Q4 2021 Gentex Corp Earnings Call
Yes.
Okay.
Thank you for standing by welcome to the Gentex fourth quarter and year end 2021 Finance results conference call.
All participants are in a listen.
The mode. After the speaker's presentation, there will be a question and answer session.
Quick question during the session you will need to press star one on your telephone.
Yeah.
Assistance, Please press star zero.
I would like to hand, the conference over to your speaker today John .
Josh a bursty director of Investor Relations. Please go ahead.
Thank you.
Good morning, and welcome to the Gentex Corporation fourth quarter 2021 earnings release Conference call.
Joshua Brodsky Gentex director of Investor Relations, and I'm joined by Steve Downing, President and CEO , Neil Boehm, Vice President of Engineering, and CTO, and Kevin Nash, Vice President of Finance and CFO .
This call is live on the Internet and can be reached by going to the Gentex website, and IR Dot Gentex Dot com all contents of this conference call are the property of Gentex Corporation and May not be copied published reproduced rebroadcast retransmitted transcribed or otherwise redistributed.
Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to the unauthorized use of contents of this conference call. This conference call contains forward looking information within the meaning of the Gentex Safe Harbor statement included in the Gentex reports fourth quarter and year end 2021 financial results press release from earlier this morning.
And as always shown on the Gentex website. Your participation in this conference call implies consent to these terms now I will turn the call over to Steve Downing, who will get us started today.
Thanks, Josh.
For the fourth quarter of 2021, the company reported net sales of $419 8 million compared to net sales of $529 9 million for the fourth quarter of 2020.
The company's revenue during the quarter was impacted by a 20% quarter over quarter reduction in light vehicle production and the company's primary markets of North America, Europe , Japan and Korea.
The industry wide electronics component shortages further impacted the companys revenue negatively during the fourth quarter of 2021.
During the quarter, the electronics component shortages, primarily impacted the companys ability to meet customer demand for full display mirrors integrated toll modules and other advanced feature unit shipments.
Up until the fourth quarter of 2021, the combination of the company's conservative inventory position, along with significant efforts to redesign affected products.
Allowed us to avoid having any meaningful shipment issues stemming from the industry wide electronics component shortages.
But in the fourth quarter, the shortages began to impact our customer shipments as well.
During the fourth quarter the company.
During the fourth.
Quarter the company estimates.
Customer order changes driven by lower light vehicle production and electronic component shortages.
And under shipments of about $85 million in revenue for the quarter.
Obviously impacting our customers by not being able to fully meet their demand is extremely disappointing. However, the team did a remarkable job of completing complicated redesigns in record time to avoid more significant customer shortages.
Looking into 2022, we are forecasting growth in FTM based on pent up demand as well as several new FTM program launches, which we expect to accelerate our growth into 2022 and 2023.
The gross margin in the fourth quarter of 2021 was 34, 3% compared with near record gross margins of 49% in the fourth quarter of 2020.
The gross margin was primarily impacted by the lower quarter over quarter revenue, especially in the company's primary markets as well as the loss revenue created by the electronics component shortages.
Other factors impacting gross margin in the fourth quarter of 2021, where raw material costs increases freight related cost increases labor cost increases driven by higher wages and labor inefficiencies created by last minute changes in customer demand and electronics components shortages.
The fourth quarter of 2021 about the perfect storm of lower revenue significantly higher material cost higher shipping costs and higher labor costs and inefficiencies that negatively impacted gross margins more than we originally forecasted.
While many of these headwinds will continue into the first half of 2022, we believe we have the ability to offset some of the impacts to gross margins as we move throughout the year.
Operating expenses during the fourth quarter of 2021 were up 3% to $56 million when compared to operating expenses of $54 $3 million in the fourth quarter of 2020.
Income from operations for the fourth quarter of 2021 was $88 million as compared to income from operations of $162 4 million for the fourth quarter of 2020.
During the fourth quarter of 2021, the company had an effective tax rate of five 8%, which was lower than our forecasted tax rate tax rate and was driven by increased benefits from the foreign derived intangible income deduction and discrete benefits from stock based compensation.
In the fourth quarter of 2021, net income was $84 2 million as compared to net income of $143 $3 million in the fourth quarter of 2020.
Earnings per diluted share in the fourth quarter of 2021 were <unk> 35 as.
As compared to earnings per diluted share of <unk> 58 in the fourth quarter of 2020.
For calendar year 2021, the company's net sales were $1 73 billion.
Which was an increase of 3% compared to net sales of $1 $6 billion to $8 billion in calendar year, 2020, and a year, where light vehicle production in the company's primary markets declined by 3%.
For calendar year 2021, the gross margin was 35, 8% compared with a gross margin of 35, 9% for calendar year 2020.
For calendar year, 2021, operating expenses increased 2% to $209 $9 million when compared to operating expenses of $205 9 million for calendar year 2020.
For calendar year 2021, the company's effective tax rate was 13, 3% as compared to an effective tax rate of 15, 6% for calendar year 2020.
