Q4 2020 Gentex Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the <unk> fourth quarter 2020 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need a press star one on your telephone.
If you require any further assistance. Please press Star then zero I would now like to hand, the conference over to one of your speakers today, Mr. Josh O'bremski director of Investor Relations. Sir. Please go ahead.
Thank you.
Good morning, and welcome to the Gentex Corporation fourth quarter, 'twenty and 'twenty earnings release Conference call I'm, Joshua Brewski 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 through the Gentex website at Www Dot Gentex dotcom all contents of this conference call are the property of Gentex Corporation and May not be copied published reproduced rebroadcast retransmitted transcribed or otherwise redistributed.
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 on the Gentex reports fourth quarter 2020 financial results press release from earlier this morning, and as always shown.
On the Gentex website.
Your participation and this conference call implies consent to these terms now I'll turn the call over to Steve Downing, who will get US started today, Steve. Thank you Josh.
Before we get started with our financial performance for the quarter I want to take just a few minutes to thank everyone, who has helped us during the last few months.
Our customers and our supplier community, we want to thank you for your communication and teamwork that allowed us to keep up with orders during the second half of this year, we couldnt have done it without your help.
To the entire team at Gentex. Thank you.
Once again, you have outdone yourself, despite the obstacles and there have been many this year you've found a way to deliver record setting results.
Now, let's dig into the financial summary.
During the fourth quarter the company experienced record net sales of $529 $9 million, which represents a 19% increase over the fourth quarter of 2019, we.
We were able to accomplish this sales growth by a combination of a 14% increase and auto dimming mirror unit shipments and a 96% increase and F. D M Mirror unit shipments.
This growth rate was in contrast, and global light vehicle production that increased by approximately 3% for the quarter and.
And if you look a little deeper into the global light vehicle production numbers for Q4, you will see that China production was up 6% quarter over quarter, but the rest of the regions were only up about 1% versus last year.
In total our outperformance to the underlying market was 16% for the quarter, which represents one of the highest growth rates for the company and many years.
For calendar year 2020, the company shipped 1.053 million units, a full display mirror, which was a 42% increase when compared to 739000 units shipped in 2019.
The growth rate of F. D M and 2020 was incredibly strong, especially when compared to a light vehicle production market that declined approximately 16% for calendar year 2020, due to the impact of the pandemic.
The gross margin and the fourth quarter of 2020 was 49% compared with a gross margin of 36, 5% last year.
This was the highest gross margin since the second quarter of 2004 and was a 440 basis point improvement from the fourth quarter of 2019.
The gross margin increase was driven by record sales levels positive product mix benefits from our cost reduction efforts earlier in the year leverage on our overhead costs and purchasing cost reductions that together more than offset our annual customer price reductions.
Income from operations for the fourth quarter was $162 $4 million, which was an increase of 46% and a new record.
Operating income improved significantly during the quarter as a result of the higher sales and gross margin levels.
Net income for the fourth quarter was $143 $3 million, which was an increase of 44% and also a new record.
Earnings per diluted share for the fourth quarter was 58.
Which was an increase of 49% versus last year and was also a record for the company.
During the fourth quarter strong sales levels combined with the cost discipline, we have been executing throughout the year resulted in record performance at every level of the income statement.
During the fourth quarter the company repurchased two 5 million shares at an average price of $31.82 per share for calendar year 2020, The company repurchased 10 6 million shares at an average price of $27.10 per share.
Our share repurchases during calendar year, 'twenty and 'twenty resulted in a 4% reduction and the diluted share count.
For calendar year 2020, the company paid $117 $2 million in dividends and Reaper.
We repurchased $288 $5 million and stock for a total cash return to shareholders of $405 $7 million.
When you combine this level of financial performance with our common sense approach to capital allocation. We believe we have forged a pathway to a significant increase and overall shareholder returns.
And I'll hand, the call over to Kevin for fourth quarter financial details. Thank you Steve.
Automotive net sales during the fourth quarter of 'twenty, and 'twenty were $521 6 million, representing a 20% increase when compared to $433 8 million and the fourth quarter of 19.
Interior auto dimming mirror unit shipments increased 13% compared to the fourth quarter of 19 and exterior auto dimming mirror unit shipments increased 16% for the same period as previously mentioned strength and F. D. M unit shipments also contributed to the significant outperformance for the quarter.
