Q3 2021 Gentex Corp Earnings Call
Yeah.
Good day and thank you for responding by welcome to the Gentex reports first quarter 2021 financial results conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. So I'll 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 Joshua Brewski. Please go ahead Sir.
Thank you.
Good morning, and welcome to the Gentex Corporation third quarter 2021 earnings release Conference call I'm, Joshua Brewski jet Xtra.
Phone for 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 and at IR Dot Gentex Dotcom all contents of this conference call are the property.
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.
Encouraged by just takes corporation with respect to any unauthorized use of the contents of this conference call. This conference.
This call contains forward looking information within the meaning of the Gentex Safe Harbor statement included in the Gentex reports third quarter financial 'twenty, one 2021 financial results press release from earlier this morning, and as always shown on the Gentex website.
Patient 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 hopefully your phone is not broken drop it on the floor.
For the third quarter of 2021, the company reported net sales of $399 $6 million compared to net sales of $474 $6 million in the third quarter.
2020.
On a quarter over quarter basis Global light vehicle production in the Companys primary regions of Europe, North America, Japan, Korea, and China decreased 23% when compared to the third quarter of 2020.
Additionally, when compared to the mid July 2021, IHS Markit.
Vehicle production forecast and the Companys primary regions actual light vehicle production during the third quarter of 2021 declined in excess of $3 1 million units or 19% as a result of the ongoing industry wide part shortages and global supply chain constraints.
The largest shortfall.
Light and light vehicle production for the third quarter of 2021 came from the European and North American markets, which together experienced actual light vehicle production levels that declined by approximately 27% compared to the third quarter of 2020.
The reduction in light vehicle production compared to forecast was led.
For several OEM customers that deploy high levels of the company's product content, including both interior and exterior auto dimming mirrors and other electronic features such as full display mirror and Homelink.
While we have been dealing with the impacts of supply chain constraints throughout the first half of 2021 the effects of the electronic component.
By surges worsen during the third quarter of this year.
In fact, the change in OEM schedules during the quarter was estimated to have negatively impacted demand by at least two and a half million mirrors during the quarter.
We estimate that the loss revenue on these units was approximately $125 million disc.
Despite these challenges.
<unk> shorter team has done a remarkable job of securing components as well as providing unique solutions for our customers that included complete redesigns in order to avoid constrained components to help minimize the impact to OEM production schedules.
For the third quarter of 2021, the gross margin was 35, 3% compare.
Compared to a gross margin of 39, 7% for the third quarter of 2020.
Compared to the third quarter the.
Gross margin was primarily impacted by the lower sales level stemming from the 23% quarter over quarter decline in light vehicle production and the Companys primary regions.
However, the gross margin.
<unk> are also impacted by lower than expected price reductions on raw materials increases in freight and other supply chain related costs as well as some component cost increases.
While the gross margin for the third quarter of 2021 was below our original forecast we were pleased with the overall performance of the company given the significant reduction.
And was the sales versus our forecast coming into the quarter.
Since the beginning of the pandemic, we have worked hard as an organization to reduce overhead costs, which helps stabilize our profitability in the third quarter. Despite this unpredictably large change in revenue.
In fact, our estimates show that had the sales level been in the range.
And by our original forecast for the quarter that our gross margins would've been very close to our previous guidance for the second half of 2021.
[laughter].
Operating expenses during the third quarter of 2021 increased by 7% to $52 $7 million compared to operating expenses of 49 point.
Range of a $1 million in the third quarter of 2020.
Income from operations for the third quarter of 2021 was $88 2 million compared to income from operations of $138 9 million for the third quarter of 2020.
During the third quarter of 2021, the company had an effective.
40% to 15%, which was primarily driven by the benefit of the foreign derived intangible income deduction and discrete benefits from stock based comp.
Yes.
Net income was $76 7 million for the third quarter of 2021 compared to net income of 100.
Tax teen dollars 1 million in the third quarter of 2020.
The change in net income was primarily the result of the quarter over quarter change in sales gross margins and operating profits.
Earnings per diluted share for the third quarter were <unk> 32.
Compared to earnings per diluted share of <unk> 48 for the third quarter of 2020.
Seven now hand, the call over to Kevin for third quarter financial details. Thanks, Steve.
Automotive net sales in the third quarter of 'twenty, one or $391.3 million compared with $464 7 million in the third quarter of 2020.
Auto Dimming mirror unit shipments decreased 7% during the quarter compared to the third quarter of last year.
Net sales in the third quarter of 'twenty, one, which includes Dimmable aircraft Windows and fire protection products were $8 3 million compared to other net sales of $10 million in the third quarter of 'twenty.
In Dimmable aircraft window sales decreased by 34% for the third quarter of 'twenty, one when compared to the third quarter of 2020.
The company continues to expect that.
