Gentex Corporation (GNTX) Q1 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Gentex first quarter 2012 financial results conference call. Just a reminder, today's conference is being recorded. I would now like to turn the meeting over to Mr. Steve Dykman, Vice President of Finance and Chief Financial Officer. Please go ahead, Mr. Dykman.

Good morning and welcome to our first quarter 2012 conference call. I will be coordinating the call this morning as Connie Hamblin is out sick with bronchitis. Joining me on the call this morning is, in Connie’s absence, is Mark Newton, our Senior Vice President. I will first cover a few housekeeping items and then I will make some remarks with respect to our first quarter financial results. This call is being broadcast live on the Internet via an icon on the homepage of Gentex Corporation's website at www.gentex.com. The auto playback of the conference call is available on the website as well. All contents of Gentex Corporation's conference calls are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the express written consent of Gentex Corporation. Gentex Corporation alone holds such rights. While we understand that there may be companies that transcribe and redistribute our conference calls, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of the content. We advise that you should not rely on the content of any unauthorized transcript, as Gentex Corporation will not be held liable for the content of any such transcripts. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any such unauthorized use. Your participation implies consent to our taping and to the foregoing terms. Please drop off the line if you do not agree with these terms. Before I begin, I'd like to remind you of our forward-looking statements. Gentex Corporation will make forward-looking statements in this presentation related to its financial results for the first quarter and calendar year 2012 and beyond that are based on preliminary data and are subject to…

Good morning. SmartBeam. For the 2011 calendar year, we shipped approximately 1 million SmartBeam units, which was a 66% increase over the SmartBeam unit shipments of 630,000 in calendar year 2010. Based on the IHS March 2012 forecast, we continue to expect that SmartBeam unit shipments will increase by approximately 40% to 45% in calendar year 2012 compared with calendar year 2011. The company currently ships two versions of its SmartBeam camera-based high-beam assist feature today. The base high-beam assist automates the process of turning the vehicle high-beams on and off, utilizing a CMOS image sensor. We recently started shipping the far more complex SmartBeam Dynamic Forward Lighting system for the BMW 3 series in Europe. That system consists of a CMOS image sensor combined with algorithmic decision making to offer constant on glare-free high-beam. Specifically, the system detects the presence of other headlamps and tail lamps and generates dynamic block-out zones around vehicle that is either tailing or moving toward. Special headlamps equipped with shutters block portions of the high beams to prevent blinding surrounding traffic while continuously optimizing forward lighting. The vehicle high beams are always on, resulting in significantly better forward vision during night time driving. Now an update on Rear Camera Display. Legislation. The Kids Transportation Safety Act and the pending requirement that all new vehicles in the United States will be required to be equipped with cameras and Rear Camera Displays by September 2014 based on the December 3rd, 2010 Notice of Proposed Rulemaking from the National Highway Traffic Safety Administration. Moved from the Office of the Secretary of Transportation to the Office of Management and Budget on November 16, 2011. At that time, the final rule was targeted to be completed on December 30, 2011. On January 10th of 2012, Secretary of Transportation, Ray…

And now I will provide an update on dimmable aircraft window programs. We currently are shipping dimmable windows for the 787 Dreamliner and each passenger aircraft has approximately 100 windows. The first Boeing 787 was purchased by All Nippon Airways. Boeing has also expressed interest in utilizing dimmable windows for other aircraft. Gentex is also shipping dimmable aircraft windows for -- on the passenger cabin windows of the 2010 Beechcraft King Air 350i, the first aircraft in general and business aviation with dimmable windows. Each King Air 350i has approximately 15 windows. Other aircraft manufacturers continue to have interest in this technology, and we are working on those potential programs with PPG Aerospace. An update on our net sales estimates for the second quarter. The following projection for net sales in the second quarter of 2012 is based on IHS’ March 2012 light vehicle production forecasts. Our estimate for net sales for the second quarter of 2012 is an increase of approximately 15% compared with the same quarter in 2011 based on IHS’ March forecasts for light vehicle production levels. The second quarter of 2012 light vehicle production per IHS the March forecasts: North America 3.7 million vehicle units compared with 3.1 million vehicle units in the second quarter of 2011 which is a 19% increase; Europe 4.8 million vehicle units compared to 5.3 million vehicle units in the second quarter of 2011, which is a decline of 10%; on Japan and Korean 3.4 million vehicle units compared to 2.6 million vehicle units in the second quarter of 2011 which is a 31% increase. For calendar year 2012, light vehicle production for North America is 14.6 million vehicles compared to 13.1 million in 2011, which is an 11% increase. Europe 18.8 million vehicles compared to 20.2 million vehicles in 2011,…

(Operator Instructions) We’ll go first to David Leiker with Robert W. Baird & Company.

