Q2 2020 Gentex Corp Earnings Call
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The conference over to your house today Mr., Josh over ski director of Investor Relations. Please go ahead Sir.
Thank you.
Good morning, and welcome to the Gentex Corporation second quarter 2020 earnings release Conference call I'm, Josh Mirsky, Gentex director of Investor Relations and I'm joined today by Steve Downing, President and CEO, Neil Boehm, Vice President of Engineering, and CTO, and Kevin Nash, Vice President Finance and CFO.
This call is live on the Internet and can be reached by going through the Gentex website at www Dot Gentex Dot com all contents of this conference call or the property of Gentex Corporation and May not be copied published reproduced rebroadcast retransmitted transcribed or otherwise redistributed.
Gentex Corporation, a whole responsible or liable any party for any damages incurred by Gentex Corporation with respect to any unauthorized use of the contents of this conference call.
This conference call contains forward looking information within the meaning of the Gentex Safe Harbor statement included in the Gentex reports second quarter 2020 financial results press release from earlier this morning, and as always shown on the Gentex website. Your participation in this conference call implies consent to these terms.
Before we begin to form a portion of the call we want to recognize the passing of our analyst David Leiker from Baird, David Leiker cover Gentex for over 20 years and had a thorough understanding of our products the uniqueness of our company and an in depth knowledge of the automotive industry.
Beyond that David with the kind thoughtful man, who is dedicated to his family and community is humor friendship will be greatly missed by our team.
We'd like to express our condolences to his wife fan and their boys and to all of his friends and co workers on the Baird team.
Now I'll turn call over to Steve Downing, who will get US started today, Steve. Thank you Josh.
For the second quarter of 2020, the company reported net sales of $229.9 million, which was a decline of 51% compared to net sales of $468.7 million in the second quarter of 2019.
The impact of the Cobot 19 pandemic created extended shutdowns in the automotive industry for much of the quarter in various parts of Asia, Europe and North America.
Global light vehicle production ended the second quarter of 2020 down 45% when compared to the second quarter of 2019.
However, the majority of the light vehicle production declines occurred in Europe, which experienced a 62% quarter over quarter reduction and in North America, which experienced a 69% quarter over quarter reduction.
The impact of Cobot, 19 government enacted shutdowns of certain countries and state and the resultant economic impact led to the most severe change in demand in a very short period of time that gentexs ever experience.
In fact, our forecast in early March for the second quarter of 2020 was estimating a 6% growth rate.
A deeper dive into the production environment provides compelling information about what happened in the quarter.
For instance, the China market expanded by 9% in the second quarter. However, our historical revenue from China has been less than 10% of sales. So this provided very little help and offsetting the reductions in our primary markets.
The company's primary markets include North America, Europe, Japan, and Korea, and together these regions were down approximately 59% for the second quarter of 2020.
While these production numbers are incredibly sobering the silver lining is that we're continuing to find ways to significantly outperform our primary underlying markets.
[laughter] for the second quarter of 2020, the gross margin was 19.1% compared to a gross margin of 37.7% for the second quarter of 2019 gross.
Gross margin declined on a quarter over quarter basis as a result of the lost sales manufacturing inefficiencies due to the pandemic and the related shutdowns severance related costs of $3.9 million, an annual customer price reductions.
When adjusted for the expenses related to severance the adjusted gross margin for the quarter was 20.8%.
Operating expenses during the second quarter of 2020 increased by 4% to $50.7 million, which included severance related costs of $4.9 million.
This compared to operating expenses, a $48.6 million in the second quarter of 2019.
Adjusted operating expenses in the second quarter up 2020 were down 6% when compared with operating expenses in the second quarter of 2019, which was driven by reductions in wages and discretionary spending.
The company had a net loss from operations of $6.7 million for the second quarter of 2020 as compared to income from operations of $127.9 million for the second quarter of 2019.
The quarter over quarter reduction in operating income was primarily the result of the lost sales due to the covert 19 pandemic and the impact this had on gross margins and the second quarter.
Adjusted operating income was $2.1 million for the second quarter, which reflected adjustments for the impact of severance related costs of $8.8 million in the quarter of which 3.9 million weren't cost of goods sold related areas and $4.9 million, where an operating expense related areas.
During the second quarter of 2020, the company recognized the tax benefit of $1.5 million compared to a tax expense of $21.3 million during the second quarter of 2019.