Net income for calendar year, 2021 was $368 million up 4% compared with net income of $347 $6 million in calendar year 2020.
Earnings per diluted share for calendar year, 2021 were $1 50, compared with earnings per diluted share of $1 41 in calendar year, 2020, which represents a 6% increase on a year over year basis, I will now hand, the call over to Kevin for fourth quarter financial details. Thanks, Steve.
Automotive net sales during the fourth quarter of 'twenty, one or $409 6 million, which compared to $521 6 million in the fourth quarter of 2000.
The 20% quarter over quarter reduction in light vehicle production in the company's primary markets led to an 18% reduction in quarter over quarter Mirror unit shipments for.
For calendar year 'twenty, one automotive net sales were $1 69 billion, which was a 3% increase over 2000 and was driven by auto dimming mirror unit shipment growth of 9%. Despite light vehicle production and the company's primary markets decreased by approximately 3% during the same period.
This overall growth was highlighted by the Companys auto dimming exterior mirror unit shipment growth of 21% year over year.
Other net sales in the fourth quarter, which includes Dimmable aircraft Windows and fire protection products were $10 2 million, an increase of 23% compared to $8 3 million in the fourth quarter of 'twenty and fire protection sales increased by 32% for the fourth quarter of 2001, when compared to the fourth quarter of 'twenty.
Other net sales for calendar year, 'twenty, one with $33 9 million compared to $40 million in calendar year 2020.
Our protection sales increased by 10% year over year, while Dimmable aircraft Windows were down, 48% and 21 compared to calendar year 2020, the company expects a dimmable aircraft window sales will continue to be impacted until there is a more meaningful recovery of the aerospace industry and the Boeing 787 production level is important.
Share repurchases the company repurchased 6 million shares of its common stock during the fourth quarter of 'twenty, one at an average price of $34 18 per share for.
For the year ended December 31, the company repurchased nine 6 million shares of its common stock at an average price of $33 83 per share for a total of $324 $6 million.
As of December 31 of 'twenty, one the company has $24 8 million shares remaining available for repurchase pursuant to its previously announced share repurchase plan.
The company intends to continue to repurchase additional shares of its common stock in the future and support of the previously disclosed capital allocation strategy.
But share repurchases may vary from time to time, and we will take into account macroeconomic issues, including the impact of the COVID-19, pandemic and electronics shortages market trends and other factors the company deems appropriate.
Let's take a quick look at the balance sheet balance sheet items mentioned today, our values as of December 31, 21, and are compared to December 31 of 'twenty unless otherwise noted.
Cash and cash equivalents were $263 3 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 with $213 1 million up from $189 2 million.
Accounts receivable was $249 8 million down from $284 9 million due to the lower sales in the current period.
Inventories were $316 3 million, which increased from $226 3 million. The majority of this is changes in raw materials.
Accounts payable increased to $98 3 million up from $84 $8 million, primarily increased raw material purchases.
Quickly looking at the cash flow statement for the fourth quarter cash flow from operations was $69 1 million compared with $135 4 million in the fourth 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.
In calendar year 2021 cash flow from operations was $368 $5 million down from $464 5 million for calendar year 'twenty.
Capex for the fourth quarter was $30 8 million compared with $14 7 million for the fourth quarter of 2020 and calendar year 2021 capital expenditures were $75 1 million and compared to capital expenditures of $51 7 million in 2020.
Lastly, depreciation and amortization for the fourth quarter was $24 million.
Fair to $26 3 million for the fourth quarter of 'twenty and calendar year, 2021, depreciation and amortization was $99 1 million compared to DNA for 2020 of $104 7 million I'll now hand, the call over to Neil for a product update. Thank you. Kevin earlier. This month Gentex participated in person at the 2022 consumer electronic show it was great to be back at.
To show and be able to demonstrate our product driven strategies with some of our new products and technologies.
This was our largest presence at CES, yet and we displayed new products and concepts from all of our various technology areas, but for the call today I'm going to focus on three primary areas of our booth the driver monitoring demonstrator, the Cadillac Escalade and the innovation lab.
First item on <unk> as the driver monitoring demonstrator. This incredible tool was developed by the <unk> team in order to demonstrate the power and capability of our driver monitoring solutions, which are based on the Guardian acquisition.
In the demonstrator, we were able to show two different camera implementations. One was a driver only focused camera that was located behind the mirror glass.
The other solution was a cabin based camera system that was mounted above the mirror in the overhead console area.
And both of these camera implementations, we were able to demonstrate the operations of our AI based algorithms used to determine the state or condition of the driver there overall attentiveness direction of eye gaze location and the readiness to take over control of the vehicle.
The systems, we're also able to identify if the person was holding objects like a phone and how many people were seeded.
In addition to these features we were able to show how it depth map can be created by using structured light.
This depth capability allows for the expansion of features and provides more accurate information in regards to where things are physically located in the vehicle they're distance from sensing system and provides estimates on mass and other necessary information.