Other net sales and the fourth quarter of 'twenty, which includes Dimmable aircraft Windows and fire protection products were $8 3 million a decrease of 17% compared to other net sales of 10 million and the fourth quarter of 19.
And then we will aircraft window sales decreased by 34% for the fourth quarter of 2020, when compared to the fourth quarter of 19.
The company expects a dimmable aircraft window sales will continue to be impacted until the aerospace industry strengthens and the Boeing 787 production levels improve.
In terms of the balance sheet during the fourth quarter. The company increased its activity and share repurchases, but we also continue to keep our focus on maintaining high levels of liquidity. So that we remain well positioned for multiple economic scenarios.
Additionally, as mentioned in the press release, the company paid off the remaining $25 million on its revolving line of credit during the fourth quarter of 2020.
I'll now mentioned some key balance sheet items as of December 31, and 2020 as compared to December 31 of 19.
Cash and cash equivalents increased to $423 4 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.
Short term investments were $27 2 million down from $144 million with the bulk of those maturities not reinvested during the calendar year.
Long term investments were $162 million up from $139 9 million.
As a reminder, long term investments include things like FDIC insured Cds Treasury notes as well as corporate and municipal debt as of the end of the year the portfolio remains and a good position with the bulk of the corporate and municipal holdings invested and a rated or better institutions.
Accounts receivable increased to $284 9 million from $235 4 million.
The increase and a R was due to the significant increase in sales during the fourth quarter and the timing of sales within the quarter.
Inventories were $226 3 million down from $248 9 million as a result of lower raw material and finished good levels.
Accounts payable decreased to $84 8 million down from $97 6 million and accrued liabilities were $92 9 million up from $74 3 million increase.
Increases were due to higher accrued salaries and wages and deferred employer payroll taxes as well as accrued income taxes.
Yes.
Fourth quarter 2020 cash flow from operations was $135 4 million up from 122 million and the fourth quarter and 19, the increase and cash flow was driven by increases in net income for the quarter, but was partially offset by fluctuations in working capital.
Year to day cash flow from operations was $464 5 million, which compares to $506 million per year to date cash flow for 2019.
The decrease on a year over year basis was driven by the COVID-19 impacted reduction and overall business and related cash flows during the second quarter of 2020.
Capital expenditures for the fourth quarter were $14 7 million compared with $26 3 million for the fourth quarter of 19 and year to date capital expenditures were $51 7 million compared to $84 6 million and year to date and 19.
And depreciation and amortization for the fourth quarter was $26 3 million compared with $25 4 million for the fourth quarter of 19 and year to date DNA was $104 7 million, which was the same as calendar year 19 and.
And I'll hand, the call over to Neil for a product update. Thank you Kevin earlier. This month Gentex participated in 'twenty and 'twenty, one virtual consumer electronic show.
<unk> has become the preferred platform for Gentex to showcase our technologies and capabilities. This.
And this year at CES, we and to adjust our normal product driven approach to the new virtual venue.
<unk> created all new virtual tools to help communicate our product evolution and the direction of the technology.
The first product area I will discuss his and digital vision.
As we continue to rollout and develop our full display mirror product. We've been focused on ways to add new features that have been either requested by customers or where we see opportunity to leverage the platform as a part of major developing trends and the automotive market.
For CES. This year, we created individual videos, demonstrating how digital video recording and trailer towing could be added to the portfolio.
Both of these products utilize the base FTM technology and by adding additional cameras or recording technology. We've expanded the feature set to meet and ever increasing demand from our customers.
And the sensing product area. We also have shown some new technology paths.
First we announced the acquisition of 8% and nano fiber sensing company out of Utah.
The vapor sense technology is capable of being deployed across multiple verticals to support sensing for hazardous chemicals.
<unk> four to provide data regarding your quality.
We're excited about the potential for this technology because it harnesses are core competencies to create sensing capability.
Perhaps surpasses anything and the market today.
Second we announced that we're bringing smoke and vape sensing to a robo taxi as part of this whole program that we're currently launching.
This development Leverages, our heritage as a particular smoke detection company, but now expanded into the automotive HVAC system Gen.
Gentex has the unique ability to deliver smoke detection, while meeting the stringent requirements of automotive.
The third area of focus was in cabin sensing.
We demonstrated and virtual platform, how visual sensing system and we're near the mirror area could help provide greater visibility into the vehicle.