Other new aircraft window sales will be negatively impacted until there is a more meaningful recovery of the aerospace industry and the Boeing 707 aircraft production levels improve.
Share repurchases during the third quarter of 'twenty, one the company repurchased 283 million shares of common stock at an average price of $32 per share for a total.
That day.
$6 million.
As of September 32021, we have approximately $25 4 million shares remaining available for repurchase pursuant to our previously announced share repurchase plan and we intend to continue to repurchase additional shares of 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 and supply constraints market trends and other factors the company deems appropriate shifting.
Shifting gears, a little bit, let's look at the balance sheet the balance sheet items mentioned today, our values as of September 32021, and our compare.
November 31 of 'twenty, unless otherwise noted.
Cash and cash equivalents were $269 9 million down from $423 4 million, primarily due to share repurchases dividend payments and capital expenditures that more than offset cash flow from operations.
Short term and long term investments combined were $211.
<unk> million up from $189 2 million.
Accounts receivable was $241 2 million down from $284 9 million due to the lower sales in the current period.
And inventories were $292 6 million, which increased from $226 3 million. The majority of this change in raw materials and primarily within that electronics.
And accounts payable increased to $100 5 million up from $84 8 million, primarily due to increased purchases as well as monthly payment timing.
And quickly, let's take a look at the cash flow statement third quarter 'twenty, one cash flow from operations was $47 1 million compared with $138 6 million in the third quarter of 2020.
Operating cash flow was impacted by the lower net income quarter over quarter as well as shifts in working capital and deferred taxes.
And year to date cash flow from operations was $299 4 million down from $329 million for year to date 2020.
Capex for the third quarter of 2021 was $13 million compared with eight.
<unk> million for the third quarter of 2020 and year to date capital expenditures were $44 4 million.
And compared to capital expenditures of $37 million in 2020.
And lastly, depreciation and amortization for the third quarter of 2001 was $23 6 million compared with $25 1 million for the third quarter of 2020 and year to date DNA was 70.
$5 2 million compared to DNA of 2020 in 2020 of $78 5 million I'll now hand, the call over to Neil for a product update. Thank you Kevin in the third quarter of 2021, there were 12 net new nameplate launches of our interior and exterior auto dimming mirrors and electronic features.
These 12 net new nameplate launches approximately seven.
2% were advanced features with Homelink and full display mirror, leading the way.
Also in the third quarter of 'twenty, one there were several new base inside auto dimming mirror launches and of these 40% were <unk>.
For the China domestic market.
This is evidence of the continued growth of our baseline technology in this growing market.
70, <unk> third quarter of 2021, we began shipping full display mirror to our 10th and 11th OEM customers on light commercial and passenger vans.
We're excited to announce that both Fiat and Mercedes are now shipping full display mirror on their vehicles.
For Fiat we're shipping on the Fiat Tucano and that Mercedes we started to ship full display mirror on the Mercedes.
Vito.
These vehicles offer a new market opportunity for us as a company over the last few years. We've shown examples of our technology that can be deployed in the commercial van market and these <unk> awards and launches are helping us find new opportunities for growth.
In addition to these new Oems launching FTM, we're excited to announce that we.
He began shipping full display mirror on the Jeep Grand Cherokee L and the Jeep Grand Wagoneer.
Our OEM and consumer feedback continues to be very strong in regards to full display mirror technology and with the addition of these new nameplates. We are currently shipping full display mirror on 60 vehicle nameplates around the world.
On another.
Technology front, we're excited to announce that we began shipping integrated toll module to our second OEM customer Mercedes.
<unk> has introduced the ITM technology from <unk> and we're looking forward to see how the consumers will continue to adopt this technology going forward.
Tony in North America continues to evolve.
And we see the ITM technology is a great way for an OEM to take a step into the transactional vehicle of the future while helping to keep the aesthetics of the vehicle intact.
Despite all of the chaos caused by component shortages and supply constraints, the launch and development activities have never been busier.
The Gentex team has done an amazing job.
And the immediate needs of the shortages and the longer term needs of developing new products and technologies that will drive our future growth.
I will now hand, the call back over to Steve for guidance and closing remarks. Thanks Neil.
The company's current forecast for light vehicle production for the fourth quarter of 2021, and full year 2021 and 2022.
<unk> are based on the mid October 2021, IHS market forecast for light vehicle production in North America, Europe, Japan, Korea and China.
Light vehicle production in the company's primary market is forecasted by IHS markit to decreased 20% for the fourth quarter of 2021 compared to last year.
It is important to note. However that this vehicle production forecast for the fourth quarter represents a sequential increase in light vehicle production of $2 5 million units in our primary markets when compared to the third quarter.
Forecasted vehicle production volumes for the fourth quarter of 2021 and calendar years 2021 and.
