Q1 2021 Gentex Corp Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the Gentex reports first quarter 2021 financial results conference call. At this time, all participants are in 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 to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today.
Josh Oh Barsky director of Investor Relations. Please go ahead Sir.
Thank you.
Good morning, and welcome to the Gentex Corporation first quarter 2021 earnings release conference call I'm, Joshua Bursty, Gentex director of Investor Relations and I'm joined by Steve Downing, President and CEO, Neil Boehm, Vice President of Engineering, and CTO, and Kevin Nash, Vice President of Finance and CFO.
This call is live on the Internet and can be reached by going to the Gentex website at www Dot Gentex Dot com 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 in the Gentex reports first quarter 2021 financial results press release from earlier this morning, and as always shown on the Gentex website. Your participation in this conference call implies consent to these terms now I will turn the call over to Steve Downing, who will get US started today. Thanks, Josh.
For the first quarter of 2021, the company reported net sales of $483 $7 million, which was an increase of 7% compared to net sales of $453 $8 million in the first quarter of 2020.
During the first quarter of 2021 vehicle production levels were negatively impacted by electronics and other parts shortage issues.
These shortages were the primary reason for the 12% reduction in North American light vehicle production compared to the beginning of the quarter forecast.
Part shortages also impacted light vehicle production levels in Europe, and the Japan, and Korea markets, which were each down 3% versus the beginning of the quarter forecast.
The part shortages and corresponding change to light vehicle production are estimated to have reduced our revenue in the first quarter by approximately $45 million.
Despite these issues the first quarter of 2021 was the second highest sales quarter in company history behind only the fourth quarter of 2020.
Our guidance for the year included a first quarter that was forecasted to be similar to the fourth quarter of 2020 from a revenue perspective, but first quarter revenues were clearly impacted by the difficulties created by part shortages.
During the first quarter of 2021, our primary revenue generating markets of North America, Europe, and Japan, and Korea were down 2% on a combined basis, which means our revenue growth of 7% yielded a total outgrowth versus the underlying market of 9%.
It is also important to remember that the first quarter of 2020 was negatively impacted by COVID-19, shutdowns, which means the vehicle production levels for the first quarter of 2021 were down 15% in comparison to the first quarter of 2019.
However, our revenues grew by 3% when comparing those quarters, which calculates to an 18% outperformance versus the underlying market during that two year period.
For the first quarter of 2021, the gross margin was 37, 9% compared to a gross margin of 34, 5% for the first quarter of 2020.
The gross margin improved significantly on a quarter over quarter basis, which was driven by the structural cost savings put in place in the second quarter of 2020, as well as product mix tailwind related to exterior auto dimming mirror growth and full display mirror growth.
Gross margins were negatively impacted during the quarter as a result of the part shortages that calls raw material price increases and increased freight costs.
The company has once again performed very well in an incredibly difficult operating environment.
The chaos created this quarter by component shortages freight issues as well as customer plant shutdowns in order changes made scheduling very difficult, but the team was able to not only keep up with customers orders, but also improve gross margins by 340 basis points versus the first quarter of last year.
While the gross margin in the first quarter of 2021 was below our annual guidance range. The majority of that shortfall was driven by the $45 million in lost sales in the quarter we.
We expect to see further improvement in gross margins based on the higher sales levels that are forecasted for the remainder of the year.
Operating expenses during the first quarter of 2021 decreased by 4% to $49 $6 million compared to operating expenses of $51.6 million in the first quarter of 2020.
The decrease was primarily driven by the continuation of the structural cost reductions made during the second quarter of 2020, but the lack of international travel and the cancellation of all industry based trade shows because of the pandemic also contributed to lower operating expenses.
Income from operations for the first quarter of 2021 was $133 $7 million, which was an increase of 27% when compared to income from operations of $105 million for the first quarter of 2020.
During the first quarter of 2021, the company's effective tax rate was 16, 1% down from 16, 6% during the first quarter of 2020.
The decrease in the tax rate was driven by increased foreign derived intangible income deductions as well as increased discrete benefits from stock based compensation.
Net income increased 27% to $113 $5 million for the first quarter of 2021 compared to net income of $89 $5 million in the first quarter of 2020.
The increase in net income was driven by the quarter over quarter increase in sales improved product mix higher gross margins and our continued operating leverage as a result of the structural cost savings that were put in place during the second quarter of 2020.
Earnings per diluted share for the first quarter of 2021 were 46 cents, an increase of 28% compared to earnings per diluted share of 36 for the first quarter of 2020.
The increase in earnings per share as a result of the higher net income and a lower diluted share count when compared to the first quarter of 2020.