The next item I'll discuss as the Cadillac Escalade. The Cadillac Escalade was one of three vehicles, we had at the show and was positioned at the front of our booth.
Scalia contained multiple new features and technology is being demonstrated and showcase some of the great vehicle integration work our teams have been doing with our latest product innovations.
As you approach the vehicles you would see displays at the sea pillar of the vehicle.
<unk> demonstrated how technology could be used to help communicate information about the vehicle status to consumer approaching.
Upon entering the vehicle CES visitors were greeted by a new concept of our Dimmable sunroof technology and a brand new product concept that turns a traditional flip down sun visor into a dimmable device.
This was the first time, we've shown in public our concept around the Dimmable advisor and the initial feedback was even better than we anticipated.
People like the idea of advisers that can be controlled to clearer dark into different levels, depending on the glare theyre trying to block this.
This dual dimmable sunroof concept was new and unique because it was designed into four independently dimmable areas. So that passengers in each seat could personally select the level of light blocking to their preference.
Our Dimmable technology features best in class dynamic range, which is the ability to choose anywhere from fully clear to fully dark and the escalade provided the perfect demonstration of these advantages of our technology.
The user interface for these dimming devices was seamlessly integrated into the vehicle Center stack display. This helped people to envision what a true integration could look like.
The final feature I'll talk about today on the Escalade was our demonstration of a sensor system that can detect the heartbeat or breathing of a baby left in a rearward facing child seat.
This technology was part of the Guardian optical technologies acquisition, we completed in 2021 and was also included in the driver monitoring demonstrator that I discussed earlier.
This technology demonstration clearly showed how our system implemented in a vehicle and use micro vibrations to detect children less than a car even when a camera based system cannot see them directly.
The final area to discuss with our innovation lab that was contained in the private area inside our booth. This innovation area was a great location for us to demonstrate products for the medical market as well as our sensing systems that can be utilized by many different markets.
The sensing system demonstrated in the innovation lab was the vapor sense technology.
<unk> was an acquisition Gentex completed in the spring 2020, and we've been working hard to refine the core technology and adapted to the multitude of use cases that exist for this technology.
We still have work to do to develop the product and the corps nano sensing technology, but we're excited to see this tech evolve and come to the market in the coming years.
For the medical area, we demonstrated three primary items are ready spec partnership for early Alzheimer's detection.
Updated surgical and medical office Smart lighting control system, which is based on our partnership with Mayo clinic.
In the development and evolution of the wearable vision system, we are partnering with each site to develop and manufacture.
The <unk> system is a unique opportunity for gentex to work with a partner in developing the next generation of vision systems to help people with severe vision loss.
Some of our core competencies like cameras optics and displays are all key components to help make this system successful.
Now for a quick update on launches for the fourth quarter of 2021.
The fourth quarter of 2021 was another strong launch quarter for the company with Homelink and full display mirror, leading the way.
We're excited to announce that during the quarter of 'twenty. One we began shipping full display mirror on five new vehicle nameplates.
As new nameplates are the Infiniti <unk> 60, the Lexus Lx the Lexus Nx.
Toyota wildland or for China, and the Toyota Tundra.
For 2021, Gentex announced we began shipping full display mirror on 18 vehicle nameplates and at the conclusion of 'twenty, one gentex with shipping full display mirror on 65 vehicle nameplates around the world.
This growth in full display mirror over the past few years demonstrates how both the Oems and consumers value of this technology.
Despite all the challenges we face with shortages and shutdowns that Gentex team has never been busier in launching products and in developing new technologies for the future.
The culture of innovation is strong at Gentex and we're excited to see all of the teams hard work on the market in the coming years.
I'll now hand, the call back over to fee for guidance and closing remarks. Thanks Neal.
The company's current forecast for light vehicle production for 2022, and 2023 is based on the mid January 2022, IHS market forecast for light vehicle production in North America, Europe , Japan, Korea and China.
Based on this information light vehicle production in these markets is expected to increase approximately 8% over the 2021 calendar year volumes.
For calendar year 2023 light vehicle production for these markets is forecasted to increase by another 10% over the 2000 22022 estimated volumes.
Based on these light vehicle production forecast, we are providing guidance estimates for calendar year 2022 for each of the following areas.
Revenue for 2022 is expected to be between $1 87, and $2 2 billion gross margins for the year are expected to be between 35% and 36%.
Operating expenses are currently forecasted to be approximately $230 million to $240 million, our estimated annual tax rate, which assumes no change to the statutory rate is forecasted to be between 15% and 17%.
Capital expenditures for 2022 are expected to be between 150, and $175 million and depreciation and amortization is forecasted to be between 101 hundred $10 million.
Additionally, based on the company's forecast for light vehicle production for calendar year 2023. The company currently expects calendar 2023 revenue growth of approximately 15% to 20% above the 2022 revenue guidance.
