Q3 2020 Gentex Corp Earnings Call

Ask a question during the session you won't need to press star one on your telephone if you acquire any further assistance. Please press star Zero I would now like to hand, the conference Speaker today, Josh Abramsky director of Investor Relations. Please go ahead Sir.

Thank you.

Good morning, and welcome to the Gentex Corporation third quarter 2020 earnings release Conference call I'm, Josh 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 Nash, Vice President of Finance and CFO.

This call is live on the Internet and can be reached by going to the Gentex website www dot Gentex dot com.

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Gentex Corporation will hold responsible and 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 third quarter 2020 financial results press release from earlier this morning, and as always shown on the Gentex website your.

Your participation in this conference call implies consent to these terms.

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

For the third quarter of 2020, the company reported net sales of $474.6 million, which was a decline of 1% compared to net sales of $477.8 million in the third quarter up 2019.

We finished the third quarter of 2020 with a second highest sales quarter in company history behind only the third quarter of 2019.

The impact of the COVID-19 pandemic that created extended shutdowns in the automotive industry during much of the second quarter continue to impact global light vehicle production, which was down 4% for the third quarter.

When looking at regional production for the third quarter of 2020, the China market expanded by 11% the European and Japan Korea markets were each down approximately 8% in the North American market was relatively flat.

The company's largest revenue generating markets, our North America, Europe, Japan, and Korea, which were collectively down 5% quarter over quarter.

The third quarter began with a slow start as orders in July were far behind prior year actual results, but as the quarter progressed, our customer orders continue to grow and ultimately the quarter ended at the highest sales levels of the year.

The change in sales volumes from the second quarter to the third quarter created numerous difficulties from an operations and planning perspective, but our team met the challenge and it's doing an unbelievable job to meet our customer orders with a very high level of operational efficiency.

During the third quarter volumes increase so quickly that it became very difficult for our operations teams to keep up but in typical gentex fashion. We had many salaried employees volunteered to help build parts to ensure we were able to meet our customer orders.

For the third quarter of 2020, the gross margin was 39.7% compared to a gross margin of 37.7% for the third quarter of 2019.

Gross margin improved significantly on a quarter over quarter basis, which was driven by the strength in orders during the quarter and the previously announced $35 million in annualized structural cost reductions that took place in the second quarter of 2020.

Gross margin was also positively impacted by purchasing cost reductions and improvements in tariff related costs, which together were able to offset offset the impact caused by annual customer price reductions.

The cost savings actions that we took during the second quarter had a sizeable and direct impact on the results reported today.

These efforts have reset profitability of the company for the second half of 2020 and set the stage for what we believe will be strong margin performance as we head into 2021 and beyond.

The third quarter of 2020 margin performance was the result of quick decision, making and flawless execution by the entire Gentex team.

Operating expenses during the third quarter of 2020 decreased by 5% to $49.4 million compared to operating expenses of $52.2 million in the third quarter of 2019.

The decrease was primarily driven by the structural cost reductions made during the second quarter of 2020.

Income from operations for the third quarter of 2020 was $138.9 million, which was an increase of 8% when compared to income from operations of $128.1 million for the third quarter of 2019.

Operating income improved on a quarter over quarter basis, driven by product mix operational efficiency and the structural cost changes that were executed in the second quarter. It was.

It was also positively impacted by the fact that many of the industry trade shows that we normally participate in have been canceled due to the pandemic and most of our business development teams have been unable to travel to customers globally the comp.

The company looks forward to being able to display products at trade shows and getting back to more normalized levels of business travel to our global customers.

Once the selling expenses begin to increase it is expected to have an approximate negative impact of 50 to 100 basis points on operating margin, but should help the company secure our future order pipeline.

During the third quarter of 2020, the company's effective tax rate was 18.1% up from 15% during the third quarter of 2019.

The increase in the tax rate was driven by lower foreign derived intangible income deduction, lower discrete benefits and certain state taxes.

The company had a 5% increase in net income to $117.1 million for the third quarter of 2020, which compared to net income of $111.9 million in the third quarter of 2019.

The increase in net income was accomplished despite the quarter over quarter reduction in sales when compared to the third quarter of 2019.

This increase in net income was driven by increased gross and operating profits, which were the result of the positive product mix in the quarter operating efficiency and structural cost savings that were put in place during the second quarter of 2020.

The company had earnings per diluted share for the third quarter of 2020 of 48 cents, which compared to earnings per diluted share of 44 cents for the third quarter of 2019, primarily as a result of the increase in net income as well as a lower diluted share count when compared to the third quarter of 2019 as a result of share.

Purchases.

During the third quarter of 2020, the company paid down $50 million of debt on our revolving credit facility.