<unk> 2022 are included in our press release based.
Based on this light vehicle production forecast and the actual results of the third quarter of 2021. The company is providing updated guidance estimates for the second half of the year.
The company's current estimate is that net sales for the second half of 2021 will be between <unk>.
<unk> from $70 million and $840 million. This revenue forecast is based on a combination of the third quarter actual revenue as well as the company's opinion as well as the company's opinion that component shortages and supply constraints will continue to drive production below the IHS Markit light vehicle production forecast shown in our press release.
700, <unk> our revenue guidance includes manual adjustments to account for the company's estimates of the impact that the global supply constraints will have on overall light vehicle production.
The company has also updated its caused some profitability models to include the estimated impacts stemming from these expected lower vehicle production levels elevated.
Elevated raw material prices freight expenses and labor costs.
The updated financial guidance for the second half of 2021 replaces all previous guidance for the second half of 2021 and is as follows.
Revenue for the second half of 2021 is expected to be between $770 million and 840.
Dollars.
Gross margins for the second half of the year are expected to be between 35 and 36% operating.
<unk> expenses for the second half of 2021 are forecasted to be approximately $105 million to $108 million, our estimated tax rate for the second half of 2021, which assumes no changes to the.
Inventory rate is forecasted to be between 15, and 16% capital expenditures for the second half of 2021 are expected to be between 50, and $60 million and depreciation and amortization for the second half of 2021 is forecasted to be between 48% and $52 million.
Stature mid October 2021 light vehicle production estimates for 2022, the company estimates that revenue for calendar year, 2022 will be approximately 15% to 20% higher than the updated 2021 revenue estimates of $1 six eight to $1 75 billion.
On a positive note overall vehicle.
Inventory levels are at historic lows demand from our customers continues to remain strong and interest from our customers and our core products and new technology areas for future projects is very high.
So despite the incredibly turbulent last 18 months in the next few quarters, which we expect to continue to be challenging due to supply chain constraints.
Based on our long term growth prospects have never been higher and we continue to believe that the next several years will produce above market growth rates that should provide us the opportunity to achieve excellent shareholder returns.
In conclusion, I would like to take just a minute to thank the entire team at Gentex for their incredible effort over the last six months.
Our customers will never.
Our full story of how much work you have done and Redesigns, abbreviated developments early mornings and late nights trying to find solutions to these supply chain challenges, but I do and I just want to thank you publicly again for the amazing effort and performance.
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 to press by one on your telephone.
Jay Your question brushed upon Keith please standby, while we compile the Q&A roster.
Your first question comes from the line of.
No the young from Baird. Your line is now open.
Good morning, and thank you for taking the question.
First question I wanted to ask about Fts and I appreciate the update on the 10th and 11th OEM customers.
There's a lot of moving parts right now between production volatility shifting vehicle mix and whatnot.
Luke do you have a view on how FTM take rates are trending this year.
Underlying basis really with a sponge J D power highlighted some very positive consumer feedback on kimrey rearview mirrors for the second straight year and was just hoping you could put that in context of what youre seeing in the business with respect to take rate specifically.
Yes. Thanks for the question what I would say is on take rates in general they have definitely been trending higher now part of that part of that is because we believe the feature is compelling and consumers like you mentioned in the J D. J D. Power study, obviously the value of the feature but the other part, especially during the first half of this.
This year with limited production capacities Oems were tending to build higher end vehicles.
So that obviously helped our feature content, but what I would say started to change in Q3 was quite frankly Oems were willing to build almost anything and so I would say the take rates have changed but not really because of a mix.
Issue or consumer preference issue on our side, but because of a mix issue in terms of Oems, we're starting to scale back some of the feature content because they knew it wasn't possible to get all the electronics they needed to build this vehicle so.
It's really been a tale of two halves of the year. The first half was very rich on the feature mix side.
Q3 was trending a little lower and primarily driven by the constraints that exist on the electronics side.
Okay. Thank you for that and then I wanted to ask a question about supply chain as well.
Just wondering what youre seeing in your supply chain right now both for chips and other electronic components I know that your teams.
<unk>.
Very close to the situations so just be interested to see.
What youre seeing real time, and if there is any signs of light in the channel right now, yes, I would say really what we're dealing with is this is a daily issue. So the teams are literally triaging. This issue in every day you come in there is a new <unk>.
A new issue.
Different components that are constrained and so.
Like we mentioned in the call.
This is actually getting worse.
Over the Q3 period into Q2. It was it was bad Q3 got drastically worse than what we're seeing at the beginning of Q4 as we haven't.
Reached that bottom yet and so we believe this is at least several more quarters of these type of issues, we're going to have to deal with.
I will go ahead and leave it there thanks for taking the questions. Thanks Luke.
Your next question comes from the.