And this demonstration showed how our technology can provide in cabin sensing for driver monitoring features but can also provide sensing and the receipt of the vehicles. So that features like child detection and notification of objects left behind.
Which seats passengers are occupying can all be seen to provide new safety and convenience features for OEM customers and consumers.
The last product area I'll focus on today is the connected and transactional vehicle and.
And they're integrated toll model module product has been rolling out with our lead customer Audi we have been working on building relationships and different areas to further enable the capability of ITM product in the area of transactional vehicles.
Late in 2020, we announced a partnership with a company called people and car.
Hey by car and utilizing total TEG systems, such as ITM and hardware infrastructure place that a gas station site to and to enable payment for fueling through the total system.
We believe this is the first step of many that could utilize the ATM hardware to perform non total based transactions.
Additionally, we announced the partnership with simple mine.
Simple night as an E commerce aggregator, we're working with them to broaden their offering from the vehicle. This includes the ability to make reservations at restaurants buy movie tickets make hotel accommodations and much more.
Gentex is currently working to connect simple nights, where homelink connect app, which will allow users the ability to perform ecommerce function seamlessly.
While the necessity for virtual CES format created some challenges for us and engaging with our customers. Our marketing team did an outstanding job of creating new tools that help explain these new products.
These tools will support our sales and technology initiatives as we go through 'twenty and 'twenty, one and beyond.
And we welcome everyone to go to our website at Gentex Dot com and look for the virtual ethylene.
Where you can also head to Gentex Tech dot com to explore the new product concepts for yourself.
I will now hand, the call back over to Steve for guidance and closing remarks. Thanks Neil.
The company's current forecast for light vehicle production for 2021, and 2022 is based on the mid January 2021, IHS market forecast for light vehicle production, and North America, Europe, Japan, Korea and China.
Based on this information light vehicle production and the company's primary markets is expected to increase approximately 12% over the 2020 calendar year volumes.
For calendar year, 2022 light vehicle production and the company's primary markets is forecasted to increase over the 'twenty and 'twenty one estimated volumes by approximately 3%.
Based on these light vehicle production forecast, we are providing guidance estimates for calendar year 2021 for each of the following areas.
Revenue for 2021 is expected to be between $1 94, and $2 2 billion.
Gross margins for the year are expected to be between 39% and 40%.
Operating expenses are currently forecasted to be approximately $210 million to $220 million, our estimated annual tax rate, which assumes no changes to the statutory rate and is forecasted to be between 16 and 18%.
Capital expenditures for 2021 are expected to be between 85, and $95 million and depreciation and amortization is forecasted to be between 105 and $110 million.
In addition, based on the mid January 2021 light vehicle production estimates for calendar year 2022. The company is currently estimating net revenue for calendar year 2022 will grow between four and 8% above our current revenue estimates for calendar year 2021.
And clothing as I reflect on 2020, there is no doubt that it was one of the most trying and turbulent years, we've encountered as a team.
We know these issues have not completely gone away and that there are still many risks ahead for the industries, we support and for our business.
Despite these issues we are hopeful that 2021 will develop in line with our forecast, which suggests a record year for the company not just in terms of revenue, but for the profitability of the business as well.
Perhaps the most important reason why I'm optimistic as the team. This team delivered world class operating results within months of encountering crippling shutdowns and changes to our business due to the pandemic.
The results this quarter shattered many records of the company and reset the profitability of the business as we move forward, but more importantly, it showed all of US at this team is capable of doing anything assets, It's mine too.
We believe that our financial discipline and performance combined with our operational efficiency, new product pipeline and common sense approach to capital allocation provides a pathway to significant shareholder returns that completes our prepared comments for today. Thank you for your time and we can now move to questions.
Thank you ladies and gentlemen, if you have a question and at this time. Please press Star then one on your telephone.
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Our first question comes from the line of James Picariello with Keybanc capital markets. Your line is open. Please go ahead.
Hey, good morning, guys and congrats on a on a fantastic quarter.
So STM shipments, let's start there finished the year just under $1 1 million.
Which given that it's a pandemic you're pretty pretty phenomenal I mean, how should we be thinking about etsy and unit growth for 2021, I mean previously and I think the idea was to take the average unit growth over the last three years, but I mean, I think that exercise would've been far too.
And conservative even for 2020, so just wondering if there's another way we could look at this.