During the first quarter of 2021, the company repurchased two 8 million shares of its common stock at an average price of $35 46 per share as of March 31, 2021. The company has approximately six 7 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 will take into account macroeconomic issues, including the impact of the COVID-19 pandemic market trends and other factors that the company deems appropriate.
I will now hand, the call over to Kevin for first quarter financial details. Thanks, Steve.
Automotive net sales in the first quarter of 'twenty, one were $475 6 million compared with $439 $9 million per quarter of 'twenty, which was an 8% increase quarter over quarter.
Auto Dimming mirror unit shipment growth outpaced revenue growth during the first quarter of 2021, primarily as a result of a 15% growth in international shipments the increase in international unit shipments were largely comprised of base interior and exterior auto dimming mirror unit shipments and included significant growth in the China market.
Other net sales in the first quarter of 'twenty, one which includes Dimmable aircraft Windows and fire protection products were $8 1 million a decrease of 42% compared to other net sales of $13 9 million in the first quarter of 'twenty.
Dimmable aircraft window sales decreased by 70% for the first quarter of 'twenty, one when compared to the first quarter of 'twenty.
The company continues to expect that Dimmable aircraft Windows sales will be impacted until there is a more meaningful recovery of the aerospace industry and the Boeing 787 aircraft production levels improve.
In terms of the balance sheet during the first quarter. The company continued with its capital allocation policy and maintain high levels of liquidity. So that we remain flexible and well positioned to handle these ongoing uncertainties in the industry.
I will now highlight some key balance sheet items as of March 31, as compared to December 31 'twenty.
Cash and cash equivalents increased to $455 9 million up from $423 4 million, primarily due to cash flow from operations, which were partially offset by share repurchases dividend payments and capex.
Short term investments were $25 9 million down from $27 2 million.
Long term investments were $172 9 million up from $162 million.
Accounts receivable decreased to $277 7 million from 284 nine.
Inventories were $233 1 million up from $226 3 million.
Accounts payable increased to $107 1 million up from $84 8 million.
Primarily due to month end payment timing.
Accrued liabilities were $116 2 million up from $92 9 million.
Increases were due to higher accrued salaries and wages as well as accrued income taxes.
For the first quarter cash flow from operations was $190 8 million up from $151 3 million in the first quarter of 'twenty the.
The increase in cash flow was driven by increases in net income for the quarter and changes in working capital.
Capex for the first quarter was $12 6 million compared with $15 6 million for the first quarter of 2020 and.
Depreciation and amortization for the first quarter was $25 6 million compared with $26 3 million in the first quarter of 'twenty.
I'll now hand, the call over to Neil free product update thanks.
Thank you Kevin in the first quarter of 2021, there were 10 net new nameplate launches of our interior auto dimming mirrors and electronic features net of previously disclosed feature headwinds.
Despite the challenges our industry has been facing the net launch rate for inside auto dimming mirrors and advanced features was strong and one of the highest first quarter launch rates in the last three years.
During the quarter there was a good mix of both auto dimming, So base auto dimming and advanced feature mirrors.
I'd onto dimming mirror launches included new models in all of our major markets and the <unk>.
Vince feature launches were led by new models of Homelink.
Now for an update on full display mirror.
Since our last announcement, our full display mirror launches we've had six new named please enter the market.
Those nameplates are the Buick envision.
<unk> seven <unk>.
<unk> E pace, Toyota Marae, Toyota Sienna and the Ram 2500 3500.
Here's a comprehensive list of the Oems and the number of nameplates, where we are currently shipping MDM.
General Motors, our initial launch customer has 24 nameplates shipping.
Subaru is currently shipping on three nameplates.
At Nissan we're shipping on two nameplates.
Toyota is now shipping on 12 nameplates.
Jaguar land Rover, we are currently shipping on six nameplates.
Martin one nameplate.
Mitsubishi is shipping on two nameplates.
And Ram is shipping FTM on three nameplates.
As we look forward to the second quarter and the balance of the calendar year, we realize that many of our customers expected launches of new vehicles may be affected by the current market shortages. However, we're optimistic because we continue to see strong demand for our latest products and technologies.
In the last quarterly call. We gave an update on an acquisition. We did in 2020 of a company called <unk> per cent, a nano fiber sensing company.
This acquisition was focused on expanding our sensing capabilities for vehicles today and into the future as.
As well as grow in other market verticals.
In late 2020, we completed another acquisition of a company called <unk>.
Argo was a small company in California, working on conductive polymer electrochromic technology.
We've demonstrated at CES for the past few years, one of our technology strategies is to expand the use cases for dimming technology.