We currently anticipate that we will pay the remaining balance on our credit facility during the fourth quarter of 2020.

During the third quarter of 2020, the company repurchased 1.2 million shares of its common stock at an average price of $26.93 per share.

As of September Thirtyth 2020, the company has approximately 11.9 million shares remaining available for repurchase pursuant to its previously announced share repurchase plan.

The company intends to continue to repurchase additional shares of its common stock in the future and supported the previously disclosed capital allocation strategy, but share repurchases may vary from time to time, and we will take into account macroeconomic issues, including the impact of the COVID-19 pandemic market trends and other factors that the company deems appropriate.

With that I will now.

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

Automotive net sales in the third quarter of 2020 were $464.7 million compared with $464.3 million in the third quarter of 2019.

Automotive net sales were strong during the quarter of 2020, despite the 3% quarter over quarter decrease in auto Dimming mirror unit shipments.

Generally driven by revenue growth of the company's full display mirror product others.

Other net sales in the third quarter of 2020, which includes Dimmable aircraft Windows and fire protection products were $10 million, a decrease of 26% compared to other net sales of 13.5 million in the third quarter of 2019, Tim.

Dimmable aircraft window sales decreased by 52% for the third quarter of 2020, when compared to the third quarter of 2019. The company expects the Dimmable aircraft window sales will be impacted until the recovery of the aerospace industry begins and the Boeing Boeing 77 aircraft production levels improve.

In terms of the balance sheet during the third quarter. The company continued to focus primarily on maintaining high levels of liquidity in order to remain well positioned for multiple economic scenarios as preview.

As previously mentioned during the during the quarter. The company began repurchasing shares but also pay down approximately two thirds of its debt.

I mentioned, a few key balance sheet items as of September 30, as compared to December 31 of 2019.

Cash and cash equivalents increased to 400.5 million up from 296.3 million, primarily due to year to date cash flow from operations and investment maturities, which were partially offset by share repurchases dividend payments and capital expenditures.

It's from investments were 52.3 million down from 140.4 million.

The company had approximately $88 million of investment maturities the majority of which were not reinvested during the second and third quarters of 20 Twond.

Long term investments were $159 million up from 139.9 million.

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

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

Accounts receivable increased to 268.5 million from 235.4 million.

The increase in Aer was due to the significant increase in sales during the quarter and more significantly the timing of the sales within the third quarter.

As of September 30, all the Companys tier one and OEM customers continue to be in good standing.

Inventories were 233.3 million down from $248.9 million as a result of lower raw material cereal inventory and finished good inventory levels as per.

As production and sales levels have increased raw material inventories that bill through the second quarter have moved down to a more normalized level.

Our purchasing and supply chain teams have continued to manage through certain supply chain stresses and supplier issues and have done an excellent job of making sure operations have not shut down as a result of component shortages.

Accounts payable decreased to 90.2 million down from $97.6 million and accrued liabilities were $146.2 million up from 74.3 million increases were due to increases in accrued salaries and wages accrued income taxes as well as increases as a result of the draw on the Companys line of credit.

Third quarter 2020 cash flow from operations was $138.6 million up from 110.5 million in the third quarter of 2019 the.

The company was able to realize a year over year increase in operating cash flow as a result of the increase in net income during the quarter and fluctuations in working capital here.

Year to date cash flow from operations was $329 million, which compares to $383.9 million for year to date cash flow and 19, driven by the lower net income in the second quarter of 2020.

Capital expenditures for the third quarter were $8.2 million compared with $12.9 million for the third quarter of 2019 and year to date 2020 capital expenditures were 37 million compared to 58.3 million year to date and 19.

Depreciation and amortization for the third quarter of 2000 $20 million to $25.1 million compared to 26 million in the third quarter of 19 and year to date depreciation and amortization was 78.5 million compared to $79.3 million for year to date 19, I will now.

Ill now hand, the call over to Neil for a product update.

Thank you Kevin for the third quarter of 2020 through 23, net new nameplate launches over interior and exterior auto dimming mirrors and electronic features net of previously disclosed feature headwind.

Of the total launches approximately 50% had advanced features.

Advanced feature launches in the quarter were led by new launches of Homelink integrated toll module and full display mirror.

We're excited to announce that during the third quarter of 2020, we began shipping full display mirror, two or eight OEM customer CA.

Developing and launching the FDM technology or FCTA was a great cooperation between both organizations to bringing exciting technology to market.

During the third quarter, we began shipping FDM on a total of four new name plates. These nameplates are as follows the Jaguar I pace. The Ram 1500, Trx, the Ram Promaster and the Toyota Venza.

The variety in these nameplates helps to show how broad the use cases are for the FDM product and we're excited to see them come to market.