I think if you look I think it would be about us and we would guide about the same methodology and if you include this past year's performance you'd start to see an uptick obviously this year and and the growth rate of ft, and so I think it would be it would probably be if you did a three year moving average and would probably be closer to what the trajectory looks like for next year.
Okay, and then just a follow on to that and any update on the on the timing for for Oems nine and 10, when they should begin shipping.
Yes, So I think I think both nine and tenor and the first half of this year.
Okay.
As we as we think about the cadence for this year I mean, we can obviously see IHS production volumes, but.
And how can we think about the companys growth over market I mean, clearly there'll be a difficult fourth quarter comp.
And this year above and also just from a margin standpoint any color on.
You know, what we should extrapolate and not extrapolate from the second half of 'twenty performance from a margin standpoint. Thanks.
Yes, I think if you look at if you look at the last six months you know you're just over 40% average, we know that thats a hair higher than it will be in 'twenty, one for a couple of reasons.
And we know there's a lot of there's a lot of shortages happening and the industry, which means obviously pricing pressure on components and it's going to be a little tougher than it was in 2020, but then we also know that sales are going to run at the same rate. It was for instance, and Q4, so which would have a slight negative impact on margins going forward, but if you look at that that guide for the full year of <unk> 39 to $40.
We feel pretty comfortable with operating in and around that range for the whole year, and we don't really see it over weighted in any one quarter and I think the risk factor like you mentioned really comes down to the second half of the year in terms of what's what are what are those comps going to look like and then we know theres a lot of catch up happening and the industry right now from the Q2 shutdowns.
And the question is is what is the what is the new run rate for production once once that catch up periods done what.
And what is the global Saar and what does that look like for the entire supply base.
Got it thanks guys.
Thank you James.
Thank you and our next question comes from the line of David Kelley with Jefferies. Your line is open. Please go ahead.
Hey, guys. Good morning, and thanks for taking my question just maybe following up on the last point the gross margin discussion.
For 2021, its better than the target you referenced during our Q3 earnings specifically so maybe if you could just talk about.
What specifically has changed and the last few months the revenue growth guidance Hasnt changed so is it.
Product specific or or anything from the cost savings side, we should be thinking about yeah. It's really a combination of a couple of variables number. One is the mix has been very positive with FTM strength and how we see strength that's been a margin tailwind.
And the cost efficiencies and the things, we did and the second quarter to improve the profitability of the business.
Playing out perhaps even better than what we had initially estimated so those are all positive trends and there's a whole lot of others, but then there are some headwinds as well.
As it relates to especially on the on the component side. So we're trying to you are looking at all those positives and and the customer pricing and what's going on and the marketplace on the on the shortage side and.
Looking at all of those and we feel we feel like it's still a net improvement versus our long term guidance. We had given previously which was the 38, 5% to 39 and a half. So if you look at that and say Hey, your 50 basis points basically better than where we were a few months ago. We felt really good about the discipline of the business and our operational efficiencies at the levels. We're at right now.
And.
Okay, Great. That's helpful and and then may be following up with the Opex 2021.
And we have the structural cost savings benefit at some point I would expect we should see some.
And <unk> expenses start to ramp back up but can you just talk about some of the puts and takes there and maybe how youre thinking about R&D this year.
Yes, so I mean, that's a good acknowledgment and as you mentioned travel and entertainment has still been fairly low.
Some of the things that have kind of filled the gap there is.
Air shipments so a lot of premium freight that we've been experiencing really and the back half of the year with a tighter supply chain and so we would expect that as things calm down a little bit you the freight costs kind of abate, a little bit and backfill by some of that travel, but we would expect that that probably isn't going to really pick up until the back half of the year I mean, as we sit today.
Travel restrictions or heavier than they were a year ago, but all the things that Neil mentioned.
Obviously don't come for free so we're very focused on net R&D budget.
And partnerships that are either have equity stakes with them or you know things that drive us for the longer term, we continue to be focused on them. So we feel really good about the things that we've done so far but there are other things and the hopper that we continue to invest and and we're putting resources to the things that we're that Neil mentioned earlier.
Okay, great. Thanks, and then one last one if I could squeeze squeeze.
Squeeze it in 'twenty and 'twenty two revenue growth guidance.
That's a long ways away, but it is a bit below your usual targeted out your outgrowth is there some conservatism built in here just given some of the ongoing market uncertainties you'd referenced or if you could just talk about if there are any other inputs, we should be thinking about that might change the outgrowth cadence that would be great.
