Q2 2021 Gentex Corp Earnings Call

Good day and thank you for standing by welcome to the Gentex second quarter 2021 financial results Conference call.

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I'd now like to hand, the conference over to Joshua Brodsky Director of Investor Relations. Please go ahead.

Thank you.

Good morning, and welcome to the Gentex Corporation's second quarter 2021 earnings release Conference call I'm, Joshua Persky, 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.

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

For the second quarter of 2021, the company reported net sales of $428 million, which was an increase of 86% compared to net sales of $229.9 million in the second quarter of 2020.

On a quarter over quarter basis Global light vehicle production in the Companys primary regions of Europe, North America, Japan, Korea, and China increased 36% when compared to the COVID-19 impacted the second quarter of 2020.

However, when compared to the mid April of 'twenty, 'twenty, 1 IHS Markit light vehicle production forecast and the Companys primary regions.

Actual light vehicle production in the second quarter of 2021 declined approximately $1.1 million units or 7% as a result of the industry wide parts shortages and global supply chain constraints.

The largest deviation from the forecasted production within the quarter came in North America, which saw on actual light vehicle production decline in excess of 15% compared to the mid April of 2021 forecast.

The reduction in light vehicle production compared to forecast was led by certain OEM customers that deploy high levels of the company's product content, including both interior and exterior auto dimming mirrors and the other electronic features such as full display mirror and Homelink.

In total the impact from the shortfall on vehicle production compared to forecast led to an estimated mirror unit shipment reduction of approximately 2 million units versus the company at the beginning of the quarter expectations.

While we are very pleased with the net sales increase of 86% over the COVID-19 impacted the second quarter of last year, we are still experiencing tremendous volatility in the order cancellations as our customers continue to deal with the impact of the ongoing part shortages that are affecting our industry.

The initial forecast for the second quarter was for sales to be 1 of the largest quarters in the company's history, but the continual changes in releases in orders resulted in the pushout of approximately 2 million units.

The unit shipment changes, where most severe in North America, where our dollar content per vehicle is above the corporate average we estimate that the total impact of revenue on the quarter was about $80 million.

As we move through the second half of the year and into 2022, we are encouraged that the overall demand for vehicles and our products should still provide opportunities for the company to continue to outperform the underlying market.

For the second quarter of 2021, the gross margin was 35, 4% compared to 19, 1% for the second quarter of 2020.

Compared to the COVID-19 impacted second quarter of 2020 gross margins improved due to higher sales levels significantly better overhead leverage the structural cost savings put in place by the company last year and positive product mix.

While the gross margin for the second quarter of 2021 improves significant significantly versus last year. It was well below our initial estimates for the quarter.

The lower than forecasted gross margin was primarily driven by the significant reductions in expected sales during the quarter, our inability to offset fixed and variable overhead costs due to the lower sales lower than expected price reductions on raw materials and higher than expected incoming freight costs.

The good news however is that despite many of the challenges in the quarter. Our analysis shows that of sales had hit our initial forecast then gross margins would have been very close to our previous annual guidance range.

Operating expenses during the second quarter of 2021 increased by 2% to $51.7 million compared to $57 million in the second quarter of 2020.

Income from operations for the second quarter of 2021 was $99.9 million compared to a loss from operations of $6.7 million for the second quarter of 2020.

During the second quarter of 2021, the company had an effective tax rate of 15% or $15.3 million, which was below our annual guidance range and was primarily driven by the benefit of the foreign derived intangible income deduction and discrete benefits from stock based compensation.

Net income was $86.5 million for the second quarter of 2021 compared to a net loss of $2.4 million in the second quarter of 2020 the.

The increase in net income was driven by the quarter over quarter increases in sales gross margins and operating profit.

Earnings per diluted share for the second quarter of 2021 were 36 cents compared to a loss of 1 penny for the second quarter of 2020.

The increase in earnings per share is the result of the higher net income when compared to the second quarter of 2020.

I will now hand, the call over to Kevin for our second quarter financial details. Thank you Steve.

Automotive net sales for the second quarter of 'twenty, 1 for $426 million and 89% increase compared to $222.1 million for the second quarter of 2020.

Auto Dimming mirror unit shipments increased 98% during the quarter.

Highlights by 140% growth in exterior mirror unit shipments compared to the second quarter of 2020.

Other net sales in the second quarter of 'twenty, 1 were $7.4 million.

A decrease of 6% compared to 7.9 million on the second quarter of 2020.

Within the fire protection sales increased 31% quarter over quarter, while Dimmable aircraft windows sales decreased by 65% comparatively.

The company expects that Dimmable aircraft Windows sales will continue to be impacted until there was a more meaningful recovery of the aerospace industry and the Boeing 787 aircraft production levels.

During the second quarter of 'twenty, 1 the company repurchased 3.4 million shares of its common stock for a total of $115.9 million.

The company intends to continue to repurchase additional shares of its common stock in the future and support of 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 highlight some key balance sheet items as of June 32021, as compared to December 31 of 20 cash and cash equivalents decreased to $353 million down from $423.4 million, primarily due to cash flow from operations that was more than offset by share repurchases dividend payments and capital expenditures short term.