At the end of 2020, we talked about being cautiously optimistic about 2021 due to instability in our end markets potential supply issues international trade concerns and the potential long term negative economic impacts from the pandemic.
Unfortunately, many of these issues impacted the expected recovery of the global automotive industry, and especially our primary markets in 2021.
We come into 2022 anticipating that at least the first half of the year, we will continue to see headwinds from supply and labor shortages that we believe will prevent light vehicle production from reaching the IHS estimates we discussed.
We also anticipate that these headwinds will continue to cause some margin compression for 2022 due to higher material transportation and labor costs. Despite these.
Challenges, we remain optimistic that 2022 will provide a more predictable operating environment, where we can begin to focus on cost containment and hope that the tailwind created by improved light vehicle production levels over the next few years will combined with our improved product portfolio to create record sales levels for the company.
That completes our prepared comments for today. Thank you for your time and we can now proceed to questions.
Yes.
As a reminder.
Question I need to press star one on your telephone.
Until the joint question Jess.
Lisa.
The Q&A roster.
First question comes from the line of Luke junk from Baird you may begin.
Good morning, Thank you for taking the questions.
First question I had is Steve wondering if you could expand on what's informing your view that IHS is too aggressive in the first half of the year. What are you hearing from customers in terms of build schedules or maybe more importantly, what are you seeing right now in terms of production cost relative to what you know clearly there was a lot of variability in the second half.
2021.
Yes, I think our opinion on production is really really driven by what we saw in the second half of the year. We think we think that instability, we know that a lot of the supply base are struggling not only with materials, but also with labor availability of labor and so we think theres going to be a lot of.
Announced OEM issues over the next couple of months that are going to drive production did not quite hit what Oems would like it to be.
So we think the first half is going to be a lot more choppy than the back half of the year.
Okay, and then follow up question on.
Gross margins soon your prepared remarks, and your belief that you will be able to offset you think some of the impacts to gross margin as we move through the year thinking about this from a modeling standpoint in the very near term should we expect gross margin to decline sequentially. Obviously first quarter is usually a little weaker seasonally and then as we move through the year.
<unk>.
I don't know if you could put a finer point on where you think we might be able to exit the year relative to the full year range that you've provided thank you.
Yes, I don't think it will have declined too much from Q4 into Q1, there is usually a little bit of APR, obviously headwinds created on January one so that definitely may impact it slightly in Q1 and Q2, but really what we're what we're reason why we think the second half will be better as as as revenue should grow throughout the year and.
Based on our estimate and understanding that we think IHS is going to be a little overstated in the first half we would think sales levels in general in the first half will be a little lower than the second half of the year and so that incremental revenue that we're expecting to see in the second half should help stabilize the margin profile and obviously create some of the efficiencies that we need on the manufacturing side.
Great I'll leave it there thank you.
Luke.
Our next question comes from the line of David Kelley from Jefferies. You may begin.
Hey, good morning, guys. Thanks for taking my question, so maybe starting with the supply shortages in the under shipment in the quarter. You noted just hoping you could provide a bit more color on the drivers of that impact was it broad based was it isolated to a subset of your supply chain.
And then as we think about the cadence throughout the quarter did did procurement visibility deteriorates.
By quarter end, just trying to get a sense of.
What youre seeing in <unk>.
2022 here.
Yes, so I mean, the vast majority of the revenue shortfall came from OEM changes.
In terms of their lower levels of production, especially in our primary market. So if you look at our highest dollar content markets being North America and the European market.
Were very significantly impacted on a year over year basis by production declines.
And that the stuff that impacted us directly it was to say if we're looking at $90 million to $100 million of revenue difference versus what we were expecting.
80% of that came from the OEM side about 20% of it came from supply issues inside for Gentex. When we've had we've had a lot of problems over the last year with supply issues.
Historically, we over the last year or at least been able to fight through almost all of those and figure out solutions.
We're down to a handful of suppliers that are impacting us on the electronic side right now the problem with that is is we don't see that ending anytime in the next six months or so so neil's team has been working very very hard on trying to make sure that there is availability of components and that there are different components that we can use to redo those designs to be able to incorporate the more.
Available components.
But thats been a nonstop treadmill really for about 18 months and so we continue to look at areas that we think are concern and then try to make sure we derisk the business by finding alternatives.
Okay. That's helpful and maybe a quick follow up on that last point.
How are you thinking about some of the <unk>.
Electronics cost inflation this year.
Understanding that.
Your timeline of negotiations with customers and potential pass throughs are still around the corner here, but we've heard about semi cost inflation pricing pass throughs kind of further down the supply chain. So just curious how youre thinking about.
Impact on what's may be baked into the guidance here.
Yes, so if you look at our guidance on a year over year basis.
From a material cost perspective, we're looking at about a 250 to 300 basis point headwind because of the cost increases we've experienced kind of starting in the fourth quarter, but then really taking in earnest full and for full year of 2022, and then on the revenue side, we kind of have baked in headwinds as well of about 100 150 basis.