For 2020, we have launched full display mirror on 18, new nameplates.

Our final launch LP for today's in regards to integrated toll module.

During the third quarter, we meet or first production shipments of ITM on six new platforms rowdy.

Currently we are shipping ITM on nine platforms rowdy and they are as follows the 80 480 580 687.

Q fives Q seven Q eight.

Each on an E Tron sport back.

We're excited with the progress of the ITM launches and we continue to see great interest in this technology from our customers.

The third quarter of 2020 was a strong launch quarter for the company and the Gentex team has done an incredible job keeping these launches moving forward even with the adverse conditions, we've had to deal with in the second quarter of this year.

Now I'll hand, the call back over to Steve for guidance and closing remarks. Thank you Neil.

The company's current forecast for light vehicle production for the fourth quarter and full year 2020, and 2021 is based on the mid October 2020, Hs market forecast for light vehicle production in North America, Europe, Japan, Korea and China.

Based on this information light vehicle production and the company's primary markets are expected to be down 2% for the fourth quarter of 2020 versus versus the same period last year.

For 2020 light vehicle production and the company's primary markets is expected to be down 16% when compared to 2019.

For 2021 light vehicle production in the company's primary markets is expected to be up 12% when compared to 2020.

Based on this light vehicle production forecast and the structural changes that the company has made over the last several months, we have updated our previous guidance estimates for the second half of 2020 to the following.

Revenue of $940 million to $960 million gross margin between 39, and 40% operating expenses between 95 and $100 million tax rate between 16, and 17% capital expenditures between 25 and $30 million and depreciation.

And amortization of $50 million to $55 million.

Given the magnitude of changes this year. The company continues to believe that providing updated second half guidance, we'll provide a more accurate representation of the new cost structure and financial performance of the company for the remainder of 2020.

Also based on the mid October 2020 light vehicle production estimates for 2021, the company as reintroducing revenue guidance for 2021.

Despite the fact that there continues to be significant uncertainty regarding macroeconomic conditions underlying overall consumer demand for light vehicles worldwide and the continued impact from the COVID-19 pandemic.

We currently estimate that revenue for calendar year, 2021 will be approximately 15% to 20% higher than estimated revenue for calendar year 2020.

While we have enjoyed a very rapid recovery in light vehicle production over the last several months, we remain cautiously optimistic about the trends in the economy heading into 2021.

We adapted very quickly in the second quarter to the Cove at 19 pandemic to adjust our cost structure, because we were estimating that global light vehicle production and therefore, our total addressable market was likely to be much smaller over the next few years than it was from 2017 to 2019.

Despite the cost changes we made during that time, we remain focused on further developing and adding to our product strategy and launch execution to help us maintain our history of growth that outperforms the underlying market.

We believe that our focus on both cost control and new product innovation will provide above market returns for our shareholders over the next several years.

Lastly, I don't do this very often on earnings calls, but my last comment today as for the team at Gentex I realize the last seven months have been unbelievably difficult on you what has made it even more difficult as that we havent been able to hold any of the large meetings that we usually have each quarter. So that we can communicate what is happening our plan and why we believe that.

Future is bright for Gentex, but this.

But despite the challenges and the changes you delivered again.

You've already read this and letters and business updates from me, but I believe that you deserve deserve to hear me say it out loud. Thank you.

That completes our prepared comments for today. Thank you for your time and we can now proceed to questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone so let's try your question the key.

And I will be compiled the candidate roster.

Our first question comes from Jim Covello with Keybanc capital markets. Your line is now open.

Hey, good morning, guys and congrats on a really great quarter here.

James So extremes.

If we if we scrubbed the run rate the second half.

Next year, you'll have the 50 to 100 basis points impact on EPS Junaid right, maybe that trends toward the low end of the range, just assuming travel and trade show spend in the in the first half of 21 is a much higher price and the current run rate and then.

Gross margins you are guiding the second half at 39.5% you mentioned, some purchasing cost reduction benefit, but so that likely picks up but you also have call it $10 million to $11 million in incremental Cogs savings from the restructuring effort. This year into next year. So.

What's the right run rate for gross margins as we think about next year and you can you just help bridge both of those buckets.

Buckets.

Sure. If you look at the overall gross margin I think the one thing that did help in Q3 that we mentioned in our press release was some help from white collar employees, who are helping build parts. So gross margins were a hair higher than what we'd expect going forward, but that total is probably only 25 to 50 basis points impact on margins. So I honestly as we stand here today.

They probably somewhere between 38 and a half to 39 and a half would be the range, we would give for next year.

38, and a half to 39 and a half yes.

Yes, yes.

Okay.