The company reported a net loss of $2.4 million for the second quarter of 2020, and a loss per diluted share of one penny, which compared to net income of $109 million and earnings per diluted share of 42 cents for the second quarter of 2019.
The reductions and net income and earnings per diluted share were driven by the lost sales due to the covert 19 pandemic and the resulting change and profitability in the second quarter.
Adjusted net income was $4.6 million during the second quarter 2020, and adjusted earnings per diluted share were two cents per share for the second quarter of 2020, when removing the impact of the severance related costs.
The company did not repurchase any common stock during the quarter as we focused our efforts on preservation of capital given the unknown impact of Cobot 19 pandemic on our customers and the resulting impact on the company's operations and financial results.
Provided that business begins to return to more normalized levels. The company will consider the appropriateness of any share repurchases in the second half of 2020.
This determination will take into account macroeconomic issues market trends and other factors that the company deems appropriate.
As of June Thirtyth 2020, the company has 13 million shares remaining available for repurchase under the previously announced share repurchase plan.
Ill now hand, the call over to Kevin for some further financial details.
Thank you Steve.
Automotive net sales in the second quarter were 222.1 million compared with automotive net sales of 456.6 million in the second quarter 2019.
51% quarter over quarter decrease in automotive sales was driven by a 51% quarter over quarter decrease in interior auto dimming mirror unit shipments as a result of the overall, 45% decrease in global light vehicle production.
And more severe decreases in Europe, and North America stemming from the Cobot 19 pandemic.
Other net sales in the second quarter 2020, which includes the Dimmable aircraft Windows and fire protection products were 7.9 million a decrease of 35% compared to other net sales of 12.1 million in the second quarter 2019.
Our balance sheet update in terms of the balance sheet. The company maintained its very strong liquidity position. Despite the 51% reduction sales and corresponding reduction in cash flows I'll highlight a few key balance sheet items as of June 30, as compared to December 31 of 19 cash and cash equivalents increased to 343.8 million.
<unk> up from 296.3 million, primarily due to year to date cash flow from operations investment maturities and proceeds from the $75 million draw on the line of credit in the first quarter of 2020.
Short term investments were 70 million down from 140.4 million.
The company had approximately $70 million of investment maturities during the second quarter of 2020.
Long term investments were 171.8 million up from 139.9 million.
Long term investments include FDIC insured cities Treasury notes as well as corporate and municipal debt.
The portfolio continues to be well position with over 90% of the corporate and municipal holdings invested an a rated or better institutions.
Accounts receivable declined to 170.6 million for 235.4 million.
The reduction in a our was due to the significant reduction in sales during the second quarter.
As of June Thirtyth, all of the company's tier one and OEM customers continue to be in good standing.
Inventories were 259.7 million up from 248.9 million, primarily as result of increased raw material inventory.
Throughout 2020 are purchasing and supply chain teams had to manage through supply chain stresses, which have included managing rolling shutdowns in our supply base managing runoff situations on certain components and then working through the second quarter order reductions and now preparing for a ramp up in the second half of the year.
Accounts payable decreased to 60.1 million down from 97.6 million based on lower purchases from suppliers in the quarter lower levels of capital expenditures and less discretionary spending during the quarter.
And accrued liabilities are 157.4 million up from 74.3 million.
The increase is due to the $75 million draw in the company's line of credit in the first quarter of 2020.
The cash flow statement, the second quarter 2020 Castro from operations was 39.2 million.
Which was down from 139.6 million in second quarter 2019.
The company was able to continue to drive significant positive cash flow from operations. Despite the 51% reduction revenue on a quarter over quarter basis.
Good day Castle from operations was 190.5 million, which compared with 273.5 million for year to date cash flow from operations for 19.
Capital expenditures for the second quarter were 13.2 million compared with 28.7 million for the second quarter of 19 and year to date capital expenditures were 28.8 million compared to 45.5 million in 19.
And depreciation and amortization for the second quarter 2020 was 27.1 million compared with 25.2 million in second quarter of 19 and year to date depreciation and amortization was 53.4 million compared to 53.3 million and year to date 19, I'll now hand, the call over to Neil free product update.
Thank you Kevin in the second quarter of 2020, there were 33 total launches of our interior and exterior mirrors and electronic features.
Of these new launches over 60% contained advanced features.
As with previous quarter, Homelink and full display mirror led the way for the advanced feature launches.
During the second quarter 2020, the company launched eight new name plates with full display mirror.
We are currently shipping on 46 vehicle name plates for this exciting product.
The eight new name plates continue to drive penetration into new segments and vehicle types.