The investments were $13.8 million down from $27.2 million and long term investments were 193 million $193.4 million up from $162 million.

Accounts receivable decreased to $234.1 million from $284.9 million due to the decline in sales.

Inventories were $263.9 million up from $226.3 million the.

Accounts payable increased $101.3 million up from $84.8 million, primarily due the month on payment timing and accrued liabilities were $95.1 million up from $92.9 million and increases were due to higher accrued salaries and wages as well as accrued income taxes.

Now quickly looking at the cash flow statement second quarter 2021 cash flow from operations was $62.4 million up from $39.2 million in the second quarter of last year.

The increase in operating cash flow was driven by increases in net income, but partially offset by fluctuations in working capital.

Capital expenditures for the second quarter were $18.8 million compared with $13.3 million for the second quarter of 2020 and year to date capital expenditures were $31.4 million for 'twenty, 1 and compared to capital expenditures of $28.8 million in 2020.

Depreciation and amortization for the second quarter was $25.9 million compared with $27.1 million of the second quarter of 2020 and year to date was $51.5 million compared to DNA of for 2020 of $53.4 million.

I'll now hand, the call over to Neil for the product update. Thank you, Kevin and the second quarter of 2021. There were 29 total launches of our interior and exterior auto dimming mirrors and electronic features.

Of these new launches of <unk>, 45% contained advanced features with full display mirror, leading the way.

Now for some updates on full display mirror, we're excited to announce the during the second quarter of 2021 of the company began shipping full display mirror to our ninth OEM module Ronnie.

The <unk> 20, now has full display mirror and we're excited to continue to grow this product across other vehicles in the future.

Also during the second quarter of 2021, we began shipping full display mirror on the Jaguar excess and the Buick envision plus for the China market.

We are now shipping full display mirror on 56 vehicle nameplates and are forecasting at least 10, new vehicle nameplate launches for the second half of 2021.

It's been a few quarters since we provided an update on the number of OEM customers that are awarded us full display mirror programs.

As of the end of the second quarter of 2021, we have been awarded full display mirror programs with 14, Oems and we'll be announcing OEM 10, and 11 in the second half of this year.

Oems 12 through 14, we'll be launching and brings the market the full display mirror product over the next 2 and a half years.

Even with the unique market situation, we have been all facing it is clear that our OEM customers and consumers value of the benefits of full display mirror system provides to enhance rearward visibility and driver safety.

In summary, even with the current challenges our industry is facing our product launches product Rollouts and new technology developments are continuing to help propel the company forward and we're excited to see the impact of these over the coming years on <unk>.

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 the second half of 2021 and full years 2021, and 2022 are based on the mid July 2021, IHS market forecast for light vehicle production in North America, Europe, Japan, Korea and China.

Light vehicle production in the company's primary markets as forecasted by IHS Markit 2 decreased 4% for the second half of 2021 versus last year.

This forecast from IHS Markit assumes that many of the supply chain related issues that began at the end of the first quarter of 2021 and continued throughout the second quarter of 2021 will improve during the second half of the year.

While the vehicle production volumes a reduction versus second half of 2020. This forecast represents a 9% increase in light vehicle production when compared to the first half of 2021.

Based on this light vehicle production forecast for the company is providing guidance estimates for the second half of 2021.

Given the significant changes in vehicle production volumes in the second quarter and the associated impact on the company's actual results and the challenges in our current operating environment driven by supply chain and the freight issues. The company believes that guidance specific to the second half of the year is more accurate and indicative of actual performance for the remainder of the year.

Then only providing full year 2021 updated guidance.

The company also believes that this approach may help provide a more accurate projection for calendar year 2022 performance.

The company's current estimate is that net sales for the second half of 2021 will be between $970 million and $1.07 billion.

This revenue forecast is based on the IHS Markit light vehicle production forecast for the second half of 2021, but also includes manual adjusted admits to the Companys forecast as a result of customer order changes stemming from part shortages that have impacted the second quarter and will likely continue to impact demand in the into the second half of this year.

The company has also updated our cost and profitability model to include impacts due to elevated raw material prices freight expenses and labor costs. The.

Following guidance is intended to replace our previous guidance.

Revenue for the second half of 2021 is expected to be between $970 million and 1.07 billion gross margins for the second half of 2021 are expected to be between 37 in the half and 38, 5% on.

Operating expenses for the second half of 2021 are forecasted to be approximately $105 million to $110 million.

Our estimated tax rate for the second half of 2021, which assumes no changes to the statutory rate is forecasted to be between 16 and 18%.

Capital expenditures for the second half of 2021 are expected to be between 50 and $60 million depreciation and amortization for the second half of 2021 is forecasted to be between 54% and $59 million.

Based on the mid July 2021 light vehicle production estimates for 2022, the company estimates that revenue for calendar year of 2022 will be approximately 10% to 15% higher than the updated 2021 revenue estimates of $1.88 to $1.98 billion.

We have updated our 2021 and 2022 guidance to include our expectations that the company will continue to see headwinds to demand due to supply shortages that we believe will continue in the second half of 2021 and into the first half of 2022. Our forecast includes manual adjustments to the IHS markit forecast for light vehicle.