So with the addition of the <unk> team and technology to the Gentex product portfolio, we have a broader path and dimming technology that will allow us to achieve more of the use cases.
This technology is still in development in a few years away from production viability, but we're exciting excited about its potential to help us expand the <unk> market.
In summary, even with current challenges our industry is facing our launches and product Rollouts are strong and with the addition of these new sensing and dimming technologies. We believe we are positioning the company to take advantage of the trends that are developing and the interest we have gathered over the last several years at CES.
I'll 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 April 2021, IHS market forecast for light vehicle production in North America, Europe, Japan, Korea and China.
Based on this information light vehicle production in the company's primary markets is expected to increase approximately 10% over the 2020 calendar year volumes.
It is important to note that from our January earnings call until today, the IHS vehicle production forecast for our primary revenue producing regions of North America, Europe, and Japan, and Korea have decreased by about 3%.
For calendar year 2022 light vehicle production in the company's primary markets is forecasted to increase over the 2021 estimated volumes by approximately 7%.
Based on these light vehicle production forecast and despite the lower vehicle production volumes that are now forecasted for 2021, we are reaffirming our guidance estimates for calendar year 2021 for each of the following areas.
Revenue for 2021 is expected to be between $1 94, and 2.02 billion.
Gross margins for the year are expected to be between 39% and 40%.
Operating expenses are forecasted to be approximately $210 million to $220 million, our estimated annual tax rate, which assumes no changes to the statutory rate 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.
Over the last several quarters. The company has been closely monitoring the tariff discussions between the U S and the EU.
Currently EU regulation 2018 O 886 is scheduled to go into effect on June one 2021.
The company remains hopeful that a trade agreement can be reached before the state. So that the increased tariffs do not take effect. If these tariffs do go into effect on June <unk>. The company estimates and the impact in 2021 of approximately $7 million to $10 million in incremental expense that is not contemplated in the guidance.
In addition, based on the mid April 2021 light vehicle production estimates for calendar year 2022. The company is increasing our estimates for calendar year 2022 revenue to be approximately 8% to 13% higher than the estimated revenue for calendar year 2021.
In conclusion, I'd like to reiterate a few key points regarding our performance.
Our forecast for calendar 2021 remained strong despite the supply chain issues that are continuing to impact the current vehicle production environment.
While these issues create instability in the short term the industry dynamics currently point to improved light vehicle production for the second half of 2021 and also the continued recovery of light vehicle production into calendar year 2022.
More specific to Gentex the combination of our launch cadence product mix and overall program awards continue to provide us confidence about the future growth rate and health of our business in an otherwise hard to predict market.
Over the last 12 months, our employees have been able to adapt to every situation. We have encountered first it was never seen before shutdowns followed by the busiest six months in company history.
We are now battling to make sure we are able to provide products to our customers at the volume and timing they require without compromising our commitment to the quality standards that underlie our reputation in the industry.
Accomplishing these objectives has become quite difficult.
But we're not satisfied with those accomplishments alone. During this difficult time, we have continued our active pursuit of new technologies and maintained our focus on cost discipline that yielded margin improvement on our core business and continued to invest capital in the company all while maintaining our rigorous approach to capital allocation and share repurchases.
We trust that the hard work. The team has done will help fortify the confidence you have placed in us and at this trust will be rewarded with above average market returns for years to come.
That completes our prepared comments for today. Thank you for your time and we can now proceed to questions.
If you would like to ask an audio question. Please press star one on your telephone again Thats Star one to ask an audio question.
Your first question comes from the line of James <unk> of Keybanc capital.
Good morning, James.
Bridging the first quarter's performance to your you reaffirmed full year guidance I know you utilize IHS as your.
Based framework for industry production I mean, it looks like second quarter volumes are expected to trend flat sequentially based on IHS. So the the <unk>.
$45 million volume impact that.
That was called out this quarter likely sustained so.
Wondering how you know how we should be thinking about the trajectory from here second half volumes better.
It does.
The supply chain inflation, the freight does that do those headwinds go away just yes, the bridge to the full year would be great.
Yeah on the on the revenue side I think Youre exactly right. I mean, Q2 is going to be pretty similar to Q1 in terms of the size that what really the improvement in what we're what we're seeing and hoping for is that the second half strength and so on and that's what IHS is forecasting versus beginning of the year. The second half has gotten better.
Really what that's going to be dependent on is the supply chain side if things.
Now it's estimated that the constraints will slow down a little bit in the second half of this year versus what we've seen in the first quarter. So we think Q2 is going to be a lot like Q1, that's going to be a lot of constraints a lot of freight issues.