Yeah, I think I think the biggest factor there isn't necessarily conservatism built in it's really about the 'twenty 'twenty, one guide being quite a bit higher than what we actually think production will come in at so that outgrowth and market.
And the growth that we've experienced in the back half of this year and then compounded with the growth rate for next year.
You know when you when you start to look at those in combination and we just we look at it and say Hey, 'twenty and 'twenty two is a tough comps coming off of a very solid 21 number that we're guiding to right now.
There is any conservatism built into it it's really a little bit of skepticism. If you look at a lot of that growth. That's estimated for 'twenty two on the vehicle production side a lot of that's out of Europe, I think it's like a 6% growth rate and 22 for Europe, and so we're maybe a little skeptical about whether or not that's actually going to pan out to those levels. If you look at the macro side of whats going.
And on and that space.
And I'm not sure that we would necessarily agree with Ihs's number there that it's going to be that kind of a growth rate in Europe and 2022.
Alright got it thanks, guys. Thank you thanks, David.
Thank you and our next question comes from the line of Ryan Brinkman with Jpmorgan. Your line is open. Please go ahead hi, Thanks for taking my questions maybe to start what is the latest that you're seeing in terms of the semiconductor shortage impacting the industry can you talk about the degree to which you're seeing any indirect impact to gentex from lower customer production.
And I know you incorporate chips and to some of your devices are you seeing any direct impact I think as of the time of CES you Havent, yet I thought to ask just given and I know a lot of suppliers are scrambling here to avoid direct impact.
Yeah, it's absolutely impacting the industry and and in two ways number one is obviously theres a theres a lot of decommitments happened and from the supply base in terms of volumes that we've put in orders for them and many times almost a year out and suppliers are struggling to keep up obviously, its a complicated supply chain that they're dealing with and.
So that has everyone moving around a couple of safeguards that Gentex has always put into places we tend to carry a little higher raw inventory than most suppliers to try to help prevent these type of issues and the other one is the team has been working really hard looking at product Redesigns. Other alternatives. When there are issues. Fortunately so far we haven't had any shutdowns of customers.
But to your point, that's the second half of the issue and that is that many Oems are starting to take days off or portions of a week at certain plants and certain product lines to give the the industry time to catch up on the silicon side. So it's something that we continue to watch and Fortunately so far it hasn't affected us.
<unk> in terms of our ability to supply, but it's always a risk factor and then number two what is probably more likely is that it's going to impact overall production levels at some point.
Probably not an extended period most of the industry is looking at the first half of 'twenty, one being really tight and then hopefully the second half will start to free up a little bit.
Okay. Thanks, and then just to dig in to that earlier discussion of gross margin a little bit more and maybe the trajectory throughout the year I think historically, you see a little bit of a step down and <unk>, maybe given a disproportionate number of annual customer price reductions taking place around the turn of the calendar and then you claw that back via performance and productivity throughout the year or do you see that pattern taking place. This year again and then just.
Also is the tone and tenor of annual customer price reductions any different this year versus prior years, just given maybe some of the stress that some of the customers might be feeling.
And I hesitate to ask but 39% to 40% gross margin I don't see why that would necessarily be an embarrassment of riches when 37% to 38% you guys are able to get away with for a long time, but just any kind of thoughts on.
Discussions with automakers, if there are any different from the past et cetera.
Thanks Ryan.
So as you mentioned and you're the best at asking seven part question, So I'll forget that.
Back half and soon.
But.
All else being equal yeah, APR typically is front end weighted January and April a lot of our customers take those price downs. The one unique thing about this year like Steve already mentioned is theyre still playing catch up for the most part so sales levels are probably elevated a little higher so that tends to up that may offset it.
But then the one other factor is tightness and the supply chain side. So components shortages are putting the ball back into the suppliers hands or as far as the leverage so pricing is going to be a little bit constrained or cost downs. If you will so.
I would say all and all its probably pretty evenly textured, but you still do have the same constraints on APR, dropping and kind of that first quarter margin all else being equal and.
And then building back up over the year and I and I.
I'd say that the pressure on the supply community from from Oems isn't really any different than it has been I think right now right now what we're seeing is mostly collaboration Oems trying to work with the entire supply base to make sure that components are being handled distributed and that they can keep all of their supply base up and running.