<unk>.

Despite the massive volatility in the industry. We are estimating that buildup demand will provide strong revenue growth next year that is on pace with our initial revenue guidance for 2022.

Our industry is enduring severe challenges currently including issues, an order cancellations component shortages raw material increases freight issues labor shortages and other pressures, but we remain optimistic that the next 18 months has the potential for to produce record level of revenues and profitability for the company.

In conclusion I'd like to take just a minute to thank the entire team at Gentex for their focus hard work and our men's flexibility during the quarter.

The amount of last minute changes in customer orders combined with the difficulty in receiving raw materials and the necessary volumes and timing made it very difficult to play on operations.

But the team coordinated and worked very hard to keep up with the rapidly changing environment, which allowed us to continue our streak of meeting customer shipments without any major downtime for our customers.

We believe the challenges facing our industry will continue for at least another 12 months and our forecast assumes the overall light vehicle production will continue to see large changes and increased volatility.

These headwinds will also continue to affect the overall profitability of the company, but much of the work. We did last year on cost controls has prepared us for the difficult conditions. We are currently operating under.

Despite these challenges our forecast for the rest of 2021 and 2022 remains strong.

As I mentioned during the first quarter conference call. The combination of our launch cadence of product mix and overall program awards continue to provide us confidence about the future growth rate and health of our business.

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

As a reminder to ask a question you will need the press Star then 1 on your telephone keypad to withdraw your question press the pound key.

Please standby, while we compile the Q&A roster.

Our first question comes from James Picariello, with Keybanc capital markets.

Hey, good morning, guys. Good morning, James the names.

Can you.

Sorry, if I can maybe just quantify the actual semiconductor in the premium freight costs in the quarter.

I believe the number was $6 million or so less last quarter. So curious how that trended and then can you share what you now have baked in for the second half.

The does the Katy and the cadence alleviate by the fourth quarter.

And how should we start thinking about these extraneous cost persisting next year within the the cadence for the second half. Thanks.

Sure. So the what we've seen on the first half is a little lower than what we're expecting in the second half, but if you look at kind of what the premium the.

The premium is on the electronics right now versus what it would've been last year on the first half of this year is probably 50 to 100 basis points of the second half we're expecting to be of 100 to 150 basis points and that's talking gross margin impact on the free is right.

Right around 100 basis points on the gross margin and just the point that out that's all incoming freight costs, which is what impacts the gross margin line. There's also expedited freight costs on the outgoing which affects ours our sales expense.

Okay got it and then as we think about next year then.

Is the second half gross margin guidance of 37.538 NAV is.

Is that a good starting point in terms of thinking about gross margins for for next year. Yeah. We think we think that's part of pretty much probably going to be in line on the only reason why we say that it's been very volatile environment. When it comes to pricing on the semi on the semiconductor side, but we believe most of the negative impacts will be will be hit hitting in the.

The second half of this year. So we don't expect additional starting in 2022 at this point.

Okay, and just a follow on to that I mean, what are the the levers.

Could that could swing that 1 way or the other in terms of you'll have your.

You're in the annual price reductions with you know with your OEM customers.

At the start of the year and then you'll be what negotiating on the on your supply on your trip supply base to get concessions. There just how should we be thinking about the dynamics, yes, I think the.

The I mean, the single biggest dynamic and the single biggest negative impact. This quarter was just the lost sales. So the really the the thing we're watching the most of US Unfortunately somewhat out of our control, but that is you know.

What what other tier 1 suppliers are struggling on that are causing OEM downtime issues. If the Oems are up and running you know based on our forecast we're going to be in great shape throughout the second half and heading into next year.

So that would be the single biggest thing to watch is how close we come to our revenue estimates from there. It's about the factors that you mentioned right.

How do the length of the link lengthening of time to get parts into the space, how do we get them into our facilities and then at what price point. So if we can handle that first half and sales actually hit and we feel pretty confident in our ability to manage the expenses around the around the price increases on our freight expense.

Got it thanks guys.

Thank you James.

Our next question comes from Luke Young with Baird.

Yeah.

Good morning.

Good morning. So first question wanted to ask is on China. So you said that China sales increased significantly in both the first and second quarter now. So it does seem like we've seen some sustained momentum there and well I know it was the negative for mix. This quarter, if we take a step back and look at the company's strategic positioning in China, I'm wondering how you're feeling about that today versus say.

A year or 2 ago or do you feel like you're on the front foot in China now.

Yeah, I'd say I would say, we're definitely making great progress in the China market. If you back up 5 years ago, I'd say, we were a little bit behind all of them in the China market versus where we should've been and so in the last few years, especially we've made tremendous progress. So these are what we're launching and the sales increases were awards that were given 2 to 3 years ago, and just going into production now.

We're definitely excited about that the the opportunities of the China market and it's good to see their production levels returning to normal.

Next question I wanted to ask is in terms of the disclosure that you gave us on the 14 Oems that are.

Now on board for the full display mirror. So I know, we're not going to get anything specific here, but I'm just wondering if theres anything in way of commonality for looking at geography market segment or similar just trying to get an idea of where youre seeing momentum in terms of bookings on the FTE on yes.