Once that's what kind of what really bridges, you from what a normal margin would be to what we're seeing in 'twenty two.
And as we've talked before like conversations with Oems are just now starting to happen. We expect some of those to elongate throughout the year, because it's a different conversation than we've had historically about reduction. So we expect that that headwind is going to last this year and hopefully we will have some positive results, but it's going to be OEM by OEM.
Okay. That's super helpful and maybe last one if I can squeeze it in and then happy to pass it along.
The impact from labor shortages in the quarter or do you expect that to be more of a.
2022 event and just any color on labor wage inflation would be helpful as well.
Yes.
For sure.
Wage inflation, that's definitely impacting gross margin profile.
And operating margins as well one of the things we're struggling with right now is overall availability of labor and what that creates is obviously the inefficiencies we talked about in the conference call comments.
Really what happens is because you're and it's driven by labor when I say labor shortages Thats really driven by two factors one is fewer people participating in the workforce.
Right now and then number two is the amount of people out due to contact tracing are COVID-19 positive.
Testing so right now the stability inside of an ability to plan is very difficult because of the quarantine periods associated with people who are contact traced or test positive and so that's been that's been the real difficulty right now as you're you're averaging upwards up 10% more of the general.
Workforce that are available on a daily basis, and what we're normally used to.
And so that's been that's been the most difficult part of it and our size you know you're talking hundreds of people that aren't available every day.
The way you would like them to be or that you would plan around.
Okay got it thanks, Steve and thanks, Kevin appreciate it.
Thank you.
Our next question will come from the line.
Josh Nichols from B Riley you may begin.
Yes, thanks for taking my question.
Just curious your thoughts.
<unk>.
Auto Oems obviously.
Do you think that we've kind of past the trough here when you look at the second half of 'twenty, one and just thinking about the revenue cadence is that expected kind of build as we move throughout the year or is it going to be a little bit more disproportionately checking.
Second half weighted whenever things start to ease up as you kind of mentioned in your commentary.
I think I think your statement that it will probably build throughout the year is kind of what we're expecting right now.
If we look at customer call offs in Q1, it looks like it's a step up over Q4 in terms of revenue. We're just a little a little more pessimistic about the industry's ability to handle that type of increase in overall volumes in a short period of time.
Underlying issues that exist for the supply base and for Oems quite frankly, it doesn't change on January one. So we think it's going to take a little longer for for the industry to get back to those higher levels of production.
Yes, the second part of that to Josh.
Yeah.
Hello.
Okay did I answer that question for you Josh I thought you had a second part of that question.
No.
Thank you.
Thank you got it okay.
Just because you mentioned it earlier I mean, some supply constraints for the first time hitting SCM, but I mean, the company has obviously had a ton of success. When you look at all the nameplate that you've been adding could you highlight a little bit about what's the pipeline look like for 'twenty two 'twenty three in terms of being able to.
To add significant new nameplates for that operator, if you could provide a little bit of color on the expectations as far as like unit growth.
<unk> through 'twenty two in that area given the high margin contribution that it has.
Yes, Neil will touch on 2020 to kind of hit 2021 retrospectively.
If you look at those final volumes for <unk>. This year, they were significantly lower than what we what we were expecting and that was really driven by both the industry and the OEM side, but also on our inability to get the components, we needed to meet demand. So I wouldn't I would guess that we are 150 to 200000 units short of SDM. This year of what we were what we built.
<unk> demand was coming into the year. So we don't see that overall demand changing as we go forward into 2022 and 2023. So we think we're going to go back to that growth rate, assuming we can get the components we need.
We know the OEM interest and consumer interest is there. So we think we're going to get back to that faster growth rate on <unk>, even though 2021 was definitely impacted by component shortages.
Do you want to add.
For 2022.
There's a lot of variables like Steve said, one volume, but also in getting components and then customers. If they continue to stay with their build data vehicles, but when looking at the year, we would see between probably between 10 and 15, new nameplates launch in 'twenty two.
And there is.
We announced that last quarter, we have additional Oems grew up to <unk> now that we've talked about that have awarded this business, we said that the numbers.
12, 13, and 14 would be in the next two and a half years I anticipate one of those will for sure launch this year potentially two of those so a lot of that is going to depend on timing in the last half of the year, but we expect a couple of new customers to be publicly announced and then somewhere between 10 and 15 new nameplates.
Okay.
Thanks for clarifying that and then last question for me.
Ill pass the baton.
You've been right to kind of fade, the IHS numbers right there'll be a little bit more so good but I'm curious about what youre seeing that gives you some more confidence that the second half is really going to be kind of a key inflection point.
Specific supply that is coming online from some of the chip manufacturers or what are you hearing when it would be tough to Oems. It gives you the confidence we're going to see this inflection second half of this year, yes.
Yes, you definitely you definitely have some additional capacity from especially on the electronic side that we believe will start to positively impact the supply side in the second half. That's why early last year, we were talking about the fact that we thought this was a $4 21 in probably early 'twenty two problem.