The launches during the quarter are as follows.
The Buick Encore Gx, the Chevy Tahoe and suburban.
The GMC, Acadia, Yukon and Yukon XL.
As well as the Toyota Highlander and the Toyota Harrier.
The full display mirror for the Toyota here, you're the first FDM to launch with digital video recording capability.
This mirrored system at launch and the Japan market and combines the superior functionality of the FDM with the added capability to record video from the root facing and forward facing cameras simultaneously.
For OEM request that is stored to an SDK storage card.
Our integrated solution provides customers and consumers with the features they want while allowing the OEM to control the integration and execution in the vehicle.
During CES 2020, the DVR meter was one of the future products that we showcased in our booth and we're excited to now have it in volume production.
For the second half of 2020, we're forecasting approximately eight new vehicle nameplate launches for full display mirror.
Even with unique market situation, we're all been facing it's clear the OEM customers and consumers value the benefits that a full display mirror system provides to enhance rude visibility and driver safety.
Our last product update for today is about the integrated toll module.
Currently we are shipping ITM on three name plates in the Aldi lineup.
The eastern the transport back in the Q seven.
In late June of 2020, Audi did a press release on the 2021, Audi Q five in woods in which the introduced it will also implement ITM as well.
We continue to see positive momentum with this technology and we're optimistic that it will continue to roll out over the coming years.
As we look to the second half of the year, we realize that many of our customers expected launch timing of new vehicles may be affected by the pandemic. However, we remain optimistic because we continue to see strong demand for latest products like FDM and ITM and some of the other products that have shown at CES.
I'll now hand, the call back over to Steve or updated guidance in closing remarks. Thanks Neil.
The company is current forecast for light vehicle production for the second half and full year 2020 is based on the mid July 2020.
Yes market forecast for light vehicle production.
In North America, Europe, Japan, Korea, and China.
Based on this information light vehicle production in the company's primary regions are expected to decline approximately 7% for the second half of 2020 and 20% for the full year when compared to the same periods in 2019.
Based on this light vehicle production forecast and the structural changes that the company has made over the last several months. The company is providing guidance estimates for the second half of 2020 as opposed to only updating full year guidance.
Given the magnitude of changes this year. We believe this is a more accurate representation of our new cost structure and financial performance not only for the remainder of 2020, but it should also provide more visibility as we head into 2021.
Our current estimate is that net sales for the second half of 2020 will be between 865 and $915 million.
Based on these sales levels, our updated cost structure and currently forecasted product mix for the second half of 2020. We are currently forecasting a gross margin in the 36% to 37% range for the second half of the year.
In a normal environment gross margins are highly dependent upon product mix, our ability to leverage overhead costs and purchasing cost reductions to help offset annual customer price reductions. In 2020. We are also dealing with a significantly smaller vehicle production environment that is resulting in sales being slightly lower in the second half of the year versus 2019.
Okay.
Historically sales declines have resulted in gross margin contraction for the company. However, given our cost control initiatives. We believe we will be able to offset the majority of the headwinds from the lower sales levels.
Operating expenses for the second half of 2020 are expected to be between 80 $893 million.
This represents a significant reduction from the annual operating expense estimates that the company.
Began the year with and was provided in our January 2020 earnings call.
The tax rate estimate is increasing to be between 17 and 19% for the second half of 2020.
Fluctuations in the FDI, which is driven by regional sales mix and changes in discrete tax benefits are the primary drivers for the estimated increases.
Capital expenditures for the second half of 2020 are estimated to be between 30 and $40 million.
This capex run rate for the second half is inline with our updated annual guidance for the year $60 million to $70 million and represents a reduction of $25 million and capital expenditures from our initial capital expenditure plan from the January 2020 earnings call.
Lastly, we expect depreciation and amortization for the second half of 2020 to be between 52 and $55 million.
Based on uncertainty regarding the coven 19, pandemic overall economic conditions globally vehicle production trends and consumer demand for vehicles. The company is withholding revenue guidance for 2021 until better data becomes available.
Despite the fact that the company as with holding guidance for 2021, the company remains confident and its ability to continue to outperform its primary underlying markets.
With the onset of the Cobot 19 pandemic, many government driven shutdowns and the obvious change in demand. We estimated that we would be facing in the second quarter. The company began to look at cost optimization concepts very early in the second quarter.
This led to the lower estimates for operating expenses capital expenditures and depreciation and amortization levels that we provided in our first quarter conference call.
