Q2 2019 Earnings Call
Thank you for your patience and please standby again yard conference call will begin in 10 minutes. Thank you.
[music], Hello, and welcome to Gentex reports second quarter two.
2019 financial results at this time, all participants are in a listen only mode. If anyone needs assistance during the conference Press Star in C. O. Four no brainer later, we'll have a question and answer session and instructions will be given at that time now it's my pleasure to turn the call to Josh Milberg ski director of Investor Relations.
Thank you.
Good morning, and welcome to the Gentex Corporation second quarter 2019 earnings release Conference call I'm, Josh Bursty, Gentex director of Investor Relations and I'm joined by Steve Downing, President and CEO , Kevin Nash, Vice President Finance, and CFO , and Neil Boehm, Vice President of Engineering and CTO.
This call is live on the Internet by way of an icon on the Gentex website at Www Dot Gentex Dot com.
All contents of this conference call are the property of Gentex Corporation and May not be copied published reproduced rebroadcast retransmitted transcribed or otherwise redistributed.
Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to the unauthorized use of the contents of this conference call. This conference call contains forward looking information within the meaning of the Gentex Safe Harbor statement included in the Gentex reports second quarter 2019 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 give the second quarter of 2019 financial summary, Steve. Thank you Josh.
For the second quarter of 2019, the company reported net sales of $468.7 million, which was an increase of 3% compared to net sales of $455 million in the second quarter of 2018.
This growth was in contrast to global light vehicle production that declined approximately 8% in the second quarter of 2019 versus last year.
Once again, the second quarter, it was very difficult to predict revenue as evidenced by the fact that I Hs markets forecast worsened by approximately 4% versus the beginning of quarter forecast.
Overall, the second quarter market conditions were very similar to those of the first quarter of this year, both of which included large reductions in global light vehicle production versus the prior year.
Despite the current vehicle production environment being down about 8% from the second quarter of 2018, we were able to outperform the underlying market by approximately 11%, which resulted in a net 3% revenue growth rate for the quarter.
For the first six months of 2019 global vehicle production levels have been off by approximately 7% versus prior year, but we have been able to maintain our growth targets for the year.
In fact based on the first six months of the year and our forecast for the second half we are actually raising the bottom end of the forecast range and narrowing our full year revenue guidance to be between 1.87 and $1.9 billion.
Based on our first half of 2019 performance and the current Hs market forecast for the second half of the year, we are poised to outperform global automotive markets by approximately 7% for the year.
For the second quarter of 2019, the gross margin was 37.7%, which was a significant increase when compared to a gross margin of 36.2% in the first quarter of 2019.
On a quarter over quarter basis, the gross margin for the second quarter of 2019 declined slightly compared to a gross margin of 38% for the second quarter of 2018.
The gross margin in the quarter was negatively impacted by approximately 60 basis points due to tariffs that were not in place during the second quarter last year.
Our sequential gross margin expansion in 2019 was due to positive product mix driven by increases in full display mirror and domestic exterior mirror growth better than expected purchasing cost reductions cost discipline throughout the company and success in mitigating some of the escalating costs related to tariffs that have been impacting the company since July of 2018.
In fact, if you remove the 60 basis points of margin erosion due to tariffs our gross margin was up 30 basis points versus last year.
Our ability to maintain gross margins in a difficult production environment is a testament to the hard work and cost focus of the entire team at Gentex.
Operating expenses during the quarter were up 5% to $48.6 million when compared to operating expenses of $46.1 million last year.
We managed our operating costs carefully during the quarter, but with the deliberate intention of continuing to invest in future growth.
The primary driver of increases in operating expenses is funding the resources needed for the development and launch of already sold products, including additional auto dimming mirrors full display mirror integrated toll modules and our new Aerospace program.
In addition, we are deploying resources to expand the product portfolio in the areas of connected car digital vision and large area Dimmable devices, which we believe will provide the potential for long term growth.
Income from operations for the second quarter of 2019 increased 1% to $127.9 million when compared to income from operations of $126.7 million last year.
The increase in income from operations was primarily due to the higher revenue in the quarter, but was partially offset by lower operating margins when compared to the same period last year.
During the second quarter of 2019, the company's effective tax rate was 16.4% up from 15.5% during the second quarter of 2018, primarily driven by a decrease in discrete tax benefits related to stock based compensation.
Net income for the second quarter of 2019 was relatively flat at $109 million compared to the second quarter last year.