And we still kind of hold to that timing, it's not going to fix all the issues I think the the thing that gives us a little more confidence, especially on our side is that there are different components that are available that arent as constrained and so it's really about us moving into those new components getting those full redesign is done and then broadening our supply base to make sure we can.
Meet meet the customer demand side. So we know we definitely left some revenue on the table because we couldnt meet the demand of the customers and obviously the industry had its bigger challenges.
We definitely have seen the ability at the end of Q4 for the industry to pick up the pace was pretty noticeable I just don't think it's quite as aggressive as what IHS things for the first half.
Thanks, guys. That's it for me. Thank you. Thank you.
Our next question comes from the line of David Whiston from.
Morningstar you may begin.
Thanks, Good morning, guys. Good morning, David Good morning.
First question is on the recently signed infrastructure Bill in the U S. I've read that that requires headlights that are very similar to your <unk> to be approved in two years I was just curious what kind of potential windfall for gentex could <unk> in the U S. Because of this legislation.
Yes, I think in regards to where our product has been growing over the last few years with the Standalone smart beam product. It's gradually been getting replaced as we've talked about I think a couple of years now.
So it is exciting that that technology is finally coming to the market since it's been available in Europe for multiple years to see it actually come here is great, but I don't see that it is going to have a great impact on us at this point.
Yes, Unfortunately, its about 10 years too late.
Not too bad.
And then on.
The new cabin monitoring Tech you showed at CES I was just curious across your customer base someone for example, like GM with perhaps not be very interested in this tack because they already have some monitoring technology as part of their super cruise package.
So I think what's interesting about the tech and what we were showing us what they have in Super cruise is similar on the base system that Neil described in his tech conversation.
But what we showed on the advance side.
It is very different than what anyone is doing right now and so even though there is always some resistance. When you have an embedded product currently the upside is all Oems are looking for what the future in this area can look like and we believe we showed something very compelling both from a geography standpoint, which is different than what GM is executing and super cruise, but also on the advanced.
Features that we can offer baidu, a full cabin monitoring not just driver monitoring.
Okay.
On.
Chips.
We actually in the press see some articles from time to time about how.
Actually going to be a big supply glut in a few years and everyone's adding capacity.
I guess my question to you is that really a bad thing for autos doesn't sound bad to me, but I was curious on your reaction no in fact, I mean honor.
Honestly what were the reason why the material cost increases that everyone seeing is because of the shortage. So.
There is a new watermark being created by the supply supply side on what the values of electronic components are once once here Overcapacities are once there is available capacity that's when the balance of power source a shift into the into the buyers of those components versus what we're seeing right now so.
I agree with you completely I mean, it gives you more design flexibility and certainly the ability to plan better and more importantly, it does start to change the overall economics of the value of a component.
Okay. Thanks, guys. Thanks, Thank you David.
Our next question will come from the line of John Murphy from Bank of America, you may begin.
Good morning, guys how are you.
Great.
Just a first question on the Capex outlook.
It's more than double year over year versus 2021, and I'm just curious what's going on there.
Yes.
First two.
2021 ended about $25 million less than what our plan was and.
Really it's kind of crazy, but it was also about availability of even equipment.
We just we have placed orders honestly couldnt take delivery of some of the Capex that we had planned for this year just due to shortages. So part of that is just $25 million or so moving from 2021 into 2022 and the other thing I think it's important to look at it as the last three years given the issues, we've really been very careful on our capex spend and so historically.
If you go back over let's say a 10 year period, you would say we averaged around $100 million a year in capex on a much smaller business back then.
Been very focused on being disciplined over the last few years, but now with the growth rates into 2022 and into 2023, we have some capacity issues that we want to address through some buildings. But then also there's levels of automation that will help with the efficiency and obviously some of the labor challenges and then more importantly, just building that capacity.
Obviously with some of the new products and the new product portfolio of those require capex to get those ready for operations as well.
So how should we think about sort of run rate capex after sort of a catch up in 2022.
Youre talking about.
Okay.
Yes, I would say no we're probably more like after 'twenty. Two if you look at 'twenty, three and beyond will probably be more in the 120 to $1 30 range.
Got it okay Super helpful.
Just on the IHS schedules.
Sort of.
Being dead horse here, but I mean, when we look at.
The light vehicle production schedules that the 17% increase in North America, and 18% Europe did you expected is that where you see the most.
Risk.
Just trying to exactly right.
Increases, yes, exactly right, that's where that's why when we look at those especially towards those those large markets. They haven't supported those levels of production in a long time and so we think theres going to be a lot of challenges is trying to get back to that level on a short period.
Would you govern those really.
That was sort of closer to 10% increases and where you are cutting those two it seems like that by supporting our 10% plus increase in the chip industry right. Now is not in the cards. I mean, what are you kind of haircut on that too in your thought process. Yes. If you look at like the overall I'll kind of talk about our primary markets and the overall IHS data being around 8% to 9% growth rate for 2022, we think.