Yes, so thats.

Very encouraging.

And then for directly him.

Sure.

What's the right target for for this year's shipment number.

If you look if you look at.

If you look at last thing Yeah, I mean, we lost if you look at if you take Q2 out of it we were right in line with our original annual guidance, we probably made up a little ground even in the back half made up a little bit of what we lost in Q2 on the bat and thus in the back half of this year. So we're going to be down from our original target for this year, but.

But definitely not not a full 25% down.

Got it and then just last one as we think about your strong free cash flow from here very clean balance sheet.

Is there a targeted.

Total cash and investments number.

As we think about what your potential cash deployment is toward buybacks. Their targeted number you have in mind for two.

Our total cash.

Yes, a little cash and investments.

Look at 125 million yet yeah. If you look at it I mean total cash and investments I mean, we're going to be somewhere in that 550 that call at a little over 600 range is kind of where we're comfortable.

So what we're focused on right now is as you saw in Q3.

And we waited till we are pretty pretty far into the quarter and we start to see customer orders respond and then cash flow build thats. When we started repurchasing. So that's kind of what we're watching as we move through the last quarter here and then they are into early next year as long as cash generation continues like it has been in Q3, you'll see us get active on repurchases again.

Got it congrats again, thank you.

Thank you thanks James.

Thank you. Our next question comes from David Kelley with Jefferies.

Your line is now open.

Hey, good morning, guys.

For taking my questions, just maybe starting with the.

Launches, how without a just writing feverously to keep up with the number of the model as you mentioned how are you thinking about kind of the go forward trajectory.

For our IP.

Just trying to get a sense of the size of contribution into 2021 would be great. Thanks.

Yes, so from a from OTI perspective, you will see it continue to rollout.

Vehicles. The multiple models that were read off were mostly the 2021 was the 2020 ones continue to come out you will see ITM show up as a standard feature in those products.

Late this year into the beginning of 21 will begin also shipping on our second OEM for that product as well so it continues to.

Growth is not as fast as some of the other technologies, but we continue to see the interest in expansion on that.

And the nice part about that in terms of contribution really given that we're still with our launch OEM Youre looking at port like Neil mentioned in the <unk> and as in his comment there were basically standard on most Audi vehicles in North America, and so you can get a sense of total aldi volume and sales in North America to give you a pretty good estimate.

Like what our volume is.

Only and typically we're in that kind of 50 to $65 price point for ITM.

Okay, Great Thats Super helpful. And then maybe switching to our cost in the quarter were there any onetime costs such as over time to meet the significant ramp up in production production volumes. You know that we were just trying to get a sense for.

There might be any offsets to the lower trade show and travel cost and the implications of that move and move forward.

I'd assume reversal of those two EPS going in.

Going into the ended the year here.

Yes, we've been pretty busy as Steve mentioned, it started a little slow but orders ramped up pretty heavily so our teams were struck stretched a little bit work in a significant amount overtime and we would expect that that would abate as you move through and things start to normalize in may offset it but you know you have you have to continually balance that with.

Wage growth and expense management, so I think but nothing but nothing on the EPS unit side that that would have been higher that would have that would be a natural offset to trade show marketing expenses.

Okay got it perfect. Thanks, and maybe last one just if I could squeeze one in Dimmable aircraft sales you noted down 52%.

Do you expect a further sequential deterioration or are we pretty much bouncing along the bottom from here.

Yeah. It could go lower I mean honestly when you look at Boeing making announcements about changing production footprint of where they're going to be building. The 77, and the fact that they've made some pretty drastic cuts to their estimates for plain production.

It could go it could go lower on the good news is it's basically 1% before that reductions there was 1% of revenue. So it wouldn't have a material impact on the topline obviously it can impact the bottom line, a little more significantly than that but it.

It could it could move lower from its run.

It's running about half the last quarter rant about half of where it was prior year it could go lower than that yet.

Okay got it thanks, guys the problem here thanks, David.

Thank you. Our next question comes from John Murphy BLE. Your line is now open.

Good morning, guys I, just wanted to actually follow up real quickly on.

On the prior question. So you have white collar workers working the line.

You are seeing that actually can create incremental cost. So I'm. Just curious if you could just seem like you are kind of that scramble would create some temporary inflation in costs would disappear overtime that just wasn't the case well what.

Well, what you'd see is that our actually our scrap rates in our yield losses were down in the quarter. So those those savings actually offset some of the inefficiencies of what we had going on what Kevin mentioned on the overtime side. So.

I would say that these are very very high levels of gross margin. So I don't think there's anything yes, theres not a whole lot of upside to that just based off the fact that we are working overtime and some of the scrambling that we had to deal. The teams are incredibly efficient during that period. Despite the despite the chaos.