Actually it's broad spread.

The markets.

The true vehicles down to volume vehicles and everywhere from standard fit on the vehicle to optional take rate. So it's I wouldn't say that it's the particular segment or a particular region because we've got vehicles that have launched in China with the <unk>.

The conversion plus the Chinese market, we've got the Japanese based products from Europe has been picking up for the European market and of course North America of your.

A large portion of it is so we're seeing growth in outside of North America lately.

Great. Thank you for that and if I could just sneak 1 last question on gross margin.

Hoping the put in context of your second half guidance relative to sort of the typical seasonal pattern that we'd see of Gentex and specifically 1 of them I'm wondering is to what extent can the normal activities that you would undertake the off the annual price Downs helped to address these pressures that we're seeing right now in terms of material and freight costs.

Yes, I think we are seeing still have positive.

The cost reductions, but the the.

The electronics content is kind of moving it out a little bit to that tune of about 100 basis points or 150 basis points in some of <unk>.

Some cases, so that's really what is offsetting kind of orange seasonal.

Ramp now of sales come in you know as forecasted.

That should help offset it but I think we're talking about a little bit of a discount to what the IHS forecast is showing so that also was a negative a little bit of of negative on the gross margin that would that should would be offset in the second half yes.

Yes, I think I took.

Kevin's point I think the the big increase from Q2 actuals to the second half guide really what Youre seeing there is the impact of the higher sales levels that were anticipating in the second half of this year.

Okay, great well I appreciate the context, there and I'll leave it there. Thank you.

Thanks Luke.

Our next question comes from Ryan Brinkman with J P. Morgan.

Hi, Good morning, Thanks for taking my question Hey.

We've heard from a couple of other suppliers that the recent industry backdrop has been distracting.

The management time and attention has had to be diverted away from long term projects and initiatives instead towards putting out various fires like figuring out increasingly tricky logistics and sourcing I know you guys seemingly more than most other suppliers are always working on long dated projects Skunk works like medical et cetera, and so thought to ask.

About your experience and continuing to execute against your long term projects, including new products under development the ability to pitch new ideas to customers, who have made themselves to be distracted et cetera, I guess, what was your experience kind of walking and chewing gum in the second quarter and then how do you see the outlook for the same in the back half yes.

Great question, Ryan Thanks for asking them as you can imagine.

On the backdrop is is distracting. However, we continue to make great progress on the on the Skunkworks types of projects that we always have going a lot of those are looking at verticals outside of our traditional vertical and we feel very comfortable on our ability to continue to do both of those at the same time.

The 1 thing I'll point out is on on our existing book of business, having a of having a forward facing conversation with an OEM on whether thats in aerospace or in automotive it has become more difficult not just because of the environment, what's going on in part shortages and downtime, but also because of the lack of travel on ability to go internationally and see our customers face to face.

But that hasn't stopped us our sales teams on the ground in those countries have done a great job continuing to show the new product concepts of what we're working on on what we're excited about the second half of this year and heading into next year, we're fully anticipating being able to do see us again, and we're pretty excited to be able to show some new product concepts at that show.

Okay helpful. Thanks, and then just what has been the early experience here in the first few weeks of 3 Q, you know relative to the supply chain constraints that you've talked about the volatility and the customer production schedules et cetera are you seen any or do you expect any improvement in these issues in the <unk> versus <unk>, perhaps on the cycling past of the range.

The fire any of the issue I was just curious if maybe now you said some of the customers that were negatively impacted had higher take rates etcetera. I was just thinking I don't know F 150 or anything like that.

And maybe those customers that were disproportionately impacted in.

<unk>, maybe that was because of Rene toss in there could be some improvement I know what you're saying.

No I mean really what we're seeing in July is pretty much of a continuation of what second quarter look like so what we're what we believe will happen is the issues will continue to exist in the second half and then into next year, hopefully just not as dramatic in other words for being down for as long as they were some of the other Detroit 3 really struggle on with.

Communication and data I think what will happen in the in the second half of this year is not that there won't be problems and when we talk about problems is not really limited to 1 supplier. It's really kind of rolls every day, you find it and get it cause of different different supplier of different problem and so unfortunately, it's inconsistent and you have to adjust each 1 of them.

But 1 of the things that we believe will happen and has starting to happen is communication and the industry is getting better so on the.

Pliers are communicating with the Oems more effectively our suppliers are communicating with us more effectively and if nothing else that gives you a better chance to plan and to react. So even though we believe they will continue to be shortages. We think the the amount of time you have to spend on it will start to shorten.

Very interesting and helpful. Thank you.

Okay.

Our next question comes from David Kelley with Jefferies.

Hi, Good morning, everyone. Thanks for taking my questions, maybe just starting with the the advance feature take rate it was a bit more resilient.

We expect to just given the ongoing headwinds so just curious what you're seeing customer prioritize.

And has that or do you think thats changing into the back half of the year given the lingering disruption.