The line of David Kelley from Jefferies. Your line is now open.
Hey, good morning, guys and thanks for taking my questions, maybe starting with the top line I was hoping you could talk a bit more about the moving parts into the fourth quarter youre going to effectively guiding to flat revenues versus.
Q3 at.
It sounds like based on the prepared remarks, you are below IHS and <unk> P assumptions, but maybe if you could just walk us through if you're assuming any incremental step up in MVP at all and also how youre thinking about some of the other drivers such as mix and outgrowth going into year end here.
Yes, if you look at it if you look at the IHS data. It suggests that $2 5 million unit increase from Q3 to Q4. We believe Q4 is going to look much much closer to Q3 production levels.
So we would tend to be pretty bearish and the primary reason is we don't see the supply side able to support that additional volume in a short period.
I am.
So if you if you if you follow that logic through I mean, we basically.
Outperformed by 700 basis points versus the reduction in production reduction in light vehicle production, we would say.
We would assume that to be continue if you look over the last 18 months, that's been roughly the outperformance versus the market.
Tom really for some time, so kind of that offer.
And of the mid single digits is kind of where we've been outperforming up.
Okay got it. Thank you that's helpful. And then maybe shifting gears to gross margin trajectory could you give us a sense of how youre thinking about some of the opportunities.
<unk> to recover those raw material cost or pass on some of the elevated electronic component costs and as we think about the revenue growth guidance for the out year for 2022.
So youre not guiding to next year, yet, but maybe if you could walk us through how you're thinking about leverage ability of the gross margin.
In line into next year.
Yes, I'd say first on the ability to get compensated from our customers on the increased cost structure. We know this is a trend in the industry and it's not going away soon so theres going to be a lot of suppliers, having this conversation with Oems.
I think Oems are going to have to address this to some degree with.
With the supply base.
Our goal here is to try to make sure we understand it before we go in and ask for relief because the cost increases arent done yet is really just the beginning of that cycle. So before we go in and try to renegotiate anything we're going to be trying to make sure. We understand the full picture first certain other tier ones probably won't have that luxury.
Here, we're going to move sooner and that will obviously help us to which the playing field for what what what's going to be acceptable at an OEM level.
In terms of in terms of future guidance. If you remember our original guide for this year was I think 38, 5% to 39, 5% or.
Our initial take on 2000 <unk>.
Two would be that it's probably going to be slightly lower than that given the material cost pressures that we're seeing and without having line of sight yet in terms of any ability to get compensated that compensated back from our customers. So we would say, it's probably trend and a 50 to 100 basis points lighter than that assuming that does not help from the customer.
Okay. Thank you that's really helpful. Maybe one more if I could squeeze it in and just a follow up to that point the electronic component costs. You noted the ongoing shortages in deterioration as far as volumes go but.
Are you continuing to see cost of rising from your electronics suppliers or any plateauing there.
And.
How should we think about some of the further pressures if any into to next year, yes.
Yes.
<unk>.
Like we've talked about earlier this isn't going to end anytime soon so as long as theres constraints, obviously, the power and the relationship moves to the supply base on constrained component. So.
I think youre going to continue to see pricing pressure really really until theres additional capacity.
Or or unfortunately, if demand were to drop but right now we don't see anytime in the next 18 months for that that equation changes and so we're going to continue to expect to see some pressure from the supply base.
Okay got it thanks, guys. Thank you David.
Your next question comes from the line of John Murphy from Bank of America. Your line is now open.
Good morning, guys I've got a few questions and as we are going to certain time so.
As best you can or whatever you.
You can but when you talk about the fourth quarter.
Youre talking about units getting about $2 5 million units better.
I'm just curious why you think you kind of have that visibility in the fourth quarter and you seem to be saying it is not getting much better but it is getting better.
I am little bit confused as to what the messages in the knee.
Near term.
So we were we were referencing IHS is forecasting per vehicle production to get to 5 million units better.
We actually think that our revenue is going to be very similar to Q3, and we think the overall vehicle production will be much more similar to Q3 than what IHS is forecasting. So we don't see the industry being able to support that additional.
<unk> volume.
Got it Okay and as you go into early next year I know, it's difficult to call, but I mean, where is it where do you think the nadir is I mean, if youre talking about revenue being up 15% to 20% year over year.
It seems like you've got some idea that somewhere in the year seeing things shift I mean, what gives you that kind of comfort in where.
<unk>.
Well I think when you look at when you look at what happened this year.
There was there were some definitely some real troughs in terms of vehicle production that if you take those out and you run at a more constant run rate. It provides I mean, I think right now IHS is forecasting 9% vehicle production growth from 'twenty.
Or do you think they need to and so we're looking at that saying, yes, and the demand that we saw from our customers is actually better so that would put us that guidance range would be about seven or at mid point would be seven 5% outgrowth versus the market, which is what we've been running at and so we think theres going to be some improvement in the supply base.
