost that is in the US you in a line that will be higher than normal.

Partially offset some of those savings this year.

Got it thanks for that and then switching gears a little bit.

Do you expect to see any changes in the Smartbeam and driver assist headwinds given the broader industry peers pressures I think you were targeting about 175 basis point headwind in 2020 before the cobot impact.

No I think I think if those we expect to be about the same that could be I mean, they if honestly those are really tied to a certain OEM and so if that OEM a how they perform and how they do on overall production could change that impact in other words, it's less about the products themselves and more about how our exposure to afford and how are they.

How do they utilize those products in the next 18 months.

Great. Thanks, guys. They say thanks. Thank you.

Thank you as a reminder, ladies and gentlemen that star done one to ask a question.

Our next question comes from David Whiston with Morningstar. Your line is now open.

Thanks, Good morning.

I guess first on the head count reductions you mentioned can you say any more detail on that are they more than earlier salaried side and salaried what parts of the company.

The ones, we're referring to on the Opex side are all salary.

Okay.

Do you anticipate.

That being one big cut that you've already done or do you think your need do a few more in the next few months.

Just a wait and see types now, we're taking a very controlled approach and trying to meet with everyone individually to how specific conversations and make sure we're doing this.

The best way possible not only for the company, but also for the individuals' impacted so this will be something that will take a couple of months for us to work through thats not typically in our culture, where don't go and make massive changes all at once we try to.

We try to do this on a personal level on a one on one basis and so we're working through that real time.

And our hourly workers or doesn't tell you need them all given your capacity utilization or are they are they on furlough do they sold at full pay earn have that working so what we're doing for workers, who aren't working currently as they are receiving compensation from the company. We've had basically at fixed number of hours.

Is that we're paying per week and that changes as we progress through this time period.

But we continue to look at what does the head count required from an operation standpoint to support the size of the business going forward and so thats something that we're looking at currently and we'll be continuing to manage and it is it is absolutely our plan to size the workforce to what the overall size of the businesses as we.

As our Oems ramp back up the difficulty right now as we're trying not to make drastic changes on that side, because we don't know for sure. What orders are gonna look like in mid May mid June when this when this does ramp back up so we're trying to scale the business as carefully as we can to make sure it matches and thats appropriate.

But there's still a lot of unknowns in terms of.

When this when we emerged from this is the business going to be at 90% of what it was before is that going to be 80 is it going to be at 100, what percentage of the expectation in the staffing that we put in place what's going to be the demand for the second half of 2020, and that's something that we're trying to be very careful about and obviously make decisions on on a daily basis.

And sticking with that point you make about what is going to look like.

Come restart.

Have an answer somewhat in China in China as you know was.

Had been a slow market pre cobot anyway, how does it looking to you right now is there way more demand than there was pre virus or is it still sluggish or.

No I'd say, it's actually return pretty well in China. The difficulty at the difficulty there is given the the language barriers and the difference. It's always in there you know you're always whenever you go through a shutdown like this you're always going to see a big Spike in returned to normal for a short period of time. The question is as though are those volumes sustainable for the remainder of the year or is that.

At a.

Huge improvement right away, that's going to then taper down back to a more normalized level and the question is what is that returned to normal on what is that normalized level and thats. The one that even in China, It's a little too early to tell.

Are they going to be a 80, 85% or what they were or is it going to be 90 95, 100% of what it was.

Okay, and Kevin had mentioned you guys already have a raw material build up so.

Once custom your customers already open.

We expect to not have that bag of working capital outflows as you already have a lot of the inventory in place.

Yes, I think a lot of the stuff in March was already committed to from an inventory perspective.

Based on plan builds for back half of the quarter, we did have a little bit to increase there, but our purchasing and supply chain teams are doing the same thing that we are on the business sizes evaluating what our order flow looks like through the second quarter and adjusting our purchase.

Purchase materials appropriately. So we don't have a major build in inventory throughout the quarter, but we wouldn't expect it to go much higher than it is currently in order to support the ramp back up of our customer base.

Okay. Thanks.

Okay.

Thank you. Our next question comes from Mark Delaney with Goldman Sachs. Your line is now.