Definitely a tight supply.
Hopefully by the back half of the year that starts to settle down a little bit and supports the higher production volumes.
Okay got it and then the.
The volumes.
The mirror shipment volumes in the first quarter were.
We're pretty strong in the exterior mirrors, especially right that's favorable mix.
The numbers to the growth rates came in really really nicely there.
But it looks like the implied price mix volume plus price mix.
The price mix side.
It was still down year over year.
Just curious how you know how we should be thinking about price mix and maybe tying that into SDM shipments for for this year.
How does that trend.
Yes, I mean really there were a couple of factors happening there number one is the impact of annual price reductions. So youre looking between 2% to 3% on most years that take effect on January one which is part of the reason for the year. The decline. The other part was interesting was if you look North America, and Europe, Japan Korea.
We're really on a negative trend from a vehicle production standpoint, the China market actually increased significantly and we saw quite a bit of increase in sales in the China market those tend to come at lower Asps. So theyre typically base auto dimming interior mirror. So your ASP on that is in the low 20 range and so that was part of the why you'd see asps kind of true.
<unk> down a little bit in the first quarter.
Got it thanks guys.
Got it thank you.
Your next question comes from the line of Luke Young with Baird.
Yeah. Good morning first question on the F. T. M. Just wondering if you could comment on how current production headwinds are impacting take rates and so far that we're seeing Oems prioritizing their more profitable vehicles is this helping take rates incrementally and could there be any longer term benefits to gentex.
Yes, I think well I don't think longer term I think you'll see over and part of the reason you know you'll see 'twenty late 'twenty, one and 'twenty two as Oems. There is no doubt that Oems are building at the top end of the spectrum right now in terms of content and feature set.
But I'll caution that by saying part of the reason you see micro shortages in some of the component shortages is with that advanced what what they're trying to build higher dollar value vehicles. The problem is is that's also where you're having the electronic shortage issue. So what we expect is that volumes will increase throughout the next 18 months, but that's also going to come with some lower.
Lower content and features some of the vehicles that aren't being built or are on the low end of the take rate side for us. So what we've seen is that there has been a trend towards higher take rates on a lot of our advanced features not just up D. M. The problem. That's been obviously adds additional pressure on the micro shortage issue and so we think hopefully by the <unk>.
Half of this year that starts to slow down like the constraints start to slow down a little bit.
The issue becomes longer term is how high does the content does it stay at this level of take rates or does it go back to a more normalized take rate I think what we're seeing on FTE and we're not concerned that take rates are going to drop because of that it's more about how do we get those same type of take rates on different different stratification of vehicles that are bill because if we can.
That obviously would signal.
Great Great success for us with MTM on multiple vehicles.
Okay. That's helpful. And then switching gears wanted to drill down on some of the specific supply chain dynamics that you're seeing in terms of your own supply chain and just wondering to the extent that your centralized production model and the amount of inventory that you hold on hand is helping you to mitigate these headwinds if you could talk about those dynamics a little bit.
I'd say the dynamic dynamic side its been crazy I mean, it's not just not just about the availability of micros, but it's in it's all kinds of electronic components I mean, it's as simple as circuit boards, all the way to high end micros.
And thats been difficult obviously the industry went through.
Pretty much globally, a lot of suppliers went through a few month period of shutdowns due to the pandemic and then catching up has been very difficult and how fast that market has responded to our market. In particular has responded has caused those issues and.
And so it's been a rolling problem I mean, we basically have a watch list going constantly of supply issues and people that were watching and communicating with daily.
Try to make sure that we get what we need to keep our customers.
<unk> beyond that I think what's what's really fascinating to watch is how does this how does the industry ever actually catch up and right. Now we are hoping that through the summer and some of the normal shutdowns in retooling. The Oems go through that there's a little bit of a break there to help some of the supply chain catch back up.
On the other side has been wild I mean, you look at freight and a lot of lot of these components are coming from southeast Asia. So you got all the issues from Suez Canal to the all the ships sitting off the west coast.
Caused a lot of freight issues there I mean, not just in terms of getting the parts, but how much you have to pay an expedited freight to try to get them here on time and so there's been a lot of headwinds on the cost side and related to that so we're hopeful.
With some of the constraints hopefully ending in the second half that we can get those freight costs back under control as well.
In terms of our inventory, yes that absolutely has helped us not shut down in OEM.
The problem is obviously, if you can't replenish that stock then you end up like everyone else, which.
Day to day needing shipments in order to be able to keep up with production demand.
Oh, that's great I'll leave it there thank you.
Your next question comes from the line of David Kelley with Jefferies.