Okay, and then just a second question on on mix seems like it.

Seems like it was very strong in the quarter for both full display and then added electronic features I. Just just curious how sustainable you think that it seemed like it was a quarter, where the auto makers were producing very high end vehicles I'm just trying to understand you gauge what you think is going to happen.

Mix going forward and what kind of impacts that specifically made had on gross margins.

Yes, so I mean, if you look at the strong North America rebound I mean, that's obviously plays very well into our feature set with FDM being the primary driver outside mirror sales were very strong in the quarter as well catering into that North American launch but.

As Neil talked about the continued launches of the new vehicle platforms, that's what's going to continue to sustain the strength and product mix as we go into the next.

The rest of this year and into next year, when I would say product mix self was probably only up on a year over year basis was probably only 50 to 100 basis points on the rest of it was operational efficiency cost structure improvements things that we did deliberately.

And Thats, what helped the margin improved.

Okay. That's very helpful and just just a follow up on that also just yep DM versus ITM. When you when you look deeds.

Those sort of newer feet newer features or new products I should say.

Is there a big Delta in the margin you're getting on those versus traditional sort of trying to get them either in house.

Oh I see that you guys have developed that you're getting paid for as opposed to some of the electronics. It will pass through in the past I'm just trying to understand it does come through.

How much higher those margins are then like base margins.

Well if you look at if you like so our base mere margins.

As we've kind of talked about in the past are usually in the high teens low twentys from a base auto dimming inside mirror standpoint, almost all of our advanced features the new things that we've launched in the last couple of years are all at or slightly above corporate average margin and so that's what's really helping as those products that were base mirrors transition to advanced features that's why we really.

At the margin uplift because you not only get the incremental dollars, but you're also improving the core mere itself from from a low or high teens to call. It mid thirtys kind of gross margin profile.

Thats very helpful. Thank you so much.

Thanks, Jeff.

Thank you our next.

Next question comes from Ryan Brinkman with JP Morgan.

Line is now open.

Great. Thanks, Congrats on the quarter. Thanks.

Thanks, two for the preliminary outlook on 2021 revenue today I don't think many other suppliers going to venture to guide to next year, just yet given the you know still high macro uncertainty as of now that seems to imply I think that the 15% to 20% about 1.22.

6.2 percentage point growth over market just simplistically looking at HSN is 13.8% growth next year I haven't tried to wait that for your geographic exposure is there anything but I think historically you've targeted more like a 5% plus just curious what your growth over market assumptions, our next year, what might be baked into that.

Well, if you look at our guidance of 15 to 20 on the I just data that we're looking at it was about 12.5% vehicle production for next year.

You know what 12% I think what you're seeing is that midpoint would be at about five and a half points better than production in our key markets.

Okay very helpful that is helpful. And then just last question on.

5 million dollar annual structural cost reduction target.

Is that right.

In any way volume dependent so if the industry continues to outperform would you maybe look to curtail that some how should we think about that now.

No that's $35 million was executed in Q2.

So that's the annualized savings, but it was it was all executed completely in Q2, okay. So none of that needs to layer back on or anything if if volume comes back faster.

No I mean, it already has in Q3, if it continued to come up even faster obviously, we'll scale the business to what orders are but then it would be in line or proportionate to the revenue growth. So it shouldn't deter from the margin performance that you've seen.

Very helpful. Thank you. Thank you.

Thank you.

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

Yes. Good morning, Thanks for taking the questions and congratulations on the good results, especially on gross margins.

I was hoping to dig into the gross margin outlook a little bit more.

Within that commentary of potentially 38.5% to 39.5% gross margins next year any more details you can provide it.

We're thinking about that.

Number in terms of factors like mix.

In volume and pricing potentially absorption, yes. Some of those other factors what are some of the puts and takes within that 38 after 30.

At present view.

Thanks for the question so the biggest.

The puts and takes going into a new calendar year, obviously are annual customer price reductions.

Our team works really hard to offset those but historically, we've talked about that being between two and 300 basis points headwind starting in the first part of the year.

But as Steve also mentioned, we have carry through of the cost of the structural cost savings that we have mix is going well and we would expect that our purchasing team to purchasing supply chain teams will be able to continue to offset much of the annual customer price reductions with the purchasing cost down so depending on.

Depending on the revenue growth the efficiencies product mix all those things really are the same factors that we talk about it every year when we when we give that.

It was more of a back of the envelope, where things are not structurally changing but we know that we do have.

Our.

Typically starting in January again.

Got it Thats helpful.

Just on the.

The content environment more generally and I understand you already talked about what what you're expecting an aggregate as you think about the growth of our production for 2021, but I wonder if you could share any more details on what you may be hearing from your customers on on the.