One at some point next year it may take until mid mid year before some of the constraints start to alleviate and start to improve.
We don't see any reason why the first half couldnt be slightly better than the first half of this year as well.
Got it okay, but youre counting on second half being the real the real I mean, being a real turning point, where things kind of.
Yes, hopefully hopefully normalize and things aren't really flowing okay.
You wouldn't think about it and if we were to think about 15% to 20%.
Revenue bump year over year, all else equal that would imply some pretty good operating leverage and an improvement in margins.
But what we've seen recently, particularly in this quarter as SG&A went up.
I was went down.
Raws are rising.
I mean.
Cost inflation seems to be seeping into the system almost everywhere I mean, how do you think about the operating leverage and positive mix versus rising costs next year and I'm not asking you certainly wouldn't opinion.
Absolute margin target right now but.
Maybe if you can talk about sort of the benefit of volume mix versus.
Cost inflation, whether it be in raws or input costs or labor.
How should we think about the major buckets there.
Yes, that's a great question I mean, I think one of the things that with the sales drop in the current quarter.
What we've seen is obviously the fixed cost piece, becoming a bigger portion of our of our overhead costs as you do grow in that 15% to 20% range you do stand to be able to leverage that a little bit better and with the changing production schedules of the OEM schedules that does create inefficiencies so you've had.
Labor time people.
People, who are working hectic schedules because.
Much of these schedules have changed.
During from the beginning of the week to the end of the week and so you have to staff accordingly.
You're going to build a full schedule and they they change so I think as we get back to something thats more stable and growing and we can predict OEM behavior better.
We can staff better.
But certainly there are cost inflation.
Things going on but part of what what.
So far and what we have continuing into next year is good product growth.
A lot of FTM growth OCC continues to be a driver of growth even into next year and so those things helped create a little bit of a.
<unk> on the margins that help offset some of these other costs.
A or transitory but.
Help offset some of the hopefully offset some of the price increases that we're experiencing.
Okay, and then just letting I'll add to that too just quickly John is.
The R&D expense is I believe a bullish sign because.
That's reflective of the work we're doing to drive revenue of three three years.
And so that's.
And our estimate at least in what we really want to drive it we want to drive home is those are not tied to the current issues that we're experiencing those are some of the same reasons.
So our team has been working so hard on.
Dropping the ball on those new product awards, and as new OEM launches and the real R&D, that's going on behind the scenes on some of the future growth and the themes on some of the future growth drivers.
Got you and then just lastly, real quick on the inventory number I think you guys cited $269 2 million.
At the end of the quarter versus 200060 end of last.
Year about a 19% increase I mean, it's a big number of sales of grinding down and.
And things are getting tighter you mentioned raws were part of that inflation I mean, what's going on there or is there some prebuilt that maybe youre doing in addition to some of that raw.
Well I think everything cost inflation, yes, if you read between the lines right, Steve talks about 100 125 million.
It is not sales falling out of the forecast a lot of that is in high electronic content.
Stuff, so I mean, we're buying.
Blaise electronic content, the things that we can get and we're.
Anticipating orders from customers because these orders were real from customers at the beginning of the quarter and throughout the quarter. So we have a buildup in.
And electronic displays for <unk> and.
A lot of our high end electronic feature set so it's really just the driver it's that pent up raw material from things that didn't come to fruition. So we would expect that to bleed off as things grow.
These are components that are that are fairly new and have very low risk.
In essence, so it's nothing.
That's a risk to us I'm, sorry, do you have.
I don't know if you can give us a mix of finished unfinished inventory near mean that youre absorbing a lot of not just the purchase cost, but the labor costs and production costs and assembly cost and not getting the revenue yet and then we flipped the script forward to quarter.
Obviously whenever it's going to be later and all of this stuff starts to flow out and you have absorbed some of these costs in prior quarters.
What's happening.
If you look at our inventory, it's probably 80% raw material I mean, we don't carry because I've got a couple of weeks two weeks of finished goods on hand, we turn those pretty quick got it we tend to carry more inventory.
Two which as we've talked about for several years in order to avoid things.
Things like shutting down customers. So that's okay.
A strategic play for us. So there is not a massive rebuild going on here, it's really just getting stocked up and ready to go okay. Thank you so much guys.
Thank you.
Your next question.
<unk> comes from the line of Ryan Brinkman from Jpmorgan. Your line is now open.
Hi, Thanks for taking my question, which is really about vehicle mix it.
It looks like your implied level of sales in the fourth quarter at the mid point of the back half guide is I think $405 million, which would be 24% lower.
<unk> on a year over year versus.