However, as the quarter progressed, we quickly realize that those changes would not be sufficient given the drastic shift in demand we were experiencing.
Our updated estimates for the second half of 2020 set forth today represent the planning idea generation and fast, but thorough execution of many cost containment initiatives. We have made to adjust the company to our new levels of revenue.
Despite the fact that the second half of 2020 revenue will be lower than we were expecting at the beginning of this year, we're optimistic that the forecasted improvements in light vehicle production throughout the second half of the year. In addition to our significant cost reduction initiatives achieved during the quarter will allow the company to return to more normalized gross margins and operating margins.
Our cost containment efforts were all undertaken with a very clear objective that we needed to protect the most critical resources necessary to continue our launch of sold programs and the support the team that leads our research and development as they are imperative to the future growth of the company.
We believe that this strategy of creating cost savings, while protecting our future growth opportunities will provide above market returns for our shareholders over the next several years.
Thank you for your time today and we can now proceed to questions.
As a reminder, ladies and gentlemen, if you'd like to ask a question at this time. Please press Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound Keith.
Our first question comes from James Picariello with Keybanc capital markets. Your line is now open.
Hey, good morning, guys. Good morning, Jamie good morning.
Just on the start on the on the structural cost outs here.
The timing of the remaining actions last and when do you expect to.
She that full 35 million run rate savings.
Yes, all of those actions and those numbers are completed so literally those those will start running from now through they will begin at the beginning of the third quarter So safe.
Let's start to the Gulf Q3, excuse me.
Basically half of that should be experienced in the second half of the year. So the $35 million july's number, but we'd expect to see about half of that flow through during 2000, you already in Q4.
And with that show up.
All in the next June a or will some also hit.
Our do you know, it's about 60% of it is actually in the overhead or the cost of goods sold area.
Right.
Hi.
SGN that's DNA.
You still there.
Yes, I'm here, Okay sorry.
Did you hear.
I missed all of that so yes, so about of the savings over $35 million about 60% of it isn't in the cost of goods sold area and fixed overhead reductions and then the rest of it is split between our research and development and SDN areas. So opex.
Got it.
And then.
The gross margins for the second half I would say clearly there's some some positive mix baked in is that mainly driven by SPM and Homelink is there any.
Yes, there any benefit.
Maybe some visibility within exterior mirrors, which would which is clear.
Obvious margin.
Margin benefit do you guys in terms of the mix.
Yes, I think if when you look at that we're obviously continue to expect FDM to continue to grow which is going to help.
Offset some of the headwinds, we're seeing and lower vehicle production.
Some of the some of the with a lower vehicle production, what do you expect to see some drop off in overall IC growth rate.
Obviously, if thats base mirror unit than you would expect there'd be a little bit of a margin tailwind associated with a stronger mix.
But one of the things that we're also looking at as we're expecting that the other portions of our business. So in the aerospace, especially is going to definitely take a hit and so what we're seeing is is that this strength in automotive and ITM FDM.
And really inconsistency and always see there's going to help offset some of those other headwinds.
Got it and maybe just one housekeeping one on the driver assistance Smartbeam headwind you guys kind of tuck.
Maybe just two quarters ago now you talked about what the headwind looks like for this year and even into next year has how has that changed now with CEO with dependent.
I'd say, it's about it's about in line and that business basically changed the the pandemic impact basically impacted at the same as it did the rest of the business. So in terms of a headwind it's pretty similar to what we are expecting for the full year, it's right in line.
Obviously going forward. The question is are those as as were rack winding down those Ford programs for driver assist are they going to be able to launch on time to finish off those programs what the with their next supplier and that that will probably take later this year to early next year to see to make sure that stays on.
Of course, but we don't expect any delays at this point.
Is there any chance.
A re.
Reunion with Mobileye now that.
Mobile for working together going forward no I mean, we quoted that probably I mean, they at Fort assets to quote that project, we declined to engage when we looked at the margin profile of that business.
In comparison to the business case of what was going to cost a launch and from an R&D standpoint, we just couldn't make the numbers work. It did not did not meet our business needs and so when we voluntarily walked away from that business and I think our strategy is to continue to say no to those type of projects.
Got it thanks guys.
I do as James.
Our next question comes from John Murphy with Bank of America. Your line is now open.
Good morning, guys. This is Alan Smith on for John Good morning. Thank you very much for for the guidance on the second half its really helpful. As we think about wave two cobot outbreaks across the country possible incremental production shutdowns as this being contemplated in your outlook at all or any level of conservatism that you're applying for power.