I want to start and focus on margins, and we’ve seen some stability here sequentially on the contribution margin. What do you think the pathway is going forward for the contribution margin to move back to normal levels? Timing wise and what the events are to drive that?

I think in the near term, like we’ve talked it’s going to be a little bit below the historical average as we’ve continued to add capacity and additional hiring. But we also have the benefits that some of the supply chain constraint issues that we’ve dealt with for the last couple of years are starting to subside. As we talked about in the fourth quarter, that had a negative impact of roughly 25 basis points. And it did sequentially improve and based on the current situation we feel will be through that here by the end of the second quarter. Now obviously that is contingent on whether we’ll have any new supply chain related issues that come up but based on what we know right now, that is an area that’s improving. And you will notice here in the first quarter that the purchasing cost reduction area is another benefit that’s coming through. We talked about favorable PPG in the 2009 and in the 2010 timeframe. And that was overshadowed by a lot of the supply chain issues that we’ve had. So that’s starting to come to light as the offsetting benefit to our margins right now.

So if you were to look at it, and you would – and I know it’s a challenge to do this, but just before the supply chain issues and the inefficiencies because of the high capacity utilization, do you think between the productivity and the purchase window (ph) you’re able to take cost down enough to offset your price downs?

That’s our objective. I think here in the near term it’s going to be a challenge.

Near term to find out, is it quarter or two or as a year or two?

The next few quarters.

We’ll go next to Steve Dyer with Craig-Hallum.

I am wondering Steve, if you are able to quantify how much idle capacity or maybe what drag that is on margins right now?

Well, I think when you look at our current capacity utilization it’s very high. Now we have four ongoing expansion projects that we talked about that are not up and running as of this point in time and some of them will start to come online here in the second quarter and then a couple more in the second half of the year. And specifically, we have talked about our chemistry lab expansions and that’s expected to be completed here by the end of the second quarter. Our expansion at our exterior mirror manufacturing facility is expected to be completed by the end of the second quarter. Our electronic assembly facility expansion in Holland is expected to be completed in mid-2012 and then connecting building between two of our manufacturing facilities here on our Zeeland campus is expected to be completed by the end of the year. So I think as they come online, there will be a little bit of a drag but what we’ve talked about in previous quarters is that the negative impact on margins is not expected to be as great as when we opened a new facility. Like we did back in 2006 because these projects are expansions to existing facilities and we will avoid having to add a lot of new support functions as a result.

Okay. So your PP&E is up almost $100 million year over year and then I am just trying to get a sense for obviously that is some drag on margins in that - it sounds like it’s hard to quantify.

Well, I think the depreciation in and of itself on margins, the increase on a year-over-year basis is only going to be a couple tens.

Thank you. We’ll go next to John Murphy with Bank of America, Merrill Lynch.

I just wanted to touch on the ASPs and then sort of the relative flatness there. I am just curious as you are looking at adding content, you’d assume those ASPs are going up but they’re not going up that much. Are you seeing automakers pull some features out of your mirror, opt out certain features on your mirror as more of those features are showing up in smartphones and the automakers are now focused a little bit more with the interconnection of that smartphones with their system as a push to actually putting those features into mirrors or potentially even into the center stake electronic system?

So we haven’t really seen a shift of movement from advanced electronic features in our mirrors. Directionally, we still feel the ASP will increase over time because of some of the additional feature content that we have within our product line. Now whenever you look at things within a short period of time, or within a quarter, like we have here in this particular quarter, it really boils down to our product mix. And within the first quarter, we had a higher mix of base mirrors as well as exterior mirrors. And if you recall on our last conference call, we had talked about in the fourth quarter that some of our exterior mirror unit shipments declined versus our forecast because some of our tier 1 exterior mirror customers were making inventory adjustment. And so in the first quarter that did bounce a little bit more as a result, which does impact the ASP because those have a lower average selling price. Like we’ve said, our gross margins do not vary significantly by our product lines. So the ASP’s decline is not really an indication of our impacts on margins.