IHS, which is currently looking for global light vehicle production down, 20% and North America, Europe, Japan, Korea production down, 20%, which I think you compare a bit more too. So I just wanted to ask on the drivers of the sort of implied underperformance there in the fourth quarter given that.
You had been significantly outperforming I don't know in your press release, you talk about product with high end features maybe haven't been disproportionately impacted by production cuts, but on prior quarter calls I think we've been talking about how automakers, we're allocating scarce semiconductors, where possible to their highest end vehicles that were.
More likely to be equipped with your advanced feature mirrors et cetera. So can you just maybe elaborate on what is contributing to the difference in the trend in.
And growth versus market and then as you look out to next year.
For the 15% to 20% growth that's $4 49.
Four points better than Ihs's outlook for 10, 6%.
And light vehicle production, so that would be a significant reversal from the trend that you see in the fourth quarter. Maybe you can talk about what's giving you the confidence and the implied outperformance there if maybe.
What's happening with mix next year and then.
How much is.
Backlog contributing to the outperformance next year. Thanks.
Yes.
That's a very well stated question I think if you look at our Q4 guidance.
What were the IHS data will show down 20, right now, but what we're suggesting is there is a couple million units of risk in IHS production forecast.
So if you then adjusted if you've looked at production and then based on US taking those units out what you would see is it still about the same level of outperformance.
So that would be another 10% or 12% down more than the 20% that you'd be looking at.
If Q3 happens again, you will be talking more like 30% down on a year over year basis, and then our.
Then our guidance would be at about the same level of outperformance. So really it's about the fundamental assertion that market.
S market believes that it's going to improve sequentially and were a little a little more skeptical than they are about the ability for the industry to support that level of production.
But to your point that we're looking into 2020.
'twenty two that's really that outperformance versus the market is really the run rate we've been at for a while and so one of the things we like to talk about here.
Don't look at these short term periods of Q3 or Q4 is indicative of where the market is we believe that 2022, we'll start to see some response.
Youll start to see the supply base able to amp up a little bit to help support higher volumes and in that environment. We should do really well and then Ryan I think the second part of your question was about mix in.
And really how does that how does that factor in and what we would say is that in the first half of the year. Your assertion there is completely accurate rate, which was OEM.
Oems knew they were limited in terms of how much they could build so they were building the absolute highest into their vehicle lineups.
What's changed really is in Q3, given so many constraints.
The Oems were really willing to build pretty much anything and so unfortunately based on packaging that meant a lot of fluctuation for us not just about our ability to produce.
They wanted but also about what everyone else in the industry could produce so if they couldnt get the if they couldn't build a top tier levels. They were willing to build a mid grade in that that sometimes impacted demand for our products.
Okay. That's really helpful color. Thanks, and then just last question here is on capital allocation.
$91 million of stock in the quarter.
The part is pretty in line with the average that you've repurchased over the past three quarters, you've certainly differentiated yourselves relative to other suppliers and continuing to.
To allocate capital towards.
Repurchases throughout.
The oscillated macro environment, just wanted to check in on.
Order, which and the appetite for continuing to buyback stock.
Uncertain environment with the Gentex of old age.
Eight 910 years ago.
What would stop its repurchases at the drop of a hat with any sort of macro fluctuation I don't know if there's something you are trying to communicate in terms of youre going to just continue to chip away at.
Or what your thought processes.
In this uncertain environment.
No I think Q3, hopefully as a positive sign that we believe in the long term growth rate of the business and whenever we see favorable prices, we're going to take advantage of that.
One of the things. We also look at is want to make sure the balance sheet is.
This well bolstered we believe that over the next couple of years there may be opportunities.
More on the acquisition side, hopefully valuations will come back in line. So if you see us if you see us take our foot off the gas as it relates to repurchases, it's only because we're either contemplating or getting ready for something that could be on the horizon that as it relates to.
Fair values and the possibility of acquisitions going up.
One of the things we've always tried to be very candid about is a lot of.
What are the multiples that were trading over the last couple of years, we just didn't see a spot for us we felt like it was overpaying.
However, given the constraints and the things that are happening in the industry some of those.
<unk> might be moving back in our favor and if so we want to make sure we're ready to move.
Okay. Maybe just final final question as we look forward to CES here.
What you guys might be looking forward to showcasing I'm, saying I cannot make any huge announcements in advance but is there any sort of theme in terms of a couple of years ago, We're looking at medical.
Bye.
Been making a lot of ways this year with your sort of.
8% or whatnot in some of the other things.
What are the technological trends that maybe we should keep an eye out for et cetera, well I think first and foremost what we're excited about us I mean, we basically missed an entire year and that's a great.
That platform for us. So we're first and foremost is excited to get back and be there and try to engage with customers face to face.
Pretty exciting I think the teams pretty amped up and ready to go for that one.
If you can't hold off until January we're going to be at Cmos. So stop by if you're bored or have nothing better to do.