Yes, I think most Oems in general on especially at the end of Q1 and really throughout Q2, if they had a preference are going to build the highest end vehicle that can in that and that's been an interesting transition theres been a lot of vehicles and there's a lot of articles about this where Oems are dropping certain features that they can't get the support from the supply base to produce it they'll build the V.

Vehicles still.

Maybe with 90% of on the content that it would of had so the the bet is towards the high end, but by the second half of this of the second quarter really so you know in the May June what you've started to see where Oems basically saying, okay. What can you get us of anything right now that we prefer to build high end, but to be honest, we will build build anything as long as we can get.

So I think there was a certain level of desperation at the end of the Q2 for all of US on the supply side and the OEM side, just trying to trying to put together a plan of what can we get you that will allow you to build a vehicle on general and so I think theres a little bit more of that we have to get through here in Q3, and then hopefully hopefully it gets a little better in the back half of the year.

Okay got it that's helpful. Maybe just a follow up.

Medium term question, but is the better visibility than average to the out year kind of the advanced feature take rate. If we think about dealer inventory levels, where they are added and Oems are scrambling to content vehicles just curious.

On the medium term visibility could perhaps even be better than than we historically see despite some of the shorter term headwinds that are out there.

Yes, I think I think the Oems are doing a better job of trying to provide you information about what their intentions are of what they want to build further out to help help with this issue of planning on.

The problem is the so far that information hasn't been very useful because it's.

It's it's too optimistic and unfortunately of the supply base can't can't support those level. So as much as every day like I mentioned the communications improving unfortunately, it hasn't really turned into reality, yet, but I think in the next 12 months or so of that'll start to turn the corner and the information that's being provided will be quite useful.

Okay got it. Thank you and then maybe 1 last 1 if I could sneak it add a potential SDM competitor announced a significant 8 S acquisition last night. So just curious if you have or maybe you are seeing any changes in the F. D M competitive landscape for prioritization by potential competitors that are out there.

No. We don't think we don't think that acquisition changes the FTM landscape at all I mean, if you look at what that what that's focused on it's a totally different technology and it isn't really in our feature set of any of our FTE on products.

Yeah.

Okay got it thanks, everyone I appreciate it.

Our next question comes from John Murphy with Bank of America.

Good morning, guys.

Yes.

The question about the the second half and I'm certainly not trying to give you guys of hard time, because as you know this is rate fall at the time and it has.

Nothing to do with what you guys are controlling at the moment, but I mean, how comfortable are you with these these volume forecast going forward I mean, because I mean, we are hearing and im sure Youre hearing conflicting user of VI chips are coming back, but maybe there maybe theyre not depending on who you're talking to you and maybe you know volumes are increasing but some of that volume increase is being allocated to.

Towards consumer electronics and cell phones more than the auto industries of the supply actually really might not be getting better in the second half of the year end of it seems like the.

Despite youre not being on chips around there was almost some pull forward and I think you've actually kind of just alluded to this.

From the third quarter into the end of the second quarter, but then that started to dry up at the end of the second quarter.

There's just a lot going on here and there is not a clear picture as to exactly how the chip shortage is going to resolve itself in the second half of this year hopefully will next year.

How confident are you in these numbers for the second half and once again I'm not giving you a hard time because this is the volatility in the industry in the.

Smbs industry not <unk>.

The autos or even what you can control Oh no. It's a good question John on Yeah, we're not we're not offended by it and in fact, that's the million dollar question that we're trying to answer every day.

What I would say is if.

If we if we do a bottoms up forecast based purely on IHS market. Our estimates for the second half would be much higher.

We reduced those based off of the change in demand that we're seeing from our customers. So we got pretty good quarter in Q I mean.

Yeah, I would say a pretty good quarter of pretty good information in the quarter for at least to give us some indication of how much volatility and likely order changes. So what we are also comparing that against is what are we hearing from our suppliers on the on the silicon side.

In terms of what can the hit in the second half versus the constraints. They had in the first half and so we do see some lightning on that also includes the tremendous amount of work that our team has done here to change product concepts and designs to make sure we're getting out of kind of more constrained components and then the others. So in the background of all of this we've been doing a tremendous amount of work on redesigning circuit boards.

Re laying out designing around components that have more availability. These are all very quick turn engineering projects expedited testing procedures, and then obviously coordinating with the Oems on the approval for all of that so it's not just the we're sitting and waiting for supply to get better. We're also actively redesigning products to try to get out of those constrained areas.

As much as possible and that's what gives us a little more confidence in the second half than what we had in Q2.

Got it okay, that's very helpful.

And then the second thing on the variable cost side I mean, obviously.

If you had better visibility and even if the schedules were not good but if they were steady and predictable I would imagine you could respond a whole lot better than you did in the second quarter I mean, if we saw something more normally in the second quarter as far as the shipments that you saw with some level of predictability of what is your ability.

Or how do you view reacted on the variable cost side that would have been much more effective than what you've got bandwidth with the variability. Yes. If you look at all kind of combined 2 things 1 of them as 1 of the profitability of the loss of business plus the overhead benefits. If we could of plan better and just having better leverage and that would have been 200 or 250 basis.

Points by itself between those 2 areas. So that's why we look at the second half, saying, we don't need we don't need it to be a record setting quarter from a revenue standpoint to get back to that profitability measure we gave despite the headwinds on the raw material side and freight.