Earnings per diluted share for the second quarter of 2019 increased 5% to 42 cents when compared to 40 cents for the second quarter of 2018, primarily as a result of a 6% reduction in diluted shares outstanding from share repurchases due to the continued execution of the Companys previously disclosed capital allocation strategy.
During the second quarter of 2019, the company repurchased approximately 3.1 million shares of its common stock at an average price of $22.72 per share for a total of $69.9 million of share repurchases.
In the first half of 2019, the company has repurchased approximately 7.8 million shares of its common stock at an average price of $21.30 per share for a total of approximately $166.1 million of share repurchases.
As of June Thirtyth 2019, the company has approximately 26 million shares remaining available for repurchase pursuant to the previously announced share repurchase plan.
The company intends to continue to repurchase additional shares of its common stock in the future and supported the previously disclosed capital allocation strategy, but share repurchases may vary from time to time, and we will continue to take into account macroeconomic issues market trends and other factors that the company deems appropriate I will now hand, the call over to Kevin for the second quarter financial details.
Thank you Steve.
Auto Dimming mirror unit shipments increased 2% in the second quarter of 2019, when compared with the second quarter of 2018, primarily driven by a 7% increase in exterior auto dimming mirror unit shipments.
Which was highlighted by a 39% increase in North American exterior auto dimming mirror unit shipments.
Automotive net sales in the second quarter of 2019 increased 3% to $456.6 million compared with $444.2 million in the second quarter of 2018.
The growth in automotive sales was driven primarily by strength in full display mirror and exterior auto dimming mirror unit shipments.
These product growth areas helped offset annual customer price reductions and product specific revenue headwinds.
Other net sales in the second quarter of 2019 were $12.1 million, an increase of 13% compared to $10.8 million in the second quarter of 2018 on increased dimmable aircraft window shipments and increased shipments of certain fire protection products.
Now for a balance sheet update the following items represent a comparison versus December 31 of 2018, which are also included in today's press release cash and cash equivalents were $260.3 million compared to $217 million.
The increase was primarily due to cash flow from operations, which was partially offset by share repurchases dividend payments and capital expenditures.
Short term investments were $190.6 million up from $169.4 million and long term investments were $121.1 million compared to 138 million.
Fluctuations in the two were driven by changes in fixed income investment maturities within the portfolio.
Accounts receivable increased 12.9 million to 226.4 million, primarily due to the higher sales level compared to the fourth quarter 2018.
As well as the timing of sales within each of the quarters.
Inventories as of June 30 declined slightly to 225.1 million accounts payable decreased slightly to $90 million and other current liabilities increased 11.2 million to $87.5 million, primarily as a result of increases in accrued taxes and accrued wages.
Now for some cash flow highlights.
Cash flow from operations for the second quarter of 2019 was $137.4 million compared with $144.9 million during the second quarter of 2018.
Year to date 2019 cash flow from operations was $273.5 million compared with 292.4 million in 2018.
The differences in each of the periods were primarily due to changes in working capital.
Capital expenditures for the second quarter of 2019 or $28.7 million compared with $25.6 million in the second quarter of 2018.
Year to date 2019 capital expenditures were $45.5 million compared with $51.9 million in 2018.
And depreciation and amortization for the second quarter, 2019 was $25.2 million compared with $27.9 million in the second quarter of 2018.
And year to date, depreciation and amortization was $53.3 million compared with $55.9 million in 2018.
Ill now hand, the call over to Neil for a product update.
Thank you Kevin.
In the second quarter of 2019, there were 33 total launches of our interior and exterior auto dimming mirrors and electronic features.
Of the total launches approximately 40% at advanced features.
While the percentage of new launches within advanced feature was slightly lower than previous quarters. The reason for it offers some interesting insights.
During the second quarter, we launched these interior auto dimming mirrors on four new name plates for domestic Chinese Oems and one new nameplate was launched for domestic India OEM.
These nameplate launches represent further penetration of our core auto dimming technology for emerging market applications.
In regards to our full display mirror product the company launched four additional nameplates during the second quarter of 2019, which means we are currently shipping on 30 vehicle name plates for this exciting new product.
For the second half of 2019, we are forecasting approximately eight new vehicle nameplate launches of full display mirror.
Our last update for today is in regards to our integrated toll module product.
Late in the first quarter of this year, we began our first volume shipments to already for the E Tron vehicle.