I think everyone's aware, what's going on and the silicon industry. So I think I think most Oems understand theres going to be some some price pressure from the supply side on.
Raw components.
Okay. That's very helpful. Thank you.
Thank you and I'm sorry.
And.
Thank you and our next question comes from the line of John Murphy with Bank of America. Your line is open. Please go ahead.
Good morning, guys and thanks for taking your time.
Just a first question on vehicle mix I mean, obviously, the automakers are hustling to rebuild inventory and and meet growing demand and so theyre building everything sort of at the higher end and I'm, just curious what youre seeing and schedules and if you expect that to continue.
In 2021, and maybe this is sort of a new phenomenon and it's a little bit less with better and better mix just curious your thoughts on that yes.
And I think I think at the beginning and you're absolutely right. When they were coming out of those shutdowns and so they were obviously trying to build a very rich mix of vehicles. I think now that's kind of settled down and it's more about what is the consumer what's the demand from the consumer side, that's probably the most shocking part of.
Coming out of the pandemic is is the flow and the optimism and the consumer base like how many vehicles themselves are being purchased I think that was a little surprising to us.
Inventory levels overall.
And for each OEM and what's happening.
There's still a little bit of work to do but I would estimate that sometime in Q2 will be through that catch up period and back into a normalized run rate and the question about mix is always a fascinating one and it's really about interest rates borrowing and and what the consumer wants. So we don't see anything changing that drastically one thing we know for sure is our.
Features right now are doing really well with the consumer and their desirable they're priced appropriately products like F. D. M have a lot of pool right now with the consumer.
Okay, and then just a second question and you Roger sort of day.
And all complex going into the vehicles is generally kind of inflated and I'm just curious what youre seeing.
On that side I mean, obviously, that's being driven by strong demand and volume. So it's a good thing right and so the reason it's rising is because.
Demand pull and I'm, just curious what youre seeing there and how much and headwinds or not that might be and 2021.
John you broke up just for a second at the beginning can you say could you say that again.
Yes.
Curious, what you're seeing on raw costs raw material costs that you guys got.
As we're dealing with I mean, the reason they are rising is because demand there's demand pull so it would reasons I'm just curious how youre thinking about that 'twenty 'twenty one yes.
And in fact and honestly that's one of the things we've modeled in is that we're not we're not expecting to get the same out of the supply base is what we have historically.
So we do have some contracts that cover products longer term on the pricing side, but anything that youre negotiating this year, yeah. There's definitely there's definitely some pressure from the supply chain and indeed for if not price stability and some instances even price increases so when we look at it we model. It we're not this year for instance.
All of those factors, both what we got out of suppliers and all the operational efficiencies offset our customer pricing and some next.
And next year, probably wont get quite that same level of performance. So that's definitely one of the negative factors as we as we put together, but it's all contemplated inside of our margin guidance as well got.
Got you and then just lastly, as you look at.
It's not post COVID-19, because we're still in the middle of it but the actions you've taken initially because of Covid and what you've worked through last year you were.
What kind of structural changes do you think you'll be able to capture or what you know what changes you've made that you think will be structural over time, it might help incremental margins overtime or just you know margins generally.
I think all the changes that we made in Q2 were structural and that we expected this to continue.
As we build back the business the cost like we have for the last several years the cost, we're adding back online with growth rates and support sold business. So.
Didn't see anything changed from that model, which as you would expect our costs both on the both on the growth on the Cogs side, all the way through operating expenses to move roughly in line with sales growth.
And is 39% to 40% gross margin you think is the new baseline off from where you will potentially grow or improve in 2022 is that a fair statement yes.
Like we mentioned before.
38, and a half 39 and a half we had talked about for the last year or so we didn't believe that there was and any reason why we couldn't sustain that for at least a couple of years and I would say that that new guidance. I mean, we haven't looked at product mix all the way into 2022, yet, but if we manage the cost the way we're describing theres no reason why that's not attainable.
Okay, great. Thank you very much. Thank you thanks John.
Thank you and our next question comes from the line of Luke junk with Baird. Your line is open. Please go ahead and good morning, everyone. First question wanted to ask about ITM and connected cars. So based on your announcement over the past few months.
Are you seeing and leaning into this space relative to pay back Carne and simple night partnerships, but I'm wondering is how that is being informed by the interest total that youre seeing in general from the OEM community and if we look at items, specifically, how that's tracking versus your expectations a year ago, and then second part of the question would just be in terms of the value.