We need is just the enough visibility and then high enough level of sales that gives us that that leverage point.

Okay.

Then just lastly on the raws it sounds like the didn't go up but they were not there a little bit worse than you were expecting in the quarter as you look at the second half of the year.

I would imagine I mean, youre, saying that they're getting they're getting a bit tougher and increasing.

As you go into 2022 was that is that still an issue.

In the first half and it might ease in the back half of the year I mean, there is once again, it's another.

Volatile factor, but it does seem like as supply comes on there on the raw Mat side, you may actually get some easing sometime in 2022, what what's your take on that what's happening in the near term on what's your take.

Yes.

For 2022 sure Yeah. The second half of this year, we're estimating and really into next year about 100 of 150 basis points of of gross margin headwind based on raw material increases and that includes the semis, but it also includes a lot on the metal side and the precious metal side of the effects of our coding and a lot of what we do on the display side. So.

The that's kind of our estimates for the second half of next year, we don't really see that easing anytime next year. We think 2023 would be the first time before you'd start to hopefully have some stability and then some more more normal type conversations around long term productivity.

From the supply base.

I'm, sorry on a comparison basis.

This kind of pressure.

Just.

The continuing to the first half of 2022 been on a year over year basis would that potentially ease because you've already seen or you expect yes on the year over year on a comp base on a comp basis, absolutely because we're expecting a lot of that the hit in the second half of this year. So in the second half of next year, you would already have some of that incorporated in your cost structure. So you wouldn't expect a for.

In Q for you in essence next year, you Wouldnt expect of 400 to 150 basis points again, it would just be the income whatever changes in the second half of next year.

Okay. So credit helpful. Thank you guys. Thanks, Kevin.

Yeah.

Our next question comes from Josh Nichols with B Riley.

Yes. Thanks for taking my question I know, there's a lot of uncertainty around the semiconductor supply chain right now, but clearly you guys are seeing a lot of traction with the full display mirror offering a lot of new nameplates that are launching here.

Are you on the good position any impact there as far as your ability to continue to supply those offerings and it's also been a very favorable.

Favorable gross margin contributor or is there any major impact there or is there still of lot of favorable gross margin impact of that youre seeing from that business and just curious about the growth trajectory. There on the margin profile, if theres been any change on on that business.

Well on the product side at the M is 1 of the more challenging products because of the amount of electronic content in that product. So getting getting components and then also making sure you're managing through the headwinds on price increase side. So LCD is especially drivers for LCD as have been it will continue to be really for the next 6 to 12 months a call.

The issue.

As the industry is facing cost increases on those type of components, but also obviously on the large end microprocessor side, which is also inside all of our FTM products. So that that product has been incredibly popular at the same time, it's difficult to get those components and then that's 1 of the challenges of controlling the cost structure of that product as well.

But as we continue to launch F. D M, where typically moving out of base mirrors into into the ft on which has the higher price point and does have higher margins overall, so incrementally. It is the benefit for the corporate overall margins and that will continue to be up the despite these issues. Thanks Steve.

Yeah.

Thanks, and then just separately as the second question here I know that you trimmed your value just estimates of a little bit I assume as far as geographically is most of that cutting that youre seeing the in North America logs of.

To the outside the U S and then well well suppliers of little bit challenged right now it seems that theres very low inventory levels right. Overall curious about your take whenever we think of little bit more about next year as hopefully things start to normalize to some degree.

How long it may take to for these Oems to kind of be build the inventory levels given that the the demand for vehicles is actually quite high right now.

I think your I think your 12 months to 18 months before Oems can reasonably get back to the inventory levels. They would they would like to be at the.

The like you said from a backdrop standpoint is actually exciting I mean, theres very low inventories.

Historically in our industry problems have always been around too high of inventory levels and what impact of that half so.

Honestly I cant tell you the last time inventory levels have been the slow.

That if you look at the Big picture of the fact, theres low inventory levels in great demand from the consumer side and also for our products in particular, that's what gives us the confidence that in the next couple of years should be a great opportunity for us to continue to grow and focus on profitability.

The bigger picture is when does it finally start a lesson.

And when can the Oems start to play catch up on the other issue is even of suppliers catch up immediately it's difficult for an OEM to ramp up capacity in a short time period and so I think that's the the 1 that we would tend to say its going to take much longer for inventory levels at the at the OEM level to get back to where they would like them to be.

Great. Thanks, guys I'll hop back in the.

And in the queue.

Great. Thank you.

As a reminder, if you'd like to ask a question at this time that Star then 1.

Our next question comes from Mark Delaney with Goldman Sachs.

Yes, good morning, and thank you for taking the questions I guess first on the input cost increases that you talked about and some of that potentially being sustained into next year could you talk about what capabilities. You think you may have to be able to pass some of these higher costs in terms of raw materials and freight on too.

Oems as you start going through the these negotiations and perhaps neutralize the impact to your margins as you think about 2022.

Yeah, typically I mean, we're a market market based pricing company. So a lot of it we don't have contracts that would dictate of.