Well disruptions at the supply base.
On the on the supply base side, Yes, I mean, we what one of the things we've been watching the good news over the last couple of years, there has been a lot of supply concerns.
Whether its part shortages or.
It geopolitical issues you name it so I mean, we've become pretty well versed in making sure we've de risked the supply base as best we can anyway.
When you talk about it from a production standpoint, though like it would this effect are one of our customers and whether it be a plant shutdown our vehicle production slowdown. That's one that is really hard to predict obviously, we tend to take a pretty conservative approach when we look at HSS amounts.
So we're not overly aggressive here, we always assume that theres, a little bit of a bias towards the downside when you're going through an issue and we try to reflect that in the numbers that we posted for for guidance in the second half.
Great Great. That's very helpful and as you think about the second half in production levels that are still likely going to be lower on a year over year basis do you have any expectations for decremental margins and how they will stack up versus the second quarter, particularly in light of your cost containment actions that you discussed and and then as we get on the other side of the crisis.
It was there any idea about how we should be thinking about incremental margins.
Yes, well if you look at decremental first I mean really what that if you take the midpoint of that guidance, you're seeing a 50 to 60 basis point kind of on a year over year basis in the second half is what that would indicate.
So we would see the the slight sales declined driving a flight decremental margin, but honestly at 50 to 60 basis points. It's the it's really more about product mix.
And overall sales levels, our ability to cover overhead costs at the at those sales levels.
So we feel really good about where we're at right now we were not expecting unless something really drastic happened to the revenue. The Q2 margin is really an anomaly because they're just there was not enough sales even come close to cover on the fixed overhead portion of the business.
So we don't think thats anywhere in the vocabulary of what we're expecting for second half.
Literally that 36% to 37% margin that we got into for the second half, we feel pretty confident about as long as sales are within five or 10% of what we guided.
Okay, Great and last question you cited customer price reductions as an additional margin headwind in the quarter on I think you've commented in the past that that those customer price reductions are typically seasonally topics in the first quarter was there any spillover effect into the second quarter or perhaps Oems getting tougher on cost as the macro.
Environment collapse, or where they pretty consistent with what you've seen seasonally.
Great question, they are pretty consistent it's pretty much weighted towards the first half of the year, but when you compare it to when we're looking at Q over Q, So second quarter last year second quarter. This year.
We know that were on average our pricing is down 2% to 2.5% and we havent seen anything that's.
Higher weighted at this point versus others other years, so it's been pretty.
Pretty consistent one and one thing I will point out the reason why you'd see a bigger impacting Q2 as many of our Asian customers are on a on a traditional fiscal year, which would be April one price downs for those so if you look at the business. During Q2, North America basically shut down completely Europe was pretty much nonexistent a lot of our business was in Japan and Korea and.
In places where do you have a little later than January one price downs that take effect. So those customers that were shipping we're most of them more weighted towards in April one price down day.
Perfect. That's very helpful. Thanks for taking the questions.
Our next question comes from David Kelley with Jefferies. Your line is now open.
Good morning, guys. Thanks for taking my questions good morning.
I guess.
Coming back to last quarter, you talked about shipment timing and the impact inventory work down can have probably early in a downturn I was curious if you could provide some color on the Q2 impact you saw from that inventory work down and maybe how you're seeing channel inventory stacking up today.
Yes, well at the end of Q1.
It was interesting you know this the actual shutdowns that started right. It's a very into Q1, we were continuing to ship. So we definitely think that a little bit of sales that normally would've happened in Q2 happened at the very end of Q1, and so then there is what we're expecting and hoping for and we'll see as we progressed through the quarter as it you would expect to see.
See some shipments at the at the early part of Q3 start to ramp up to help catch up with what did not happen obviously throughout Q2. So.
What we do know for sure is that OEM inventory levels are pretty low, especially Mgms case, if you look at between the UAE W. strike at the end of the quarter first quarter and the impact that head on their overall inventory levels and then the shutdowns.
We feel like Theres going to be a step up in the GM business for a while based on based on them needing to get inventory back on the dealer lots. So we're hopeful that that helps drive sales in Q3, the bigger question for us in the one that I think as $1 million question. Obviously is what how long does that last and what is the long term economic impact.
Back to a consumer and how the consumers handle Q4, and what does the overall sales and Saar levels going to be in the second half of the of the quarter of Q3, but then also into Q4 and next year.