That's more like five to six.
With the bulk coming out of North America, and Europe , most of it coming out of North America and Europe .
A little bit a little bit a little bit Japan Korea.
Okay got it driver monitoring systems cabin monitoring system, there's been a lot of players out there are you sit in a unique position where you are in and the vehicle, which is a good vantage point.
Just curious how many competitors are there and sort.
Sort of what's the unique position that you think you have I mean amir.
You're in a very very unique position with real price Hitachi.
Protected I mean, when you get into this new pool.
Is it just a much wider pool of.
Competition, how do you how do you think about that for that part of the business going forward.
It's a great question I mean, one of the things when we when we decided to make the Guardian acquisition and then look at what our competitive advantage would be in the space.
Looked at the availability the base version of our system Thats, just a camera anywhere in the car looking at only the driver there are going to be a lot of players in that space and that's not really where we were wanting to compete where we want to compete is in the higher end system. Both from a geography standpoint to your point of concealing the camera and the emitters IR emitters and Amir.
<unk> are in an overhead.
But then also looking at the advanced feature side, So what Neal was walking through on that on the advance on the advancements the ability to see.
Look at a rearward facing car seat and pick up micro vibrations is really the secret sauce of the system of what Guardian was working on so it's literally doing structured light to look at it is picking up very very small micro vibrations in and around the cabin of the vehicle and with that comes the ability to do a lot of feature sets that just a vision CIS.
<unk> alone would not be able to deal and so we're going to compete not only from our geography and location and ability to conceal cameras and inventors, but also with a higher end feature set.
Got it.
And then just lastly on the raw mat discussions I mean, obviously these are.
It's a little bit opaque on hedging pass throughs all of this kind of stuff that impact youre sharing with your automaker on around that.
And hopefully at some point normalization coming back down, but I mean has anything changed in these discussions I mean, my understanding is that prior.
For a long time, probably between <unk> the bulk of the raw mats were sort of at risk more on the supplier side on your side or even or nine automaker switch to taking over a bit more and now it seems like it's.
Switching youre pushing back a little bit because they are so.
So much going on with <unk>, they need they need help on both the capex or the capital and the cost side. So it just seems like youre going to push back a little bit more on the raw mat increase I'm, just curious if thats changing or if it's just more of the same in these discussions.
No. It's definitely I would say, it's definitely changing we've engaged just since the last call. We started to engage with Oems on this very discussion and honestly and in 20 years at Gentex I've rarely had this type of a conversation and so its definitely new waters in a lot of ways for us as a company, but Oems are beginning to state there.
Positions on whether theyre going to do with the supply base, obviously in terms of tier one suppliers. There is a lot of companies.
We're going to struggle to these type of raw material increases and labor increase in labor and cost increases without some pulled out support from an OEM.
And so it's going to be very interesting to see which Oems are supportive to try to help the supply base in which pushed back harder.
The constrained environment, it's going to become interesting.
Oems, who work with the suppliers better are probably going to be in a position to get more access to inventory into component. So.
Every OEM is going to make a decision on what their position is and we are beginning to have those discussions about the fact that we can't eat all these cost increases alone without help from an OEM.
Just one follow up on that I mean have you ever envisioned a contract that will be set up what ultimately gets passed through to the end consumer I mean, the automakers are at that point, where theoretically they can raise prices to potentially offset this but you're kind of stuck in the sandwich, where youre not you.
You don't have that flexibility.
Is there any kind of discussion on indexing to ultimate sell through pricing to the consumer I mean, thats, where I mean that would be sort of the Holy Grail is trying to get up the food chain, where it gets passed onto the consumer but.
Complicated, but any discussions around that.
I wouldn't say discussions yet there has been a ton of speculation and ideas thrown out and obviously as a supplier. There is a lot of discussions that we have with with Oems about hey, we're willing to get creative with you to try to solve this problem.
So I mean, theres been I wouldn't call it any <unk>.
Tangible conversation around an idea like that right now everyones kind of in the idea generation phase, where youre trying to find a way that it doesn't become combative, but you are trying to find a way that it can work for both us and an OEM to make sure that we're getting there is interesting Oems I feel like through this last 18 months have gotten better with the <unk>.
Tumor are saying, hey, there is a little bit more pricing power there than probably Oems even believed in the past and especially with the fact that you can't you can't build as many vehicles right now so you've got to try to maximize profitability on a per vehicle basis, and Oems have seemingly done a really good job of changing their mindset as it relates to what is what is the price of a vehicle and how do they match.
<unk> that valued for them from a consumer.
Let's just hope that sticks with us.
Exactly. Thank you so much guys. Thank you so much guys take care. Thank you.
Thank you. Our next question comes from the line of Mark Delaney from Goldman Sachs. You may begin.
Yes, hi, good morning, and thanks very much for taking the questions first I wanted to ask on the sunroof you spoke about it as part of your comment.