If raw materials go up by 10% that we get the pass those along but.

Every year as the new year from our annual customer price reductions negotiations and so you know putting putting those cost increases into our argument as far as like negotiating lower price Downs is typically our best argument of how we approach it on an annual basis. So we have those conversations we're having those conversations about last year is still the some Oems because obviously volume.

Live up to the expectations and so that's really our best chance of.

The kind of offsetting the increase in raw materials is is getting a lower price down on average at of <unk>.

Given customer.

Going into next year.

Got it.

And then in terms of the.

The company was giving around.

Light vehicle production expectations.

For 2022.

I believe the number of the.

Company is expecting is pretty similar this quarter compared to what you had last.

Last quarter on 76 million and Youre talking about the.

The potential for some of these chip shortages to be sustained in so called in some degree of difficulty next year. So is that something you already trying to bake and even last quarter and to the.

The 22 outlook on that and Thats why isn't changed or is this from other puts and.

Takes that are allowing you to maintain a similar volume outlook for 2000 range. So the.

On the published IHS numbers that we Didnt change those and the change that in our in our press release, but we're talking about our top line forecast that we're discounting that.

And when we provide our revenue guidance, it's got our internal kind of manual adjustments.

In there so we still publish what what IHS is for the regions just for a benchmark, but just anecdotally talking about we were discounting it so that it helps with the modeling going on.

Got it that's helpful. And then maybe just 1 last 1 of your.

Thinking about the second half of the year.

You've already given some helpful color on how you're you're hearing from customers about the build schedules and how that may ramp up but you could you talk a little bit more about the linearity in the second half. The holds in terms of where you are running at today and how the starts to improve yeah, I understand you're still tight throughout the whole of second half but.

Later on <unk>, maybe that gets better or is it or is it really more of a for Q phenomenon for you think.

Absolute volume start to increase.

Go ahead, I'll say the first half of Q3 is going to be much.

Similar to Q2, and we think as Q3 progresses is when youre going to see your first opportunity for things to start to get better typically Q4 is a little lighter than than Q3, and so if you look at holiday downtime and some of the things that Oems have done historically, we think theres going to be a lot of changes to that and the Oems are going to be more aggressive tier ones.

Well in terms of working working through the fall on into the winter and so we think theres upside, especially in Q4 to what's going on because historically if you look at what's going on right now right I mean on the consumer electronic side, you've got a lot of builds happening right now to get ready for the holiday season. Once you get into Q4, there should be of lightning and demand on the consumer electronics side.

Versus what's happening right now and that will obviously, what hopefully free up some capacity for for automotive and other industries, but that's kind of our expectation is that Q3 is going to start basically like like Q2, and then hopefully it continues to get better throughout the end of year.

Thank you.

Thank you.

Our next question comes from David Whiston with Morningstar.

Thanks, Good morning.

I wanted to go to a comment Steve that you made earlier on the Q&A that to me implied that there has been some maybe inadequate communication from the Oems.

On to the suppliers.

And I realize the OEM supplier relationships are a bit of the soap opera, but.

I'm on Earth is still important communication going on after so many decades of working together and how serious the chip issue as well I think I think it's less to do with intentional poor communication and more about what Oems are planning to do this entire time, what they wanted to do and then not hearing I mean, what happened really is during the quarter as a lot of <unk>.

Our suppliers told us at the last minute or we found out when the shipment didn't arrive that was short components are never shipped and so a lot of suppliers. We're dealing with the same problem, which is poor communication from the supply base and then suddenly you realize you of a problem you're trying to find out are you going to get the parts of our you're not what kind of volumes and then that information let upstream to the Oems.

Later than it should have and then they had to make decisions with it too. So it's not that it was a deliberate deliberately poor communication I would argue that it's actually gotten a lot better over the last few years and Kevin has gotten better. During this the issue is is that on the supply side.

Especially on the Silicon side, there is a lot of last minute information coming in there are a lot of short ship and no shipments of that happened that obviously took a took a few weeks and then what happens is obviously once that information matriculates up up to the top and OEM then has to make a decision and then that has to work its way back down on problem is as they change what they were.

Wanted now you have to like redesigning the entire production process around what part number they want when do they want it and so I wouldn't blame this on the Oems I would really say it was kind of a bottom up issue off on the supply base that caused the Oems the struggle with these issues.

So the last 1 the changes are those coming from the OEM or from upstream.

Well it started with the the tier 2.3 for supply base and that was really driven by still playing catch up from last year of shutdowns all over the world. If you look at the supply chain.

For an electronic component, it's a very complex very of drawn out process. It goes through especially on the microchip side goes through multiple countries on a lot of areas.

And so that caused a lot of problems each of these countries growing on the shutdowns of different times caused tremendous and still dealing with them causes of tremendous backlog and an information on processing and so that that started really on the supply side of multiple levels below tier ones and then obviously has impacted everything.

<unk>.

And that that communication historically hasn't been hasn't been as good as it necessarily should have been on the tier 2 or 3 or 4 basis.

And I think that's where the tier ones ended up struggling and then obviously, causing problems for the Oems at the last minute.