Hey, good morning, guys. Thanks for for <unk>.
My questions and apologies for the background noise I'm in airport here, but maybe to follow up on the full year guide.
Maintaining your outlook despite the headwinds the disruption and then cover the IHS numbers coming down a bit can you just talk about some of the incremental positives that have emerged over the past two to three months that are helping to kind of offset those incremental headwinds.
Yes. Thanks. This is Kevin I think we've seen a bit of a resurgence in the China market as Steve alluded to earlier really good growth in some of the base level products and that volume has been applied throughout the year and we've seen great strength in take rates in that market as well as the north American market and some of the things that Neil talk.
It's about as some of the launches are taken off on time and with take rates that we were expecting and so it is really bolstering that but again a lot of that is driven by what IHS is estimating to be.
Of that supply chain issues in the back half.
Okay.
Some of the strength two has been on full display I mean full display mirror continues that growth rate that we were on really for the last couple of years. So that's been strong in the ITM launches have been going very well too. So that's been helping to add some positive positive revenue.
Okay. Thank you and then maybe a quick follow up Kevin to your point on China can you give us a sense of kind of where the auto dimming penetration is today and.
What that penetration is dumbo over the past couple of years or so.
Yes, I'd say, it's gone it's grown drastically in the last couple of years.
Go on back of the envelope real quick on that and I think it's probably around 15% to 20, probably about 15% of the China market right now has.
<unk> is the base auto dimming inside penetration rate in that market.
Okay got it. Thank you and then last one for me and I'll pass it along just curious I mean, it sounds like the visibility to the back half of the year is pretty strong here, assuming that the supply chain improves, but how should we think about kind of the normalized gross margin.
In the back half and again, we're moving kind of supply chain impact that helps you get to that full year, 39% to 40% were just kind of trying to bridge the gap here.
It appears to be kind of second quarter.
Gross margins, it'll probably be somewhere in the first quarter range to that second half uptick that gets about 39% to 40% that'd be great. Thanks.
Yeah, I would say like you mentioned, we're expecting the second half to a be a little higher than the first half in terms of total sales dollars. So the contribution margin of those incremental sales are what's going to help us drive to the to the midpoint or slightly above the annual guidance range in the second half of the year and that's how we get to that still inside of that annual guidance range for full year.
Some of the factors that we historically have seen them not only the higher revenue that which should help us in the second half, but as Kevin mentioned in these calls we talk about the first quarter and usually the second are both impacted negatively by the fact that we're still carrying inventory from prior year at that year's cost basis, and then as we start to move through March April may we start to see.
The positive impacts of purchasing cost reductions of the raw materials and so that usually helps the second half as well and then obviously as we talk about the growth rate.
The growth rate can get above the 5% to 10% range you usually you see obviously positive flow through the income statement with a higher growth rate.
Okay, great. Thanks, so much really helpful guys.
Thanks, David.
Your next question comes from the line of Josh Nichols with B Riley.
Yeah. Thanks for taking my question and good to see the company. We are affirming the 2021 outlook. If you could provide a little bit more color I mean nice.
Nice to see the 'twenty two outlook actually get raised here.
What's really the areas of strength that give you enough confidence to raise despite some of the near term shortages were seen as at full display mirrors ATM.
What are the puts and takes for that 22 hours.
Yes, I think well the first what we mentioned I think in first.
Year end conference call on January one of the things we did talk about as we were a little bit bearish on IHS vehicle production forecast that turned out to be probably well founded.
<unk>, obviously watching that that dropped by 3% in the quarter for the full year was something that we had to keep our eye on and we're probably a hair.
Probably a hair bearish on the IHS number in terms of total growth, but what gives us the confidence is actual take rates of our products on the launches that Neil is discussing continued strength and interest in our full display mirror ITM. Some of the new technologies that we're rolling out so even in even absent not hitting the exam.
Number on IHS total vehicle production growth rates, we feel like that our content is doing quite well in the market and that's really those are really the key drivers of why we feel like we could raise that guidance for 2022.
Yeah. Thanks, and then just for a little bit of clarity looking at the back half of this year.
How much of the supply chain shortage is expected to kind of alleviate.
Is it expected to still be some lingering impact in the second half or what are the thoughts regarding the second half forecast.
It's funny when you know everyone you talk to will have a different opinion on that if you look at.
My personal belief on that is that it's going to last longer even in the second half of this year. If you look at how long it takes capacity to get put in place for these type of components, it's not going to happen in a short term and so youre talking to 18 24 months at least before you could see any type of capital investment in the supply chain kind of improved total.
<unk>.