During the second quarter of 2019, the first consumers began registering their ITM systems online to activate the device and begin using the system for normal totally new.
We are watching and waiting for feedback from the consumers dealers and the OEM to help other customers understand the use case and consumer acceptance of this product.
Well the volumes are relatively low on this vehicle. We are excited to have success, we launched a new innovative connected car product that includes transactional capability.
Over the next 18 months, we continue to expect for their nameplate launches with our launch customer Audi as well as the initial launch of ITM has two additional Oems.
I will now hand, the call back over to Steve for guidance and closing remarks. Thanks Neil.
Based on the mid July 2019, I Hs market light vehicle production forecasts for our primary regions of North America, Europe , Japan, Korea and China.
Current forecasted product mix and expense growth estimates and year to date actual performance for the company as updating guidance for the remainder of calendar year 2019, and each of the following areas.
Revenue of $1.87 billion to $1.9 billion for the year.
Gross margins in the range of 36.5% to 37.5% for the year, which represents a 50 basis point improvement in the gross margin forecast for the year and includes estimates for the additional tariffs that became effective in June of 2019.
Operating expenses between 195 and $200 million.
Estimated tax rate between 16, and 17% capital expenditures between 90, and $100 million and depreciation and amortization between 101 hundred $10 million.
Additionally, the company is maintaining its previously announced revenue guidance for calendar year 2020 to be between three and 8% above 2019 revenue estimates.
The second quarter of 2019 was a challenging vehicle production environment, but the company delivered growth that outperformed our underlying market by approximately 11%.
While we were pleased to see the sequential improvement in sales growth rate versus the first quarter. The most impressive performance was evidenced by the strong gross margin during the second quarter, which improved 150 basis points versus last quarter.
The focus and hard work from the entire team at Gentex combined with our disciplined approach to capital allocation led to a 5% increase in EPS for the quarter.
Thank you for your time today and we can now proceed to questions.
Thank you ladies and gentlemen, if you have a question at this time just press Star then one on your Touchtone phone.
Good question has been answered or you wish to be removed from the queue just Preston.
And our first question comes from Chris Van Horn with B. Riley FBR. Your line is open.
Hi, Good morning, guys. Thanks for taking my call and congrats on the quarter.
Good morning, Chris Thanks, Chris.
So just on the gross margin guidance covered up a little bit.
Just a little bit more detail what you're seeing here is it is it around the full display rollout is it around some mix tailwinds that you see is that is it cost controls just a little bit more detail on what's driving that.
Yes, Thanks, Chris It's a combination of some of the things we laid out earlier in the year little bit better.
Participation from our purchasing cost reductions that initially we thought were struggle our teams have done a great job of improving that we've offset some of the tariffs earlier in the year and are able to mitigate some of that going into the back half, but yeah. The mixes.
Going very well right now you know as the weakness in China is playing out we've talked before about base level products into the China market actually that's been a tailwind for us on the on the margin side. So we're seeing a lot of that stuff continue into the back half of the year.
Okay got it.
And then and then on the on the new name plates for full display mirror would you be able to give us any more information on who the customer was that a passenger vehicles versus trucks rescue be anything else you could give us there.
Yes.
Nope.
Yes, absolutely the.
For new name plates, specifically there was the.
Cadillac Cts Cts five our XD six I apologize XT six theres, the GMC Silverado heavy GMC and Silverado heavy duties and then there was the Jaguar land Rover sport the discovery sport.
So okay got it got it all right.
And then and then was that was the was there any difference in content of those were slimmer in screening or both or or one or the other.
On GM, it's where display mirror only.
And then on the range Rover, where system camera display.
Okay got it got it so if you if you look at.
You'll maybe even from a regional perspective, how you're thinking about the back half of the year. We've heard other suppliers that are kind of be costs really cautious on Europe and.
Cautious on China.
It seems that China is kind of building up a little bit.
More from a penetration standpoint versus a market risk perspective, but I guess could you just comment related.
How you how you're feeling for the back half of the year.
Yes, I think I think what.
Like we when we came into the Q2 or in the Q1 call heading into Q2.
We've made some comments that we are a little more pessimistic than what the Hs data showed in Q2 and actually our forecast played out almost entirely the way we had expected it to.
We did make some manual adjustments today, just data, which actually served us pretty well helped us out plan a little better than we would have if we had gone purely off of that data.