Yes. Good morning, Thanks, very much for taking the question.

So I mean first to better understand how you're thinking about inventory digestion at your customer I think the company seemingly outperformed auto production in the first quarter right about 20 points and your guidance implies about seven points about growth for the year. So do you think the inventory, we get said digested your customers pretty quickly and second quarter or more spread out over the course of the or.

Any color on that would be helpful. Thanks.

Yes, I think if you look at our expectation and we think two things happen in one of them as on the supply side, we know that our outperformance in a downturn like this will be a little higher on the front end and then on the return it will be a little less than the real reason is that production. We're shipping weeks ahead of time before parts and up on cars. So there is.

Natural lag, which is why our outperformance with so much higher in Q1, we wouldn't expect as it ramps back up that same level of outperformance because we know that theres, they're parts that we shipped in March art or you're going to get use now and may or June and so we think that will more they'll go back to a more normalized level in terms of outperformance for the year, which has been in that.

Mid single digits range for the last couple of years. So we feel really good about that as you look at kind of what's going on yes. We think the overall inventory levels are one of the things that we watch in terms of number of vehicles. What does that look like really it's the thing that's probably most concerning for us that we watch in the industry is when do show rooms open back up when what is.

That.

As it relates to their Billy ability and willingness to buy a vehicle and we think thats more of the long term drivers of our business than just auto production itself. What does that consumer sentiment. If you are going to buy a car what level of cardia by how much do you spend on features on what that average purchase price. Those are the types of things that will really kind of impact our business more than just.

The raw.

Production levels themselves.

That's helpful and the second question on Gentex is thinking about sapphirex versus the market I think the initial or the prior 2020 guidance assumed gentex revenue grew about six points above auto production at the midpoint and I believe the guidance today is now about seven points above auto production. So just trying to understand how you're thinking about your outgrowth.

As the market today compared to 90 90 days ago.

Yes, I think it's really it's about the same I mean, I think the hardest part there is it's such a it's such a chaotic environment and I just the data for vehicle production is changing like that drastically literally in the last three weeks.

North the global production dropped about eight to 10 million vehicles in the last three weeks. So in other words coming into this year I think global light vehicle production was 88 million forecasted that drops drop now to 70 million.

So it's one of those things that's changing on a on a weekly basis and so we're looking at bottoms up forecast over the next 12 weeks, meaning orders from customers on what where our expectations or the business is from.

On the download standpoint from a customer base, but then overlaying that and taken the input from the I just side for out the out months forecast and really it's up pretty modest change between the six or 7% outgrowth, but it's right in the range of where we've been in the last couple of years.

Okay. That's helpful. Just finding for me in terms of your outlook for revenue outside of the.

Auto market you just talked about some of the the trends that you're seeing in other some.

Product wins and.

Commercial plane market.

So in that market has had some some challenges so just any more color how you're thinking about 2020 for the non.

Okay.

Yes, absolutely.

We were very excited about what we're doing in the aerospace business, it's been a nice growth driver for the company.

Finally, definitely opens up some new opportunities for us with our all of our technology not just the Dimmable glass.

Obviously that industry has been impacted by this as well so.

It's difficult right now for pretty much any production environment and so it's hard to predict exactly what the impact will be on our customer base from a from a dimmable glass standpoint in aerospace obviously production of what's going on on commercial construction side, which is really what drives our fire protection industry on a lot of that has stopped our slowed Kurt.

Only our customers are doing quite well.

So we continue to ship.

Our fire protection products very regularly and we're optimistic that that business will continue to hold up well through the second half of this year.

Really difficult to predict exactly what's going to happen on especially on the construction side, because you're talking about local state state and local governments kind of controlling what is allowed to a not allowed to happen on the construction side. So unfortunately that ones, even less about the overall economic conditions right now and more about whats legal what's allowed.

That is each state, allowing construction companies to deal.

Thank you.

Thank you. Thank you thanks Mark.

Thank you.

Im not showing any further questions at this time I would now like to turn the call back over to Josh oversee for any closing remarks.

Thank you everyone for the questions and your time this morning stay safe and have a great weekend. This concludes our call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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