That was going to be a tougher one we think Q3 is going to be solid primarily just because of inventory levels being where they are at and meeting the play catch up.
But then the question is a longer term economic impact of the shutdowns and of the pandemic.
Okay, that's great and may be on that playing catch up point do you see any risk to the whether it's from the supply chain standpoint or are sourcing risks, if we asked to and seemed to be ramping up pretty aggressively here in North America.
Yes, Theres Theres definitely you definitely see some suppliers that are that are trying you try to get employees back into buildings trying to follow social dispensing guidelines. Each state kind of has their own requirements of what that looks like so trying to get the same number of people back into the same footprint.
It's difficult for certain for certain of our supply base on first cells at times as well so what we've been doing though as throughout this entire shutdown period and trying to stay in communication with the supply base to make sure when when this does fire back up again.
What is their confidence level, how many what percent of their employees are coming in are reporting and working what percent of capacity are they at and so we feel like we've done the best we can to make sure. We've mitigated those risks and any any place. We do have concerns were aware that and watching those suppliers carefully.
Okay perfect. Thank you and then last from one from me and I'll pass along just curious if you could talk about gross margin cadence throughout the quarter, we're hoping to get a sense of run rate.
And then as we think about the second half.
Any thoughts on sequential ramp will gross margin be more Q4 weighted Ed just curious about cadence go forward as well well I think I think first I'll jump in on Q2 and say the April and May and when you look at sales in Q2 April and May we're basically non existent other than some of our Asian customers in June.
We started to see a pickup in sales and margins margins in the month of June were far better than they were in April and May.
Much more not not quite to the level that we just gave guidance, but much closer to and that's what gives us the confidence when we give that guidance in the second half of the year that 36 at 37%, we expect sales to be slightly better than they were in the month of June and should should have a positive impact on gross margins. So I wouldn't expect Q3 to be drastically different than Q4.
We think both quarters really should be in that range that we gave for the for the gross margin guidance.
Alright, perfect. Thanks again.
Thank you.
Our next question comes from Josh Nichols with B. Riley. Your line is now open.
Yes, thanks for taking my question.
On that.
Could you comment a little bit about what you're seeing as far as the penetration rates to the companies like Dimmable glass interior and exterior mirrors, particularly in.
North America any commentary as far as the mix of vehicles that are being sold today, if you're seeing more or less that may have piece like higher and features that typically have these add ons like people glass.
Let's say the penetration rates have actually held up I mean really well the bigger challenge. So we haven't seen.
Content change for any of our products and we havent heard anything from Arkansas customers that would imply.
That they're going to change kind of how we're packaged or that our penetration rates will change through this.
Whether as good or bad were not entirely sure, but if you actually look at the segmentation during the during Q2 and and the forecasts throughout the rest of this year it was pretty evenly spread across all segments. In other words, it's not like Deeni cars continue to sell and AB and seized in it.
Literally the production happened across the board across all segments. So if you look at those down right. There is a little bit of variability, but for the most part it was pretty much evenly spread across all the regions at those rates and across all segments in those regions. So as of right. Now we don't expect anything to change in terms of our mix, our overall penetration rates and our primary markets and one thing to add as if.
Neal's commentary about the new launches with FDM very heavy in the GM lineup and those are very strong vehicles and as they as they launch and build back that inventory like Steve mentioned, you would expect that there maybe a little bit over overweight.
Volume on the on the advanced features in the quarter.
Great and then on that question like how are you looking in terms of inventory level, the company's large customers right now and.
You feel comfortable with where you guys stand right now for this we ramped that we're seeing take place of lot of auto auto manufacturers in the us and also in Europe.
You mean, our our inventory at the OEM or the Oems inventory at at dealers.
I guess, how one a year or how are the Oems inventory right now for your products into are you comfortable with where you stand to be able to fit the needs. The reramp is that accelerates in coming months, yeah absent well on the on our ability to meet demand from our customers. We feel very good about that I mean, the nice part about the hard part about Q2 is.
Given our commitment to automation and what we have in terms of capital equipment, It's really hard to scale that and quick downturn. That's really why you saw the massive decremental margin in Q2.
However, it also does give us the upside of being able to respond to demand if that ramps quickly. So.
Obviously, we would need people to help us build those parts, but at the same time the structure of the infrastructure the capital equipments here and ready to go. So we don't feel concern about ramp up and not being able to meet demand for our customers.
In terms of where our customers themselves are I think the good news of this if there is any is that.