And for some of these elements that could have maybe recurring elements to them, how you sort of position after the Oems as well and at a high level.
Sure absolutely good morning.
I think one of the interesting parts with ITM and general as the product continues to rollout across the Audi <unk>.
Like we've described before.
This coming year there'll be more platforms that we'll deploy it and I think they'll be on every platform when we get into 'twenty and 'twenty two if I'm not mistaken. So it's continued to grow when we talk about expanding the features and capability of the transactional vehicle. That's not just something we're we're dreaming of it's something that our customers are looking for and expansion of the technology.
And the hardware platform and gets added to the vehicle. How do you continue to add more value to the vehicle itself or to the consumer and how it gets used so the payback car is a great example, leveraging the existing technology, but now offering to the consumer.
And next step advantage of a transactional piece at the gas pump using that platform and have already paid for so we see that continuing to build simple nights and other stretch on that where it is now getting into additional features and functions reservations and beyond where we believe the consumers want that seamless.
And the seamless interface from their computer to their car to their phone and that's.
Simple night enables us that ability to bring all those together and offer them. One complete system. So we're excited about it we think there's some great opportunities and how that can help grow and expand the payback cars, a great initial and leveraging the hardware and a simple night takes it beyond just the hardware play.
Okay. That's great really helpful. A follow up question on the adoption curve for the <unk>.
Full display mirror and what I was hoping you could comment specifically on is what youre seeing in terms of take rates right now relative to what you've disclosed in the past.
And earlier in the call that products like do you have to have a lot of pull seems to suggest there is some movement there and you just saw.
And for any additional color you could share.
Yes, I think if you look at the last.
Last half of the year for instance, the product mix was really strong and one of those like we mentioned was partially because Oems were billing higher content vehicles and with that what we're seeing is very high take rates on the vehicles. We were on so initially we had said we would expect on a on a high and very luxury vehicle like Cadillac when they first launched Youre running 50 to 70 person.
And take rates and then as you move down you had trucks higher and trucks and Suvs, maybe and the 20 to 30 and then on entry level vehicles, you're going to have much lower take rates, what we've seen and the last six months are actually running even above those levels and the fundamental question is how long will that last is that the new norm or is it going to come back down to more standardized.
Packaging what were seeing for the first half of 2021 would imply that that trend continues.
Higher take rates and so we're pretty optimistic one thing thats for sure. There has been some studies and some and some consumer engagement from Oes.
And that really liked the feature so we think regardless of what goes on with the whole product line. We think we are and continue to see a lot of pull on the full display mirror side because of the customer interest.
Great and leave it there. Thank you. Thank you thanks Luke.
Thank you and our next question comes from the line of David Whiston with Morningstar. Your line is open. Please go ahead.
Thanks, Good morning.
First on gross margins I know for this year, it's 39% to 40% guidance, but were you, saying long term you still think it's 38, 5% to 39 and a half or do you think about better.
And I think theres the potential for it to run at that at that guidance for 'twenty one into 'twenty, two and we have obviously a lot of work to do to make that happen, but that's definitely feasible.
But you don't want to talk about beyond that at this point right is too uncertain yeah.
Yes, I think I think right now and we Havent model and out that far is little difficult to predict but.
As you know with us and David I mean, if we get once we get there we don't like we don't like Retrenching and also I can promise you that by the time, we get close to it and we're gonna be due and everything and our power to make sure we can maintain it.
Right and.
Your guidance for this year right now, though it does not include any shutdowns related to the chip orders, even if they are beyond Gentex is control yes.
Yes, there is IHS is actually model and in.
Downtime at most Oems not not extended for very long periods, but kind of rolling shutdowns week or two at a time.
For the first half of the year and then there's not much contemplated in the second half due to due to supplier issues are a part shortages. So it's a fairly modest impact I forget it was a few hundred thousand vehicles I think what IHS made their latest update.
Globally, so it's not not a huge change to overall production, but there is some of that built into the forecast.
Right and.
You were talking earlier about skepticism about IHS as EU number with that for 2022, only or both this year and next year really scoped and more for more for 'twenty two.
Okay, and then just one last more big picture question strategic one have you guys ever.
<unk> thought about making.