But.
Marketing all there on the themes side has been to continue to expand on especially on the sensing platform side.
Large area devices, so our core electrochromic, but in larger format. So not only in aerospace, but also in automotive so youre going to see a lot of that right, which is how can core electrochromic play a role not.
The car today, but in the ride sharing or autonomous vehicle in the future.
And then more importantly, what are the sensing.
<unk> that we have and how do you deploy those skills into new feature content. So that's really been the theme for the last couple of years, we're going to continue to drive that home this year at CES.
Okay, great. Thank you. Thank you.
As a reminder, if you would like to ask a question you will need to press star one on your telephone to withdraw your question just press the pound key.
Your next question comes from the line of Josh Nichols from B Riley. Your line is now open.
Yes, Thanks for taking my question well pointed.
I was kind of wanted to hit on will clearly theres a lot going on.
The automotive supply chain and Thats, probably going to last over the next few quarters, but.
It seems like the gap is actually kind of widening and I'm just thinking about this is the fact that well production capacity is limited.
But do you have an exceptionally strong.
Strong consumer and record low inventories I'm, just kind of curious like.
What are your thoughts on how long it takes to actually rectify right.
<unk> and the inventory situation I would think that while there's some near term headwinds that provides you with a lot better longer term visibility than you probably would have as long as the consumer stays strong.
No youre exactly right.
The hard part right now is getting through the short period of time.
Trying to make sure you're taking care of customers and delivering making sure you have to predict where theyre going to be and what theyre going to need and make sure you can secure the components obviously, but.
But the hard part is getting through this period.
The upside of what's happening on the macro side of the industry is should be phenomenal for us over the long period, because it's going to take a while to rebuild not only get back to production levels.
<unk> and Sars that makes sense based on demand, but also to rebuild that inventory levels at dealerships. So.
We believe really.
Really for the first time in a while not only is our product portfolio is strong and a lot of demand for our products, but theres going to be some tailwind from the overall industry over the next couple of years.
We believe it's going to take at least a year, maybe two years to kind of get back to the level of inventories that Oems are looking for and Thats all assuming to your point that overall demand from the consumer doesn't change.
<unk>, which we don't see.
Don't see any reason why that won't continue for at least the next couple of years.
Thanks. So then I mean, you've been kind of spot on you've been skeptical about.
It's S numbers I think you said similar commentary right on the last quarter that you thought that they were probably a little bit aggressive.
And clearly you think the pull through numbers are too high I guess.
It's hard to look out a year, given what's going on but I guess, if you look at the Saar that their estimate for next year in North America, it's like $15 million and $70 million globally, and I guess what are your thoughts on those numbers and like do you think those are achievable.
Or kind of what has to happen to get their risks puts and takes.
Yeah, well thanks for noticing that we were probably the last couple of quarters. Its been odd we've been probably one of the few companies that's been talking about.
Issues around the industry.
So occasionally you think well, maybe we're being overly paranoid.
But.
Obviously this quarter kind of showed that we werent wrong in our assumption that the industry was pretty constrained and they were going to be challenges.
When you when you look out over the numbers for next year, they're not way out over the ski tips in terms of can the industry support those level of volumes there might be a little bit of.
Risk in terms of the supply chain side of hitting those.
We don't believe there is a demand challenge at those levels of production. So we think we think there.
There's plenty of pent up demand to support those production levels. The question is can the industry keep up.
If you look at the year over year change from an IHS standpoint, we don't believe that those are so far.
Reaching the industry can't get there maybe the first half of next year might be a little bit of a challenge, but the back half for sure there should be some capacity increases on the supply side that should help get to those numbers.
Thank you that's all for me thank.
Thank you Josh.
Your next question comes from the line of David Whiston from Morningstar. Your line is now open.
Hi, Thanks, good morning, good morning.
David.
Steve you talked earlier about.
Gentex can wait to unlike other suppliers to ask for some.
Input.
Recoveries from Oems and is that just fortuitous luck on timing or is there another reason.
Well I think if you look at our if you look at our profitability.
We are able to wait a little longer than some because of that.
And then more importantly, we think it's prudent because of the game is changing daily and so going in and.
Negotiating early isn't always to your best advantage because.
You don't know how much how much higher pricing can go and what is really going on if demand hits. What we're predicting then we think it's going to be a constrained environment for a long time in which case the supply base will have a lot more leverage.
So youre going in now and talking to an OEM.
Oh about cost increases, which you may only see 20 or 30% off right now is probably not prudent because youre going to want to see that full picture before you go in and have the conversation our preference has always been to walk in with a full story and a complete picture not try to not try to do it five times over the next few years so.
And quite honestly.
<unk>.
It allows the industry to understand what's happening for Oems and our customers to get their legs under them and understand truly what's happening in the industry on the cost side and then to find out what is their position with their consumers. So.