On the content environment, and you know I think the mix of vehicles has been trending toward the high end for it for the whole market, which should be very good for Gentex. But then you also talked about some of the factors like in this current macroeconomic environment and what sort of content.

Certain vehicles.

I mean features like auto dimming mirror. So just just kind of any more details you can share on.

And maybe potential constraint as you hear from your customers sure.

Sure. If you look at yes, I mean, the Q3 was very solid in terms of average content per vehicle we know.

We know as Oems were working to rebuild inventory levels. They were starting with a higher end feature sets as you as would anyone would do.

And so thats been really positive when we look at releases so far in October and heading through the end of the year, we really don't see that changing drastically from what the third quarter was and so when we when we look at a lot of what we get from data from our customers is we're sourcing programs and we're working on launching we.

We know what their estimated take rates are held their packaging.

Something drastic would have to change at the beginning of next year, let's say for that for that mix to adversely impact kind of the forecast that we just gave I think the bigger risk factor is overall number of vehicles sold what does the consumer what's consumer sentiment average price of a vehicle what a borrowing rates really macroeconomic type trends.

Would be the biggest thing we would be worried about micro kind of decisions that are made about packaging will not have nearly as big of an impact as as large pitcher macroeconomic issues would have.

That's helpful. If I could ask one last question just on the longer term outlook for for for the easier products and electric vehicles.

Proposals for somebody else goes to use either smaller outside mirrors are camera in order to maximize the potential.

Range at about object vehicle can can travel, but again these are all high end vehicles.

Typically in and maybe those are actually in a really good opportunity for Gentex, maybe you can talk a little bit more on what you're seeing on on design and for for your products.

For mirrors.

Within the antibody electric.

Vehicle market in particular.

Our high level first I'd say on both vehicles, we do really well on content. If you look at the consumer if you look at the average price of those vehicles, what you'll see is a trend towards technology, which suits us really well, whether it's with FDM or other advanced electronic features you look.

You look at the LD for instance, in the E Tron and that was our launch vehicle for our integrated toll module product and so we feel very well set up to be a part of that that trend and take take advantage of those of those trends.

When you look at when you look at what's happening in the space as it relates to cameras, replacing outside mirrors, the talk and a lot of the movement that happened over the last couple of years has actually slowed down a little bit.

Primarily because of the cost structure, the difficulty engineering and getting those products in the space and the cost. Once you do we still believe we have a superior offering in that space and we're excited about what opportunities that will bring we think it's just going to be a few years longer than what everyone estimated it will be before you'll start to see and.

And that requires a lot of.

Legal changes to happen in various parts of the world before it becomes mainstay or even even a larger portion of the market right now youre talking tens of thousands of vehicles sold globally with this type of technology, and primarily because of multiples more expensive than the than existing auto dimming technology and so we continue to be excited about the opportunity around.

Presents but we think it's going to be a few years out versus how fast the market seem to think it was going to happen.

Thank you very much.

Thanks.

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

Thanks, Good morning.

First a question on unit shipments the one positive outlier. It was north American interior was actually up on us.

Just curious why.

Yes, it's really driven by that that increase in light vehicle production.

From the first.

The first part of the quarter to the end of the quarter were Oems are really trying to fill that pipeline get vehicles on dealer lots and then as Neil talked about read some of the vehicle launches FDM launches have been very strong and the strong mix towards high end vehicles contributed.

Contributed towards that.

Yes.

And how would you gauge.

I don't know how much it's like you can get into your customers.

I am customer state of mind is on the on supply chain and what not but.

I mentioned in April is extremely frantic admits inventories still quite done as you know so do you think it's a little bit less frantic for them and it was three four months ago were about the same.

I would say, it's a little less than it was then I mean, if you look at if you look at what was happening then you're you're dealing to with government intervention at the time, telling you.

Telling you what you can and when you can and cannot work how much.

And so that added a whole layer of chaos that unfortunately, right now were not having to deal with it.

In terms of trying to get back up and running the hardest part Oems had then was trying to make sure you could staff each plant that you could get make sure your supply chain with secure.

So thats happening now, but for a different reason before it was did everyone gets started could everyone make sure a guarantee they were started back up now. It's do you have the right number of people do you have the capacity in place and can you keep up with demand and so that's that's really probably what the next month or two looks like as you know what does all of September was was really dealing with can start.

Paints and trying to make sure that your entire supply chain is operational.

Operational and able to produce the capacity that's needed and that's a similar problem that we had in the quarter and where the Gentex team really stood up well was making sure that we are supplementing where needed and people volunteer into change buildings changed lines whatever needed to be done to make sure we kept up with customer demand.