Software for <unk> or is that something you think thats really not in your wheelhouse and there's plenty of other players already.
And I think I think when we look at that I mean, we're open to the concept of an OEM partner wanted to come and ask us for help and we would be open to that concept, but to go out and try to market that is probably not something that we would have necessarily the credibility to pull off right now.
And so we.
And we're like we wake up every day always willing to look at new opportunities and assess whether or not we can create a value proposition. There I think as we sit here today, we would look and say well, we're probably not the right partner necessarily to develop that and provide it but if that changes we would absolutely try to create to create a new business model that would work for the OEM and for us.
Okay. Thanks.
Thanks, David Thanks, David.
Thank you and again, ladies and gentlemen, if you wish to ask a question at this time. Please press Star then one.
Our next question comes from the line of Josh Nichols with.
B Riley your line is open. Please go ahead.
Yes, thanks for taking the question.
From a strong quarter.
I was wondering if you could maybe provide a little bit more detail about like that the cadence of the revenue trajectory given that this is a little bit of a different setup here.
And they are still playing catch up right as far as inventory levels, especially and <unk>, probably institute <unk> and <unk>.
Are you expecting that <unk> to be a little bit stronger how may that trend through the rest of the year.
You're exactly right I mean, Q4, Q1 don't look too dissimilar outside of the chip issues and there are any pick up there and it.
And really strong into the second quarter, but then I think like Steve mentioned already.
The comps start to get hired and then the normalization of what production and actually it looks like and the second half.
Starts to play out a little bit more so you have a little bit of strength and then maybe a little taper heading into the back half of the year.
Yeah.
And as you kind of mentioned Theres always.
Things up and the error rate, especially this year, it's a little bit different than obviously, what we had seen before and I'm. Just wondering kind of your thoughts about like the impact of Gentex, we've been seeing one some higher and vehicles and an increasing percentage of the mix trucks and Suvs.
Also the potential for like fiscal stimulus from the federal side and rich.
Turning to a more aggressive maybe manufacturer and symptoms as inventories normalize and just kind of your thoughts on those areas.
You're absolutely right I think you know I think that's what's really kind of driven the strength and the second half of this year and the first half of next year is going to be playing that catch up from the second quarter, which was pretty much nonexistent and a lot of the markets and so that once that catch up periods. Over then it really comes back to consumer demand and the question I think longer term, we all have to Russell with them.
And <unk>.
What are the lasting economic impacts of the pandemic and and some of the policies that have been put in place. So one we're watching carefully and the reason why we made a lot of the structural changes we did in Q2.
And as we need it we knew we needed to prepare for either scenario and.
And Fortunately that's worked out well so far.
We know we have to continue to watch it and no one ever knows if its going to be completely done. If this is a recessionary market for the next few years or whether or not it's a stable market. One thing is for sure is we've lowered the fixed overhead of the business significantly and so we feel like we're prepared for both either flat to an expanding market or even if this market retrenching and we believe we've put the right.
And discipline in place and we have adjusted our cost structure to be able to handle that first wave of any type of downturn or a recession.
Thanks, and then last question from me. This is a little bit longer term question I guess, but you are seeing an increasing number of auto Oems.
Talking about moving to a much larger percentage of their lineup going to EV right over time also some legislation and other states like California right.
And that tends to be the new ship going forward. If you look at least 10 year horizon, how is that like gentex positioned for that does that are you kind of indifferent to whether you're using gas or EV or better mix shift for you or just kind of curious about the longer term opportunity puts and takes on that yeah. The short answer is that we're really not affected by.
The powertrain.
Whether that is gas or diesel or electric so theres nothing structurally there that will impact at the one the one side benefit to us as what we've seen is mostly vs. Right now are selling on the higher end of the marketplace, which tends to be good for us we would look at and say that's not necessarily correlated but it is a it is a happy accident of sorts where.
And you know most of the Evs that are rolling out right now tend to be by luxury Oes are higher and builders. Most you know most of the cost focused evs have even added higher technology features and that's worked out really well for us over the last several years.
Great. Thanks for the color I'll hop back and acute.
Thank you and I'm showing no further questions at this time and I would like to turn the conference back over to Mr. Josh flow Parsky for any further remarks.
This actually concludes our call. Thank you everyone for your time and the great questions Hope you have a great weekend.
Ladies and gentlemen. This concludes today's program you may all disconnect everyone have a great day.
And we will.
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