Really what youre going to be looking at is trying to catch up from those down the downtime that happen due to the pandemic is step number one and that's starting to happen, but it's going to take several more months before they can even get there and then theres, obviously youre talking about shared resources with consumer electronics and so on.
Question, There is will consumer electronics trend up or down over that same time period, what about automotive content and.
So I personally think its going to be more like an 18 months play before you start to see total relief, but we do think it will get a little better than what it's been in Q1, I mean Q1 was.
With pretty harsh environment from the supply side and so we think we think that'll lessen but not go away by the second half of the year.
Okay.
Thanks, guys I appreciate the color there Bob.
Your next question comes from the line of John Murphy with Bank of America.
Good morning, guys, you got to a lot of my questions, but I have just a couple left.
On the raw material costs I'm just curious if you think that's a headwind that may ease as we go through this year and into next year or is that something that remains.
I think raw material actually it's probably going to get worse throughout the second half of the year and the reason why is a lot of the electronics suppliers are coming with price increases to customers. So that very little of that actually hit in the first quarter. There was a little bit of it but there'll be more in the second quarter and beyond but we believe that the free.
Free issues will start to drop in the second half and so we think those the headwinds we experienced in Q1 will be very similar to what we see in Q2 through Q4, it's just going to be a different mix right it'll be more raw material headwinds, but less on the free side.
Got it and then on the semi is I mean, if you just give some color on this but if we think about next year and in everybody maybe out of their homes and not buying as many computers and screens and playstations and alike.
Do you think that there's the potential that this could swing back in the other direction, where capacity frees up than autos becomes the best game in town for the semi companies and you have this.
<unk> dramatically and maybe actually become a tailwind for you at some point next year.
Yeah, I don't I don't know if it'll be next year, but I think in a two to three year window. That's possible I think theres a lot of semis that are putting additional capacity in place and spending a lot on capital right. Now. So if you look at you know maybe there was a 10 or 15% increase in overall production capacity and I think thats, where we will get that relief and start to see this be.
More like you describe it historically you've looked at high end electronics in a 3% to 5% down market a year on asps.
We would expect that to happen again, but we think it's going to be a few years before that begins to become the than the normal again.
Okay, and then just lastly on China I'm, just curious what percentage of your sales.
Going or being delivered to China, who are the customers and it sounds like its most mostly base interior and exterior mirrors for now, but what's the typical curve that's become more advanced in years over time.
Yes, right around in the quarter it was right around <unk>.
707, five percentage of total revenue.
<unk> shipments to.
The most of our revenue is through joint venture Oems.
We also have exposure to the Tesla plants in China.
Which is obviously taking off and so it's a pretty broad spectrum, but we do have launches as Neil mentioned in the past several quarters with some local Chinese Oems and it's just a it's really a play it as far as our expanding the ability to do things locally the tariffs still remain a headwind going into China and thinking about.
How we manage the supply chain there for future growth with advanced features the product everybody loves it it's just a matter of the.
Considering some of those things.
And your other question was how do you what does that development curve look like we believe that after several years in the market with the growth that we're getting right now on base auto Dimming technology, we believe that will open the door to more advanced features we have done some in China.
But longer term, we need to work towards market specific features that are unique to the China market and that's what we've done historically really well I mean full display mirror is obviously, a great opportunity because it defies borders in regions, but there are some market specific type technologies that we need to continue to work on to help that helped that advanced feature content.
In the China market.
And I think I know the answer this but I'll ask it anyway.
There are any thought of building a production facility over there is everything going to stay in Zeeland.
Right I mean, what we have what we have we've actually we bought a new building a couple of years ago in China, We have a distribution center. There we actually bought a new building a couple of years ago that were just getting occupancy and right. Now we did a renovation of that building what that building offers us up is a lot more storage for inventory for finished goods out of Zealand into the China market.
It also opens up the door for us to be able to do light final assembly, there to support customer demands and to help with the tariff situations. So.
We have plans in place right now to continue to look and expand our ability to do local final assembly in that market.
And that final assembly skates or docks below potential tariffs.
Well what it does is it takes a lot yes. It takes yes. It takes a lot of that dollar content say plastics and metal mounts and even circuit boards and says we're going to find a local supplier for those so those would then avoid you wouldn't have duty on stuff that you sourced domestically in Asia.
The core auto dimming elements are something that we would still producing zone, one and ship there, but it lowers the total amount of tariff because of dollar content drops.
Incredibly helpful. Thank you guys.
Thank you.
Your next question comes from the line of Ryan Brinkman with Jpmorgan.
Great. Thanks for taking my question.