So you have not had any customers say well we need these mirror units by tomorrow or next week, but then say well never mind, we had too many people call in sick are we at the south.

Top line or slow the line nothing like that no.

No I mean whats happened as you have customers changing orders a lot like on this side, usually its canceling orders when they when you're on the when you're coming into a bad time to sign that can we get 10% more than what we said are 15% more than we said.

Typical gentex than we try our best to honor those if we can't we just give them a applicable time under which they can get those parts and typically given the supply supply chain, there's flexibility from the Oems. So if they have a request and if you give them a reasonable response, you can usually find a way to make sure you get on the parts they need in enough time for them to build the vehicles they want.

Okay and on the guidance the second half operating expenses are higher despite the structural cost reductions. So just curious what looks like a dynamic there was increasing versus the decreases from Q2.

The.

Really driven by the fact that the margins improve and our corporate profitability improved which then ultimately our profit sharing bonus which is really for the employee level all employees share in that that drives a little bit of increase there.

Options expensing things that things that we're estimating based on the performance and our expectations of what stock price will happen, obviously that moves options expensing in and there's a few others. They unlike like Neil mentioned, there's a lot of launch activity going on and so what you're going to see a lot of that flow through the R&D line items.

So it's mostly comp in launches is that fair.

Yep.

Okay. Thanks, guys. Thank you.

Thank you David.

Thank you Ashley reminder, to ask a question you will need to press star one on your telephone.

Our next question comes from the junk with Baird. Your line is now open.

Good morning, everyone.

First question I wanted to ask is maybe a little bit more of a hypothetical and that is if there were to be a change administration, I mean, who knows of course, but.

If there was we could maybe see a softening in the U.S. this stance towards China and Im just wondering if you could.

If you could walk through the potential benefits to the company if that did happen both in terms of gross margin as it relates to tariffs and perhaps more importantly, just the ability of the company to compete in China more broadly.

So the obvious it lists lets just assume for a second there were a change in administration and then the trade war or to slow down or stop.

There's upsides and downsides to that as well number one on the upside would be obviously, our duties and tariff rates would drop on.

On incoming components, but also on our exports hopefully they would drop on our exports into the China market, hopefully, making our price point, a little more competitive for you for shipping into the China market.

On the flip side of that though you have and you would expect to have increased competition from from.

Copy copycat type suppliers in the China market. So there.

Theres, obviously, theres pulp pros and cons and you would expect that youre not going to get much help from the Chinese government if that were to change in terms of support for representing enforcing and.

And helping.

Imports into the China market from Us based supplier so.

I think it's hard to determine what the net of that is of the pros and cons, but those would be the two common kind of areas that we would see and expect if that were to happen and then one other item to consider and that theres not a lot of details coming out but I think.

I think if there was a.

If there was a change administration a lot of the talk around increases in corporate income tax rates is certainly.

One of the primary agenda is there in that in that camp. So you would expect a negative impact there and very concerning as you can imagine.

Right. Okay. So some good things to consider I. Thank you for that and then second just looking a little further into 2021 in terms of the FDM just any very high level Guardrails, you can give us around the pace of launches 2000 is still a good starting point or maybe could that get squeezed a little bit higher.

If we see this trend towards sort of the higher end vehicle mix that we're seeing currently continue.

In terms of launches our annual volumes in terms of the launches I don't.

I don't think launches will change I mean, if you look at the engineering function and the time lapse. It takes to get them queued up and ready we feel pretty comfortable where we're at for the rest of this year and into 21, I don't think that'll change a whole lot.

Okay. Thanks for actually it makes my first actually I meant to ask in terms of just the just the unit.

The unit numbers, yes, if you look at if you kind of like we said, we lost a little bit it because the Q2 and not being able to ship there for a while but if you look at that trajectory. We were on from last in the last couple of years to what we expected. This year and then that trajectory we expected to continue into next year. So factor out that we lost.

Yes, all good portion of Q2, but the trajectory itself hasn't changed in other words, what the growth rate was and the total number of units we expect to add on an annual basis, we expected that would continue and build through 20 and into 21.

Okay. Thank you.

Thank you.

Our next question comes from Josh.

Your line is now open.

Yes, Thanks for taking my question and clearly a an exceptionally strong quarter here.

Looking here great to see the North American interior mirror market actually up 4%.

I would assume that that's bolstered by the growing dominance. So we're seeing that some of these higher value trucking.

As should we have you seen a material increase in some of these markets for penetration rates for the interior or exterior mirrors as far as like Jim a little class is there significant opportunities to further push that forward over the next October 24 months.

Yes, if you're talking about penetration, that's a pretty steady as you go.