We kind of we are taking the same approach in the back half of this year. So.
Despite there you see the Q3 numbers that we posted in the press release, the Hs numbers were probably a little more pessimistic than what the show. So we're we're hopeful obviously the comps get a little better in the second half of the year, because China, the China market start to fall apart really in the whole second half last year. So the comps are a little easier, but we really don't think there is a recovery there fully in place yet either so we would expect probably closer at showing growth in a couple of regions like in Europe , North America and in the back half of this year, but we probably look at those as more flattish type markets than we would growth markets.
Okay, great. Thanks again for the time.
Thanks, Chris Chris.
Thank you and our next question comes from David Leiker with Baird. Your line is open.
Good morning, everyone, turning David and David.
I understand.
I should know this number but just.
Remind me please.
The customers do have no.
We're shipping five currently.
We have that we've announced that we have.
Nine total source, but we Havent released the last four yet because they are not in production.
Okay, great. Thank you and then as.
Couple of things so your growth above market.
Great number here in the quarter.
What you are talking about.
It's something a little bit less than that can you talk to that a little bit.
Your 11% in the quarter and you're talking about 7% going forward.
Oh, yes, well I think I think thats really the gap you see is the actual.
The actual outperformance to the market in the first half on the seven is really representing kind of what we believe is numbers forecast in the second half are probably a little higher than what theyre actually be so the difference between the two would be not completely but part of that is going to be the kind of the manual adjustment that we're making to our back half forecast.
I follow you so.
Good.
If you look over the next.
Let's say three to five years, what do you think from what you noted day that you can commit to or suggests that you could do in terms of revenue growth relative to a flat set of markets flat. What are you actually were able to grow we believe yes, we believe we believe.
Really our long term projection is like mid to upper single digit outperformance to market conditions. So.
If you if you look at it and said call it five to eight or something in that range. I mean, thats what were really targeting right now is to outperform our market by those those type of levels.
And then a similar comment here on margins you got some headwinds that you're doing a nice job of offsetting.
You are running my gross margins today, there are a couple of points below what they had been historically.
But thats a longer term target as it relates to gross margins.
Yes, we think we think somewhere in that kind of cut at 30, 637, and a half range is kind of a realistic range.
What we talked about this a couple of years ago, when the margins gotten to like the the high 38 that we didn't believe those are sustainable margins. Today. If you look at that margin level. There was a lot of things factoring into that that helps but what I would say is if you like we mentioned if you took if you took tariffs out of this which didn't exist. Obviously, a few years ago, you're talking about a 38 three gross margin.
Which would be at the very high end, if not outside of what we would look at as kind of a realistic long term target. So really if you look at the natural evolution and margins remember the backups seven eight years ago. They were actually well below where we are now they were in the kind of 30, 334% range and so we have improved significantly over the last few years. We do think there is kind of a natural barrier and really what thats driven by the products that Neil talked about.
Some of the launches with base auto dimming applications in emerging markets are going to be a natural barrier to margin growth, but they also helped drive revenue opportunities and then longer term market opportunities.
And then one last item.
It sounds like you are doing.
Pretty good on mitigating some of these tariffs issues, what's the path to being able to mitigate all of that or is that just reasonable.
I think some of it is.
Not reasonable until we have a change in business structure potentially.
And we're evaluating that all the time at this point.
It's about a 50 50 split between tariffs inbound from raw materials, and then tariffs on the export of our materials into the China market. So we're evaluating that business model all the time and.
We continue to hope that there is a trade deal that would happen that would.
Help us keep most of our business close to home, but again if it goes too long then we recognize that theres embedded cost that we need to address but we've addressed a significant amount of the potential tariffs already and we're continuing to work towards action plans to mitigate smaller portions of those as we move forward.
And then the question will become structurally how much of that can you accomplish versus how much you have to spend to achieve the savings.
And so thats those are those are simple make buy decisions that we that will make every day.
Okay, great. Thank you very much thank you.
Thank you and our next question comes from Ryan Brinkman with Jpmorgan. Your line is open.
Hi, Thanks for taking my question I saw the earnings release made some mention of better progress in mitigating the impact of tariffs can you talk about what those actions were whether they relate to sourcing components from countries other than China. Some other factor I think you'd previously discussed the possibility of potentially local assembly in China, I mentioned and maybe you've done some of that in the past Delta facility, there may be being used as a warehouse et cetera.