Vehicle inventory levels are pretty low on a historical level, especially with certain Oems and so that really should set us up well at least in Q3 as they look to rebuild as inventory levels at the dealerships that should really help bolster our sales in the quarter.
Great. Thanks, guys.
Thank you.
Our next question comes from Ryan Brinkman with Jpmorgan. Your line is now open.
Hi, Good morning. This has been fully onboard Ryan Brinkman and thank you for taking my question.
Yes, Kevin.
I just have to question one of the first 6% reduction and Opex in the second quarter from wages and discretionary spending how much of that you expect to permanently eliminated from the cost structure and and thinking about window spending starts again, how should we thinking about spreading those.
Numbers over the next few quarters and I have one more question. Thank you.
So on the on the waste reduction.
Really that 35 million dollar savings on annual basis about 40% of it is coming through the operating expense.
Category.
So if you were to take the half of that for the back half of the year you'd be able to get to that number and then the discretionary spending I mean things like travel are still impaired.
Severely meaning theres, they're shutdowns were arch arc travel is limited severely so we would expect that that to come back slowly overtime, but as long as there's still the pandemic travel is going to be impacted and then things like other discretionary items are we're keeping a close lid on.
As we continue to ramp sales and things like that but were we continue to fund program related costs and things needed to continue our launch in development programs.
So we're taking a much closer look at that but I would expect it's still going to be depressed expense wise over the next 12 to 18 months.
Thank you.
And pull up to that one went up.
One expanding coming back when it capex started to come back how should we think about Q3 to four and then I'm going to the first two quarter of next year.
Yes, I think we had given guidance for that $60 million to $70 million on annual basis. We spent about 30 million through the first six months.
We have a couple of.
Projects that were in process and those are continuing throughout the year, it's going be pretty even flow throughout the back half of the year next year I would expect it to be as it really depends on how light vehicle production ramps, but we do have from an equipment perspective capacity. That's obviously underutilized right now so we feel pretty good that will probably being a little bit lower.
Miniature budget going into 2021 as well just given the fact that the light vehicle production market as it's dropped considerably things that would change that though is if we have consent considerable growth and FDM that we don't have capacity for and some of the other advanced projects wanted to be clear. We would expect if the business continues to grow into 2021, it will be higher than the capex.
Spend was and 20 and 2020 so.
60 to 70 for this year 30 to 40 in the second half is what our Capex guidance is for Q3 and Q4, we would expect if the business responds the way we hope it will in 2021 that would probably who will definitely be higher than that $60 million to $70 million range for this year.
But that all the way, but not all the way back to that $100 million range, we're running at our guided to last year.
Got it got it. Thanks, So thats really helpful. Just my last question related to the large demographics and.
Now what did the progress under large dimmable, it's Andrew I know that you showcase that product.
Earlier, this year and so far we always index product on yes. So we're continuing neal's teams continuing to focus on the development aspects of what that product looks like a lot of testing theres that there's a tremendous amount of work that has taken place and we'll need to continue to take place.
Especially that allow us to give samples and prototypes proof of concepts to our customers. So.
Really looking at kind of 24 to 36 month window.
Before we probably will have hopefully get to the point, where we have a program announcement or at least feel confident enough to take that next step with an OEM customer.
Okay. That's helpful. Thanks, so much appreciate it thank you.
Our next question comes from Mark Delaney with Goldman Sachs. Your line is now open.
Yes, good morning, and thanks very much for taking the questions.
My first questions on the due 2020 guidance for revenue that's implied based on the two which our guidance into tier results.
And I think if I put that together the new 2020 revenue outlook is a bit below what the company had been expecting as of last quarter and the I Hs production numbers of the company's using I think are still pretty similar down about 20% some hoping to understand whats the bridge to the do implied.
20 revenue outlook compared to the fire deal.
Well it is slightly lower than what our previous guidance was what you have to remember an April 24th when we posted Q1. The pandemic was just starting we were all expecting that the state shutdowns would be over by mid April that obviously continued into may and those rolling shutdowns happened not only in North America, but then in Europe.
And so yes, there. The then if you look at production estimates then versus what they change to now it's drastically lower than what it was then and that's what the primary driver of the change in revenue guidance.
Actually our revenue in the second half has held up very well in comparison to what our initial forecast was for the second half of the year.
On the majority of the impact that you're seeing was all actuals in Q2, and it was really driven by the extended stay shutdowns and production shutdowns at our and our customers.
Okay. That's helpful and my follow up was dead to better understand qualitatively.