We've seen about a percent of your if you look at the across the across the landscape again, the nice part about North America as we are getting a ton of foothold with the new vehicles, the FDA programs GM.

GM truck as you mentioned before a lot of a lot of platforms. There really were in heavy launch and the Oems really.

Trying to get dealer dealer.

Inventory to an acceptable level it to the level that they were hoping for so I don't think the penetration necessarily has increased on a step function, but we continue to work.

Nickels and platforms that we don't have exposure on.

Thank you then just looking at the full display mirror, great to see such a sharp rebound in the third quarter and I know next year, if you guys and 15% to 20% sales growth fair too.

Fair to assume I would think that that.

DM piece of the business would be growing materially faster than that as far as what you have planned for launches any detail you can provide around that.

No your assumptions right, what I would say and what we've been consistent with a couple of hundred 250000, 300000 kind of a unit growth rate that we are expecting for this year on FDM. We had expected initially for that to happen and 21 as well and so.

So thats kind of the trajectory we're still on.

Great and then I.

I guess, what's the ability I guess to.

The address a larger percentage of marketing here to really bring down costs for the full display mirrors the penetration rate can expand a little bit more.

Bounce officially over the next couple of years to a more material percentage of the overall market.

Yes, we've been working on that and that a lot of the customers that we're launching with now there's a much wider variety of price points that we execute full display mirror with so at the beginning everything was kind of in that 225 to $250 per unit.

Come down because that was four years ago, Thats come down 3% to 4% a year in essence, so you're really kind of in the 200 to 225 range now for most products. We also have lower cost versions smaller display is not all the bells and whistles certainly not all the graphics processing capability in every product depending on what the OEM wants and so you can see price points.

As low as 150 to $180 on depending on the size of the display and what type of graphics processing. The OEM once done and so we do have a wide variety that we offer our customers on that you start to see these on multiple Oems, sometimes you can notice a difference in those products certainly when you drive them or how the OEM chooses to handle that grafix process.

Nothing can lower our cost to them if they choose to do it at the camera and video processing block so there.

So there is already a wide variety of price points. That's what has allowed us to continue to grow the number of Oems and the units.

Great and then last question for me is there any real material difference I know that you have relationships pretty much all the automakers as far as penetration rates for the company's products amongst the various Oems, particularly but the larger Oems are the opportunities to improve with one or two manufacturers specifically.

Yes, there is a there is a lot of opportunities. If you look at the high end or luxury builders.

Tend to have very high penetration rates of our core auto dimming technology.

There are real opportunities start to come from our when you look at volume producers and.

As our core auto dimming technology get packaged in such a way that offers the most upside I mean, if you look globally right now I think we're still only on about 32% of vehicles produced with our inside mirrors and sub probably 15 14, 15% I would guess.

Penetration rate on our outside mirrors. So there is still significant amount of upside potential for us to continue to grow our core auto dimming technology. In addition to that if.

In addition to that if you look at full display mirror your tuck in just a very small percentage of the total global production that has that type of technology. So we're still excited about the upside potential.

Not to mention the things that we've been showing at CES things like integrated toll module and some of our newer technologies that we've been working on that haven't even really begun to hit the market yet.

Thank you I'll hop back in the queue.

Yes. Thank you firewall, if you've got any other Josh yes.

I guess, one more I guess, if we want to talk a little bit about.

More broadly like how material could.

The ITM opportunity be I know thats still relatively nascent offering, but if you could elaborate on that a little bit that would be helpful.

On on FDM.

Okay, Yes, yes, I think if you look at it right now the full all end market potential right. Now is just the north American market on the product itself is specific to North America. So if you look somewhere between depending on what you think Saar is somewhere between 15 and 17 million vehicles. That's that's the obvious cap beyond that.

You have to deal with how does an OEM on a package this luxury segment only.

Geographically, obviously theres a theres a bent towards where this is more useful today, obviously on the coast in the south.

Those are very high.

Some parts of the Midwest like Chicago, but Theres definitely pockets of places in the North American market, where vehicle sold in those spaces will be much more useful product for them and it would be in other places where totaling isn't as common. So when you start looking at that though when we look at car sales.

Spread out over North America. The estimates are anywhere from 40% to 60% of vehicles are sold in areas, where tolling as either very comment or or at least available and so when we look at that we would say 50% to 60% of the total North American market is absolutely right in the strike zone for key market for us.

Thanks, Thanks for providing all the color on that stuff our hop back in the queue.

Yeah.

Thank you im not showing any further questions at this time I would now like to turn the call back over to Josh Raskin for closing remarks.

Thank you everyone for your time and questions. This concludes our core.

Q3 quarterly call.

Have a great weekend.

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

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