To what extent.
Do you expect to make additional progress mitigating tariff costs and then just lastly, along just fine.
Sure China trade attention people.
What happens then are you able to or would you desire to revert to your past practices, thereby eliminating all tariff related costs or would you want to or need to continue with these alternative sourcing your other coping mechanisms, which would mean, maybe some elevated costs relative to prior.
Thanks, Thanks, Ryan I'll try to start and I think Steve we'll finish that was a pretty long statement. There. So [laughter]. So most of the work if not all of it so far has been around.
The first priority was looking at our existing supply base and seeing if they had manufacturing capabilities.
Outside of China, So thats been one leg of the process. The other processes has been changing some suppliers to places new suppliers outside of China. The other one was is honestly our team's going to work to look at the country of origin of some of the materials that we've sourced and we've had some rulings.
Stuff that was.
Originally thought to be China, that's now Taiwan or another far east region, So, but thats been the primary work so far and I'll, let Steve talk about kind of the longer term strategy. There, yes, so like Kevin mentioned everything's been focus right now on supply base low risk.
Low cost of entry to get these components done really with little or no cost impact over what we were say a year ago in terms of the bill of material. These items. So that was the primary focus on cheese vector of which we've executed very well.
The next stage of that like we had mentioned on our prior calls is a little more a little more difficult and cost impacts both lasting or upfront capital and so what we're doing right now is about evaluating those constantly we have not started to manufacture in the China market for sales there yet so we havent made any permanent or lasting decisions in terms of the costs have been able to mitigate these are ones that are still before us so where we have plans right now we're working on both to go further with additional suppliers to help mitigate tariffs and then also looking at alternatives for our for our own.
Supply of products back into the China market, but none of those decisions are final yet.
Okay very helpful. This will be a much shorter question. What would you say are the primary factors that are allowing you to a roughly maintain your full year revenue forecast at least at the midpoint in the face of some materially lower industry light vehicle production forecast is it primarily a penetration issue isn't higher take rates or more traction on new launches et cetera. Thanks.
Yes, I mean, if you look at the we we tried to probably not the greatest job, but we tried to highlight a few of those in terms of growth into emerging markets with our base auto dimming capabilities.
Obviously some of the takeover business that we've talked about the last few quarters from our competitor on the outside mirror space has helped drive growth and then the really strong interest and launch of FDM has been one of the key drivers of the business in the first half of the year and so we continue to watch this.
The one thing that's very interesting as we've been talking about the industry headwinds, but we've also had some of our own product headwinds with a mobileye losses and so as we're posting these growth rates. This is in the face of losses on the Mobileye integration. So if you look at that and add that back you're really talking about even another 100 150 basis points better.
Performance because of the headwinds that we're facing on the product side.
Great. Thanks, a lot. Thank you.
Thank you. Our next question comes from John Murphy with Bank of America Merrill Lynch.
Good morning. This is Alan Smith on for John .
First question, we've heard from a north American supplier earlier this quarter that there was some incremental pricing pressure and concessions that occurred intra quarter and mid year, which is a bit abnormal.
And you guys have talked about at length at the majority of the price Downs you face hit in the first quarter, which you then work to offset through the course of the year.
Is there any indication that automakers are pushing for more now from you or from any other supplier or the pricing dynamics, you face pretty well known at this point and it's just a function of what you're able to offset in terms of purchasing cost reductions our other productivity initiatives.
Our experience is that the pricing pressure is relatively similar to what we face. The last few years. So I wouldn't say that anything's changed from an OEM standpoint.
Obviously with every supplier there's unique situations that occur in your business within relate business relationship with the customer. So my guess is that some of its related to that.
So sometimes these things are a little more subjective than objective in terms of what those pricing pressure feel like.
It does vary from time to time, but I would say ours is relatively in line with our forecast and exactly with where we expected it to be at the beginning of the year.
Okay, Great and second question you referenced that part of the sequential margin expansion in the second quarter was a function of product as positive product mix for the full display mirror.
Correct me, if I'm wrong, but I was under the impression that full display mirror is more of a corporate average margin. So is the margin benefit really just attributable to exterior mirrors or are you now also seeing some margin uplift on FDM.
It's really a it's really about that and the product mix. So you are not incorrect. The FDM is really in line with corporate average margins. However, when you are rolling off a mobileye integration product as that products winding down and affecting our revenue growth rate, but it's actually being replaced with FDM products that are a better margin profile than the mobile i. integration product, so even though that represents.