Comments about the CES Tradeshow could you go into more depth and when you could see that being used.
In the market for production vehicles.
Sure absolutely. So yes, the evolution of the product has happened over the last three years through three years or four years now through CES as we've demonstrated different levels of dimming devices.
<unk> grown that into some moves from the aerospace window side.
From a market and activity there is still a lot of work to do from a vehicle side integration and working with customers.
Say that within the next three maybe three three years to four years is when you would anticipate seeing that from us in the marketplace.
It's a great evolution I think the thing that's really coming along well with the technology.
As the consumer side seeing the need and the one for it.
The ability to choose individual control over the different seating locations for the consumer to have it be clearer dark or different.
Different levels in between the two states is extremely advantageous and I'm really positive results.
That's helpful. Thanks, and then in terms of cash flow for this year could you talk about use of cash and how you think about maybe balancing that I mean, you spoke already on your Capex plans to open in terms of using free cash flow.
How do you think about buybacks versus M&A and are there more tuck ins.
The marine market acquisitions, maybe considering.
Yes.
8% Scarring Guardian.
Augmenting the product portfolio, so interested in the outlook for dividends and acquisitions can be thanks.
Yes. So if you look at the playbook, we've been executing in the last couple of years to your point, we've been we've been enhanced.
Enhancing our R&D portfolio with the small acquisitions that we put in place we've got teams working on product development for commercialization.
But again that doesn't detract a lot from a free cash flow perspective, So we plan to stick to the plan as we did this year, we're spending $325 million on Capex and.
Cash flows should as sales come up the operating cash flow it doesn't change the matrix doesn't change.
Capex is up a little bit as Steve already alluded to but that leaves a significant amount for kind of executing share repurchases on a systematic basis throughout the year and then if there is an opportunity that presents itself from either bolt on or a small technology acquisition. We continue to look and our teams are very focused on that and developed over the last few years. So.
The same the same.
Offensive plays as we ran in 2021 I just wanted to so just to clarify quickly when Kevin said, the 300% to 325%. He was talking about repurchases Capex net capex sorry.
Understood. Thank you.
And once again Thats star one for any questions.
Our next question will come from the line of Ryan Brinkman from.
JP Morgan your line is open.
Hi, Thanks for taking my question in the release had mentioned full display and integrated toll module has been more impacted by the chip shortage. Then your lower feature I guess lower ASP products Im curious the degree to which this mix impact maybe the less high feature products may be factoring into your margin guidance for 2002, I get that the overall.
Level of customer production due to the chip shortage will result in less fixed cost leverage so arguably the chip shortages impacting your margin and in more ways than one, but just specifically with regard to the mix of your own products is that a significant factor in the margin guide and when do you think you may no longer be supply limited on some of these.
Higher future products.
Well as Steve alluded to right. The first half of the year with FTM, an ICM constraints kind of rolled off Q4 that we see that in the first half of the year hopefully freeing up in the back half.
What we're seeing is great growth in other products like we did in Q4 was outside mirror growth throughout 'twenty, one into 'twenty, two but when you put all of that into the into the mixed calculation. We're seeing about a 50 to 100 basis point headwind.
From the mix side, if you look at the overall product mix and shipping base mirrors versus the advanced feature stuff.
Okay. That's very helpful. Thank you and then you mentioned I think in response to one of the previous questions that the conversations with customers had already begun with regard to the recovery of these non commodity supply chain costs that were talked about on the third quarter based upon those early discussions when do you have any thoughts on what percentage.
Of that cost increase that you might potentially be able to recover in those discussions.
Yes, it's tough to put it in that regard already obviously with some of these as you can imagine youre, having these conversations early with some of the more difficult relationships. So unfortunately, it's probably not a good it's probably not a good indicator of how all of them will go because you're starting obviously with the ones that are most challenging.
It's tough to put it into a percentage of what percent of an increase are you seeing because like we mentioned before we're going to we're going to take a long term approach with us and so we're not going to come in saying this has to be done and it has to be done. This year and this is what it has to be it's more about hey, what is the book of business look like what is the new opportunities for growth look like.
What are our previous commitments and how do we find something that can work for an OEM and handle this over a multiyear period and so it's difficult to put into a percentage right now what I would say is that probably.
Half of our conversations are overly combative Oems are interested in collecting the data and understanding what we're seeing and having a pretty honest, it's really an education process at the beginning of us the explaining and helping them understand what we're seeing and then I think the next two to three months are going to be key in trying to reach some agreement with them on how do we.
We go about this together.
Very helpful. Thank you.
Thanks Ryan.
Thank you I'm not showing any further questions in the queue I will turn it back over to Josh for any closing remarks.
Great. Thank you everyone for your time and the questions. Today, we look forward to meeting with you in 2022 and hope you have a great weekend. This concludes our call.
And this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
[music].
In Q2.
Yes.
Okay.
[music].
[music].
[music].