In the release about the part shortages that resulted in raw material price increases can you talk about what your biggest raw material buys are and which are the ones that are contributing to the increase is primarily the electronics components, you've been talking about or is it more based materials I'm not sure of the extent to which you might be exposed to like polypropylene or thermo plastics.
We use an housings, we're seeing a lot of increase there and then also could you talk about any kind of customer pass throughs that you might have in place. Thanks.
Yes, so the largest.
Purchase that the company undertakes is obviously micros electronics components the biggest negative impact. However, this quarter. We saw was in some precious metal markets what we saw.
See that what we saw in the quarter.
But going forward, it's really the price increases that Steve alluded to really starting to take hold in the back half of the year.
On the electronic side, but we do have exposure to the to the plastics issues that are also impacting the market and price increases potentially in that realm as well.
What was the last part of the.
I think I'll pass throughs, the customer pass throughs, I mean with the market with our with our products being market based pricing we work as hard as we can to push push on the APR side, but.
We take that risk every day when you look at our margin buildup already and try to push on APR either through volume or.
Those types of things, but for the most part that is for us to figure out on either getting more efficient in the manufacturing process.
And minimizing the impact of these cost increases.
Great. Thank you and just lastly is there an update that you could provide on the integrated toll module product you know you've been announcing a lot of awards there without <unk>, but I think theres been some expectation you might snag, some new ones with other automakers, perhaps this year I'm curious what discussions with automakers look like on that product.
And you know.
I'm not sure you've disclosed asps or profitability metrics for that product, but any color you might want to provide there would be helpful. Also.
Sure I can I'll talk a little bit about the product side. So the Audi rollout continues to go extremely well volumes have continued to increase over the last year, It's now consumer awareness and getting some of the functionality in place that the consumers looking for as we continue to improve the product.
Second customer that we've talked about.
But something in the last part of Q2 early Q3 for that.
On the ISP side, asps around $50 to $60 for that product.
Okay very helpful. Thank you no.
Brian Thank you.
Your next question comes from the line of David Winston of Morningstar.
Morning.
I know in the past you've talked about how you are.
Rock solid cash flow balance sheet tends to give you a higher priority.
Scarce raw materials, when theres supply problems is that happening this time around.
Yeah definitely it definitely helped US there is no doubt I mean, there were there were.
Whenever whenever you gone through something like this one of the things you wake up with sweat that every day is afraid that something happens when you shutdown in OEM I mean, that's that can't happen and we've been fortunate not to have that happen in our inventory definitely allowed us to fight through that better than some.
You can read it for pretty much every day you pull up.
Automotive publications, and you'll see a different OEM going down because because of a shortage by our supply base and so we've been fortunate knock on wood.
And that hasn't that we havent been the cause of any of those but like we mentioned as you're as you're struggling to get shipments youre burning through some of that inventory on hand, and so we're trying to get creative here to make sure. We're working with our suppliers to give them plenty of visibility and lead time and make sure. We're committing what they need to make sure we get access to those parts as quickly as possible.
But theres no doubt that it helped the team has done a remarkable job of of Triaging the supply side to make sure that we have what we need when we needed to get to get those shipments out on time. Unfortunately, one of the things that did drive is obviously higher freight cost trend, especially on the incoming side and making sure that we get stuff from the port to us as quickly as possible.
And somewhat related then.
I believe the annual price reduction and mitigation that you go through throughout the calendar year. I think Q1 is normally the worst of it because you haven't started the process or only early in that process, but this year, you've got much higher raw material prices too. So how does that price reduction mitigation effort look this year is it going to be extra hard.
Yes, it's going to be it's going to be much more challenging theres no doubt I mean, if you look at it from a timing standpoint with the basic timing won't change I think what youre going to see is the amplitude of improvement from Q1 through the back half won't be quite as much as what we've had historically on a normal year, because youre going to like you said you got burned through prior year inventory in the first quarter and then as you move through <unk>.
Second quarter and beyond you start to get the positive impacts of the Apr's from our suppliers. The issue this year with some material increases in some areas youre going to see a little bit not quite the same level of improvement on the purchasing side and so what we're modeling is not quite as much benefit there, but like we mentioned before youre going to see you're going to see some pickup.
On free as the year progresses, because we're not expecting the same levels of premium freight charges in the back half is what we're what we've been paying so far.
And that actually leads to my my last question on <unk>.
You had talked earlier in the call.
The offset with lower freight versus the higher electronics.
Rices.
So how much of an offset is that lower freight is it 30% to 50% 90%.