A slight headwind to revenue or losing some business it does improve profitability.
Great. That's very helpful and last question to follow up on earlier around Tara.
As we think about the opportunity for some of the trade friction that exists right now to maybe be more structural in nature, rather than what I think many assumed to be transitory and as you guys. In particular work to expand further into international regions and emerging markets do you have any updated thoughts around having a weather having an international footprint with another plant in Europe or Asia would ultimately makes sense.
Yes, we have actually a very large facility in south and central Germany, and we have been in the last two years have purchased a larger building in the Shanghai area and that is always and one is one that we're refurbing right now and getting ready.
Something that offers the potential we distribute all the time out of our Shanghai facility for all the China market currently and so if if these things remain the possibility for us to do a localized final assembly in China is always on the table.
And how long would that would a transition like that to move it from a distribution center to a production facility take.
Well right now what it is we're actually getting we're getting the purchase facility up to our current specs and and and what how we like facilities designed and built and so that should be done hopefully by the end of this year or early next year and then from there you are looking at probably another.
12 months, roughly when you could have final assembly.
Going inside of up and running inside of a facility.
Great. That's very helpful. Thank you so much for the questions.
Okay. Thank you.
Thank you and our next question comes from James Picariello with Keybanc capital markets.
Hey, good morning, guys. Good morning, So you mentioned the driver assist smartbeam.
Headwind I believe in the first quarter was roughly 250 to 300 basis point headwind what was it in the quarter and what are your expectations now for the full year.
Yes, it was pretty much the same I mean as a combination of a weakness in our strong markets for the smartbeam weakness, but when you put it all together between 200 250 basis points of headwind.
In the quarter.
And then 200 still for the full year, yes.
Two to 50 yeah.
All right and then.
Regarding FDM.
Do you have any update on maybe what your annualized shipment target is I know Youve previously said greater than 500000, just curious if true if you got a clear update on that.
Yes, I think so I think in the last quarter or one of the things last quarter conference call. One of the things. We mentioned is that we felt very comfortable with.
We should be we should be above that happened million dollar happened nine unit target for the full year.
And I've been dead time, we said well above.
So that's that's just unchanged.
Correct.
His FDM included in your interior domestic unit number.
Wherever it's being shipped its included in the.
As as a unit as the unit, yes, yes.
Okay, just last one for exterior domestic in another quarter of very strong growth from.
Market share capture there just wondering what your thoughts are for the back half for that particular product.
It's going to start to revert to kind of normal growth rates.
In the back half of the year as we lap really if you think about yeah. We're in the Q3 growth I think Q3 was.
The start of that takeover business last year, because thats still be up year over year or would you see possibility I mean, depending on production, obviously would win in the market, but yes. It's still shows outside mirrors in general are exterior mirrors in general are still growing above.
Above market.
Okay. Thanks, guys.
Thank you.
Thank you and us having mind, ladies and gentlemen, if you have a question just first start in line to get into queue. Our next question is from David Kelley with Jefferies.
Hey, good morning, guys.
Another one from from SDMA ill me could you update us on the customer pipeline I think you were targeting a 10th customer announcement by next quarter, but any update on new customer traction would be appreciated.
I think the customer side of its going extremely well, we don't have a template to announce this quarter, we still do expect that in the third quarter and we have some positive engagement with some additional customers as well.
The nice part is as as we begin to ship these on more and more vehicles.
More consumers are getting acclimated to the product and then obviously Oems are getting to experience. It on competitive vehicles and so we believe that can help help drive interest in the product longer term.
Okay, great. Thank you and you maintain full year operating expense guidance, you've obviously got some is a fair amount of new product ramp and several new products in development could you just talk about the balances of managing the Opex line, while also investing and so these growth portfolios.
Absolutely in fact, that's probably the most challenging part of our job quite frankly is it's a difficult production environment. Obviously, we have a strong income statement, but making sure that we operate with discipline and we fund those ideas appropriately as probably the hardest part of the job in terms of finding that right balance we believe like what we've seen in the first half of this year is probably the best execution, we've had in that area in a while it is growing slightly faster than our top line.
But we believe we are funding those and new development and technology is appropriately.