Ultimately you have to understand all of that in the full consequence before you go in and have a partial conversation so <unk>.
<unk> for us our profitability does allow us to wait a little longer than certain suppliers.
And the Oems, probably understand that dynamic too, though but I assume it's totally up to the supplier to initiate these talks are well the OEM come to you early.
They rarely answer their phone.
Okay.
When do you want to have a conversation like this.
Now, we're not expecting a not expecting a warm reception when we go into have typically for us. What also helps us usually we have contracts pre establishing pricing for a couple of years.
One of the things that you are able to do on this let's talk about.
Renegotiating those price down.
We're talking about it's not always just about price escalation, sometimes it can be about netting against price reductions that you're pretty committed to theirs.
Theres also future awards and business growth opportunities. So there's a many faceted question and so we tried to walk in with that big picture in place and not not get into a <unk>.
<unk> conversation about.
This one parts Gotta go up by a nickel right now or else, it's more about hey, let's look at the whole book of business and let's talk about where we're going is as partners.
And Neal you said earlier, there is some technology in China, and its gaining penetration I missed exactly what you were referring to.
Do you mind repeating that yes, no problem actually was the increases in base mirror launches continue to go up in the Chinese domestic market.
Okay.
Yes.
No problem, just not core auto dimming continues to grow and continues to expand into additional local platforms.
And so.
I guess I'm trying to do to kind of start backwards in the sense that you started with the more advanced content first on the length of the Germans or is there still a lot of room to go advanced in China from here.
There's still a lot of room to grow from an advanced technology side, obviously electrochromic came in with JV partners.
As being a lot of Europeans came into the China market now what we've been seeing is continued expansion of that base technology too.
Local domestic manufacturers as well and it continues to grow and grow at a decent rate.
Okay. Thanks, guys.
Youre welcome Thanks, Dave.
Your next question comes from the line of Charlie Sloan.
Finally advisors. Your line is now open.
Good morning, and thanks for taking the questions great quarter by the way and.
I can only imagine the employee base how her.
They are working to get all this stuff done for the OEM, so that you're not the ones sitting there not allowing production to occur and so it's really amazing I mean, you guys are pretty small right, but you guys have a pretty wide berth of commitments you have to fulfill so that's awesome.
Thank you for.
That's very well said.
Yeah.
Amazing.
With regard to your R&D.
Steve you talked about your R&D and how people should notice when you look at the R&D or the components of those is mostly that the core auto market or are you expanding your R&D.
Thanks for the other areas that should that investors might want to focus on.
Let's say the core the core of the R&D budget I'd say about 85% of it is focused on automotive. The other 15% is really looking at projects in aerospace fire protection.
But also just kind of blue Sky type projects. So.
And things that.
The technologies that could also reside in automotive, but things that arent necessarily just focused on peer auto in other words their underlying kind of core competencies are things that we're trying to develop at a core level.
Okay, and so things, but not like maybe.
Hard.
So that's for Joshua <unk> cellphone.
Yes, thank you for that.
Pleasure.
Yes.
Some of it some of it are those type of technologies as well right looking at looking at things that could change how we approach electrochromic and the field. If you look at for instance, when we talk about large.
<unk> area devices, Youre talking about taken electrochromic and making much larger version of a device. There is a lot of core technology that has to go along with that right the ability to been much larger pieces of glass.
Types and different substrates that electrochromic could be applied on in ways of going about darkening.
Glad those are all kind of they all have line of sight into automotive, but they also could apply to a lot of different industries as well.
Sure so.
And so keep that up and we're very pleased with the share buyback commitment that you showed this quarter end.
It does speak to the.
Smarter.
And so vision you have to the future so anyway and then finally.
With regard to the Oems.
When is that annual price.
Reduction kick in I forgot is that mid year or is that the beginning of every year about 85% of our customers on January one.
Okay.
Smarter. So we still have a few customers who are especially in Asia, who are on agent fiscal year. So there are some on April one we.
We do have a few other projects here and there that are randomly.
Pace throughout the year certain contracts are based on one year after our Sop a vehicle for instance, so some of those just happen at random.
Times throughout the year, but I'd say about 85% of our price Downs happened on January one, okay, and so you still expect those but.
Those are always open to discussions privately correct yep.
Okay well good luck appreciate it thank you very much okay. Thanks, guys.
There is no further questions at this time I will now turn the call back to Josh a brewski. Please go ahead Sir.
Thank you everyone for your time and questions today as Steve noted, we will be at Sema and CES in the coming months and would welcome investors at our booth. During those shows so please reach out to you analysts or to myself and we can confirm the details.
Thanks again and.
And have a great weekend.
This concludes today's conference call. Thank you everyone for participating you may now disconnect.
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