What the operating environment as in terms of engaging in.
New projects with your customers and.
The company being able to still complete projects and when bookings and a more virtual environment or is there anything that.
You are taking place there that's us so problematic. Thank you.
No. That's a that's actually great question is probably one of the harder things to do is how do you. How do you how do you bring up especially given what we sell on the type of products that we tend to have introduced our customers. It's really difficult introduced new technology when it in a virtual environment.
Obviously, the other factor is that many of our customers are dealing with cost and pricing pressure issues and and trying to work from home issue. So.
It is definitely put a slowdown in terms of how you can ramp new product concepts with your customer certainly you're not dropping off proof of concepts and let them drive vehicles. The same way. So that's probably been the most difficult part of this is looking out three to five years, how do you make sure that you keep.
An eye on growth rates and new technology that will help propel the company in that three to five year window, and so that once that ones. One we're still working through and so theres a lot of creative ideas.
Fortunately in some of our markets like Neil mentioned, the the Toyota Harrier DVR launch in Japan.
It was Japan continued to work through a lot of the the pandemic and so we are able to our team in Japan was able to do a great job continuing to push our technology with that customer and Fortunately that that's got a lot of excitement at Toyota for new products, new product concepts of what we can do not only it with mirrors, but literally with our camera system.
James and digital digital driver quarter. So we're excited about that Theres no doubt, though that with certain customers. It's more difficult now to introduce new products. The fortunate part is if there is anything good news in there it's same for everybody.
All suppliers are struggling with how to you engage with the customer working remotely or through some of the job eliminations that have been announced with certain of the Oems.
Thank you very much.
Thanks Mark.
Our next question comes from David Whiston with Morningstar. Your line is now open.
Thanks, Good morning.
First on the 35 million comps.
I'm just curious what how much of that is just.
Street.
Byproduct of headcount reduction and what percentage or headcount on due to these cuts.
100%.
So it's all people okay.
Okay.
Okay and on the supply chain.
Thanks, two questions there the is there any.
Going upstream for you is there any weakness in getting any shortages in terms of getting raw materials electronics, and then any do any tier two or three players have.
Working capital issue with the ramp up coming now.
The right now we're not seeing any issue in terms of supply chain, making sure we get enough volume to one the one nice thing I mean, if you think about where we were 18 months ago automotive was had grown quite a bit there was a lot of constrained suppliers in terms of at capacity.
Given the slowdown in the lower volumes, we feel pretty good about not having that issue for the foreseeable future in terms of bumping up against capacity issues in the supply base.
Sorry, David yet one there was a second part of that but.
I was just asking about some of the availability of things and then also do any of the upstream players have a working capital issue ramping Olympians are wrapping up well that ones that one is probably the most concerning quite honestly as you look at the supply base.
Automotive is pretty notorious for haven't pretty thin margin profile. So as you take 2030, 40% of the volume out of the game what is their decremental margins look like what does their ability to maintain profitability and stay and stay liquid through this so that's one that our team our purchasing team continues to look at this one of the key factor is that they have been better at over.
The last several years is understanding the overall financial health of the supply base. So that's one we'll continue to look at we do have we do know the the suppliers that have issues with those and it's something we continue to watch and monitor to make sure that they're okay financially not just not just their ability to produce barge, but ability to stay solvent.
Thanks, and then going downstream from you guys automaker level or are there any disruption that these are your customers plants from either print shortages unrelated to gentex or worker absenteeism, that's preventing Jeff thanks for making shipments to your customers.
Nothing I would say this preventing us from making shipments early in the process there were definitely some issues around other suppliers.
Based on where they were government based shut downs you name it not able to get parts and that caused some automaker. Some problems. So that definitely probably did impact the quarter, especially in Q2, we're not anticipating that being a huge problem going forward.
The supply base for the most part is pretty much up and operational and most of our suppliers are running at pretty high levels in terms of their efficiency versus where they were pretty pandemic. So we don't feel like there is a huge risk factor to that right now.
If the strength continues to happen through Q3 in Q4, obviously that could be a problem as it relates to availability of labor, but then also availability of components at our customers.
Okay. Thanks.
Thanks, David Thank you very much David.
I'm showing no further questions in queue at this time I'd like to turn the call back to Mr. overseas for closing remarks.
Thank you everyone for your time and attention today, we appreciate the questions in the call and we hope everyone has a great weekend.
Ladies and gentlemen, thank you for participating in today's conference you may now disconnect.
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