Well, let's put it this way right now what we saw in Q1 was about 100 per 150 basis points headwind from raw material and freight combined and so we don't think that that number changes drastically in the back half. We think there is the opportunity for that to obviously go down, but we think theres going to be the majority of those that headwind is going to last throughout the year.
Okay. Thanks.
Thank you thanks, David.
If you would like to ask a question. Please press star one on your telephone keypad again, Thats star one to ask an audio question.
Your next question comes from the line of Charlie Schlang of Alka.
Family at Pfizer.
Welcome from the Midwest.
Just calling him just hey, guys. Just a couple of questions you know in the previous cycles <unk> seen more lags.
As the automakers ramp back up versus your production just because you used through inventory, but it doesn't seem like that's going to be the case here because you're just struggling to keep up.
Yes exactly tie.
Timing is always interesting if you look at like the downturns, even when in into Q1 Q2 with a pandemic as Oems went down we were continuing to ship and so there is typically you know were anywhere from four to 12 weeks ahead of our customer in terms of when we're producing and so but because there is so much constraint and there's less inventory at the OE.
<unk> right now unless les en route and in transit.
You're exactly right, there's going to be a little less of that lagged in what we would normally see quite frankly, we'd love for it to get back.
It is it is it is a little hand to mouth right now and so I think for the next six to 12 months youre going to see it be much much more correlated on a timing standpoint to what it has been in the past.
And then on the F. D M, which is if you go back a year to your optimism about Ftm's has any thing changed or is it more optimistic or less optimistic how do you perceive it from a year ago and then my next question would be as a follow up are you, giving guidance as to the total shipped.
<unk> of <unk> this year.
Index.
So I would start I'll start with the optimism I would say that from a year ago till today I'd say its about the same I mean, we felt really good about where the growth rate wasn't what it was going now what I'd say is it's been a roller coaster between a year ago to today.
Even given everything that's happened you kind of go through man is this is this product going to continue to grow despite the issues that are happening in the industry and so we sit here today, having watched Q1 develop at about the same growth rate, we were expecting and so despite the issues and the problems and everything that's gone on we're right on track with our growth rate, what we kind of talked about the second part of your question there.
On the growth rate, we were really talking about adding a couple of hundred thousand units a year for them each year for the next couple of years and we're right on right on pace with that last year was a was a huge growth year for F. D M. But we continue to expect that thing to increase by two.
200, 250000 units a year.
Okay, and then finally given that.
You guys have managed through the cycles, so powerfully and you have some cash on the balance sheet.
About $640 million right between cash and long term investments zone right, yes, Sir.
Okay, and so the 525 target have we.
What are we going to do about that well we.
We've done as we've increased it a little bit through the cycle because quite a.
Beginning with the pandemic, we started getting a little more focused on cash retention for two reasons number one is not knowing the out the long term economic impact of everything that's been happening I want to make sure you're prepared for anything that could go wrong on the business side, but number two and the one that's honestly been a little surprising we thought we thought through this that there had been more.
Acquisition targets become available at reasonable pricing quite frankly on the multiples have not really changed that much in terms of available businesses and so we are preparing for hopefully what we're expecting to be a downturn in a depression of market values of available assets, which hasn't happened. So we're trying to not only for a rainy day, but also prepare for.
The potential for buying if market prices dropped.
Okay. So I say, we because we are shareholders were not just the sell side, where the buy side and so if there's any excess capital that you have sitting on the balance sheet I'm sure shareholders would appreciate that.
Yes.
Great.
No no no. We appreciate it and we love we love the confidence that you've shown us on a long time and I think one thing we are absolutely adamant about is our goal is not to stockpile cash beyond what's necessary and that's why that our share repurchase plan is kind of our fallback position, saying, Hey, we're confident in our long term growth and what that what that future will look like.
Five to 10 year period, and so whenever we have an opportunity we're going to be buying stock and whenever we see market retrenched too much we will get more aggressive on that side as well.
Okay, because it does look like as you describe but youre, describing a wonderful 2021, and where your new feature sets that are coming into play with higher.
Asps.
You have a slowdown in some of the freight cost stuff that you've run into and probably a pick up in production.
The car companies.
Look at this and say Wow okay.
Yes.
Neil Neil's team has done a remarkable job on the technologies piece of delivering new features new content.
We believe that sets us up for for a long term growth.
Okay, Alright keep up the great work I appreciate it. Thank you so much thanks guys.
There are no further questions at this time I would like to turn the call back to Josh <unk> for any additional or closing remarks.
This concludes the Q&A portion of our call. Thank you everyone for the great <unk>.
<unk> and hope you have a great rest of your weekend good weekend.
Thank you for participating in today's conference call. You May now disconnect your lines at this time.