So given what you just said is that why in the press release, you don't say shipper semiconductor shortage can you give us a part shortage.

Because it's more than just that I mean, other things that affected us as Oems were struggling with plastics at times foam for seats, there's been multiple different commodities that have been affected by this and ultimately those didn't affect us directly in that we didn't have foam that we needed to put in the mirror, but what did happen as an OEM can't get the seats.

That they need or a certain component whether its plastics are leather.

We're changing what they're going to build or not build in that case and so that causes an OEM to go down meaning we are planning to build we might've, even built the component for them and then at the last minute. There like you know what don't ship it because we don't need it.

Because we're not going to be able to build those vehicles right now and so the reason why we talk about shortages in general is because we're aware of all of those different commodities, causing problems in the industry, it's not just electronics.

Yeah.

Okay that makes sense.

And then.

For Kevin.

The chance to buy the administration is going to raise the U S federal tax rate and I was just curious.

Do you think that would be on Gentex right would it be like a 1 for 1 impact in terms of every 100 bps in the federal rate or would it be less.

I think that there's a lot of speculation about the city or the F. The II, which is the big benefit to the company. So if it's a if the headline rate just goes from 'twenty..1 to say 28, then we would expect it to the move linear but if the if the rate goes up and the fit he goes away.

Going to be the.

Would be a bigger impact on that so I think we're we continue to stay close to it there's speculation back and forth on the.

He is going away or if there's a replacement for the city, but yes. It would.

It's just the headline rate, we would expect it to move linear.

For now.

Okay. Thanks, guys.

Thanks, David Thanks, David.

Our next question comes from Charlie <unk> with Oak family Advisors.

Good morning, and.

Actually a great quarter I mean, you guys are amazing in terms of your ability to generate cash during this time and as you look forward in the board's tenor around Europe statement and the enthusiasm around the SDN and <unk>.

Your positioning on the industry.

How does the board look at Sars or any kind of shareholder other the shareholder purchases that sort of going forward.

Yes, I think that focus is very very deliberate and very intentional on terms of providing shareholder return as you can imagine.

1 of the things 1 of the things that we've looked at as you know this philosophy of in the last couple of years of consistent share repurchases.

Driven around and supported by our estimates of future growth and profitability.

Given the board of the confidence to say, we're going to be aggressive there try to return basically of 100% of of free cash flow to shareholders in the form of dividends and share repurchases.

It's absolutely our strategy intention on the 1 thing I do always abbreviate that with us by saying if theres, great M&A opportunities that right valuations that are of good fit for the company those will move up and take the precedence over those over those prior to but in the absence of something that we feel very confident about creating shareholder value. We're very confident in our.

The ability to continue to grow the business organically and be.

And be very flow hyper focused really on making sure of returning capital to shareholders and those 2 forms.

Sure and then as the management team how do you look at the current price of the stock knowing that you don't control of it you just control of the fundamentals and the investors control of the stock price, but the board via your.

I think what do you have do you have just over a half of $1 billion in net rainy.

Rainy day funds, yes, yes, yes, okay. Yeah go ahead, sorry, Oh, sorry, so I'll speak for myself personally when I talk about the share price, but if you look at what's happened I felt like right over the back up 3 or 4 months ago. The price in the $36.37 range seem like a very fair price given our trajectory.

We look at opportunities like what's happening right now with the retrench and the stock price as an opportunity to get a little more aggressive than what we have been on share repurchases from them. Because we think this is more industry wide background and it's not long term fundamental issues with the company.

You fast forward 18 months 2 years, whatever that time period is if the fundamentals don't change economically then I E. There is no recession.

Cost of borrowing remains low and consumer demand for autos, and especially our products remains high on theirs.

No reason why the next couple of years can't be of great growth opportunity and great profitability time for the company and so then we think that at 32 Bucks a share right now is probably undervalued.

Well, we would share that opinion.

And you are you're in compliance of all your debt covenants correct.

Yes, yes, okay, because you don't have any debt that's correct.

Okay. Okay. Good and then lastly are you hearing of an analyst day coming up what's the.

The status of that Josh Josh I had been working on that we were we are planning on but then obviously still travel from Grand Rapids its hard.

And last time, what we were talking about doing 1 the next 1 we do we're toying with the concept of doing it in New York again, because it's been a couple of years since we've been able to do 1 in New York. So Josh will reach out to you on like you know we make firm up those plans, but we've been trying to be trying to be reasonable about obviously people getting here is difficult and then how do we make sure we're doing something.

At a time period that is appropriate yes, we would always encourage everybody to take part in CES and join US on the show floor. There, it's much more fun to actually see and tests on our products and it is to hear us talking about it and you don't have to wait for Neil state when it come visit West, Michigan anytime Youre welcome right I mean, it's pure Michigan I don't know why the east coasters won't come out that's the net.

Exactly.

Okay. Thanks, guys I.

I appreciate it thanks Charlie.

I'm showing no further questions in queue at this time I'd like to turn the call back to Joshua Brodsky for closing remarks. Thank.

Thank you everyone for the time and questions today, we appreciate your attention and hope you have a good weekend.

This concludes today's conference call. Thank you for participating you may now disconnect.

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