Obviously that could subject to change and this as a very innovative company when new ideas come up we don't we don't idle them purely based on the budget, we look at the ideas and almost almost with like a venture capital type model of if Theres a mailing idea that's outside of our budget for the year, but we've seen the long term growth prospects, we're willing to step that up to make sure. We're funding the appropriate the appropriate innovations.
Okay got it thanks, and last one for me and I'll pass along and I really appreciate the color on the China and India launches I guess, how quickly do you think your emerging market exposure can ramp up in the next couple of years do you have either a shipment or maybe an annual sales growth target that you could share.
Well I think that we're really what we look at there is its not in terms of units, it's really looking at outperformance to market there as well we want our growth rate in emerging markets to be kind of at the higher end of our growth rate range for the company and and now it's difficult to do because in emerging markets Youre shipping lower cost products or introductory base auto dimming type technology.
But we believe we believe there is absolutely an avenue for us to continue to grow in those emerging markets at the high end of the corporate growth rate range.
All right perfect. Thank you appreciate the color. Thank you.
Thank you and our next question is from David Whiston with Morningstar.
Thanks, Good morning.
First I was wondering to tariffs a two part question.
Given the guidance raise can I assume your German Japanese customers are not that worried about new auto tariffs under section 232. If you can just talk about the sentiment or any chatter you're hearing from the German Oems in the Japanese ones that would be helpful. And then Kevin you talked about.
If these tariffs were to be enacted later this year or more cost you can address so why not go ahead and make those cost reduction actions now.
Anyway, regardless of that.
Well I think the some of the stuff has been enacted in June .
Look three going at 25% our teams there have not stopped looking for ways to optimize that.
Going forward I think the one that I mentioned is there is also a retaliatory tariffs that started in June going into China, and what I was referring to is changing the manufacturing process like Steve already mentioned is that's a longer term play.
If we do nothing than that that cost stays in the in the pipeline until we do change our kind of our if we were to do final Assembly in China for instance, so.
That's the piece of why it's there and not addressed well and the reason why we're careful about that one is because we believe we have the right cost optimization model. Currently if there were no tariffs are or if it was back to the way. It was say a year ago from trade standpoint, and so we don't want to necessarily add those costs or the capital infusion that would require to get there to offset something that may not be a permanent.
A permanent part of our future. So we're just carefully watching that we're actually building our plans around both models just in case.
We'll continue to refine those and if it looks like.
It looks like it's destined to stay then we'll have to we'll have to consider at least making different decisions, which will have multiple plans in place to address if that time comes.
As it relates to the sentiment from Oems, what I would say.
His.
All the Oems are obviously very aware all of them take a different stance one thing and it is consistent is most Oems ask us kind of okay. What your what would be the mitigation plan and how do we work through that together to make sure if something like this were to happen to make sure that we can continue to do business in a cost effective way. So while this is all happening on the China front, we actually have request from Oems all over the world talking about their specific situation and we discuss quite openly.
What what our plans would be and what our capabilities would be to help support them.
Okay. Thanks, that's helpful and then moving onto the language in the press release on moving to large area. Dimmable devices are you talking outside of autos are you talking more like parts of the vehicle interior in windows and related to that how do you avoid competing with many other firms in that space and I know, it's something you tried to avoid.
Yes, well the interesting part is if you look at our core Electrochromic technology. There is not a long list of natural competitors for that type of technology. So we're not trying to compete with.
People that are doing.
Commercial glass, our automotive glass for that matter that is fixed transparency, we're looking at basically helping create a new version of the technology and the new space. So.
Our primary focus right now has been the aerospace market in that expansion and adding the triple seven in that launch that we're working on currently.
But then it's also looking at multiple use cases for dimmable glass or dimmable surfaces in a vehicle environment last year at CES, we showed that with multiple use cases everything from sensor shrouds to kind of visor applications. The sunroofs.
And then as we move forward, we are going to continue to look at new ideas and ways, where that type of technology could be useful for a car today or a car of the future.
Okay. Thanks, guys.
Thank you.
Thank you and I would like to turn the call back to Josh Parsky for any final remarks.
Thank you. Thank you everyone for your time. This morning, as a reminder, our analyst and Investor Day is coming up on August 20, Onest and we'll be head held at our headquarters in Zeeland, Michigan, If you or someone from your firms interested in attending please reach out to me at your convenience and I'll send over more details about the event with that said this concludes our call. Thank you and have a great weekend.
Thank you, ladies and gentlemen for participating in today's program you may all disconnect have a wonderful day.
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