I am just trying to understand, I mean, it’s really been two years where this number has been plus or minus $46. And I am just curious -- it’s not just a one quarter issue, I mean, this has been 10, 11, 12 quarters of these kinds of numbers relatively flat and historically you’ve had pretty good growth in these ASPs and we’re talking about new content like SmartBeam and RCD being – ultimately being added and I know you’re calculating numbers slightly differently than we are. But the ASP is not really the revenue per mirror. All in, it’s not really increasing. I am just trying to understand what’s going on there because it’s not just a one quarter issue?

Right. I think it depends a little bit as to what timeframe that you are looking at because over the last 3 plus years we’ve really increased from the low 40s into the mid 40s. So it has increased. Now when you look at it from any particular quarter, there certainly is some fluctuation and again that boils down to the product mix and feature content. So again, directionally we feel the ASP over time will continue to increase because of some of the higher value add content that we have and then obviously for rear camera display, the growth rate is slowing due to the overall uncertainty with the ongoing delays. So that does have a slight impact.

We’ll go next to Adam Brooks with Sidoti & Company, LLC. Adam Brooks - Sidoti & Company, LLC: Yes, real quickly wanted to take a look at inventories, crept higher again in 1Q. I know you touched on the last quarter that possibly you’d hold little higher inventories given supply chain issues. Can you talk about maybe how inventories are through the balance of the year if they get worked down or if we’re just going to stay at this kind of new norm?

Yeah, so you looked since December 31 through the first quarter, our inventory levels overall increased about 6%. The increases were primarily in the raw materials area. We do feel since we are on the tail end of our known supply chain constraint issues that those raw material inventory levels will start to decline a little bit. But we are expecting starting in the second quarter we’re going to see some slight decreases in our raw materials inventory with a potential for some additional flat decline as we progress through the year. And again, some of that is somewhat dependent on production levels and if any other supply chain constraints do arise. Adam Brooks - Sidoti & Company, LLC: And can you touch base – touch with us a little bit on exterior mirrors, domestically up only about 4%. Was there any type of inventory adjustments there? Was it mix and what really drove the underperformance in the market?

Okay. With respect to exterior mirrors domestically, if you think about it, many of the North American automakers really only have one exterior mirror where – when you look in other regions in many cases they will have one or potentially two exterior mirrors. So that has something to do with it as well.

We’ll go next to Brett Hoselton with KeyBanc.

Good morning Mark.

Good morning.

And Steve, with Connie out I thought you might relax the one question rule. But –

We wouldn’t want to disappoint Connie, no.

I am sure she is listening in. RCD, you’d provided guidance of up to 10% to 15% in the first quarter, and I didn’t hear or see any where you’ve commented on the performance in the first quarter. Do you have a – or can you give us a sense of how you performed in the first quarter?

In the first quarter, it was on the low end of the range.

Okay. And so as I think about flat for the full year, it seems to imply that you’re going to have declining RCD shipments throughout the remainder of the year, which is surprising in part because production is increasing overall which you think would just simply drive RCD shipments to begin with. And then of course, you’ve got the customer price downs that you typically faced which would suggest that in addition to lower shipments in the back half of the year, let’s say, your sales are actually going to decline maybe incrementally little bit further. And so is that the case? Are you expecting RCD shipments to actually start to decline as you move through the second, third, and fourth quarter?

We’re certainly leveling off and as we’ve talked there is a lot of uncertainty and there have not been any sourcing decisions that have been made. And so there are no new programs that’s based off from our forecast for the calendar year 2012 which has estimated take rates based on packaging assumptions and there is some fluctuation there. The other thing to keep in mind that we mentioned the last quarter is that there are some programs that are in the production.

And is there the potential for some upside in the back half of the year or is the timing just too tight and really that the year is kind of set in place at this point in time, you really have to look out into 2013 before you can see any new programs?

I think the variability, Brett, is going to be in the production forecast and that vehicle production within customers by platform with the vehicles we are on and what happened.

And then finally, how would you characterize the customers? I mean, would you kind of say they’re all just simply in a holding pattern or would you say that they’re aggressively evaluating alternatives at this point in time or do you see them actually moving in some particular direction and then just simply delayed?

Hi Brett, this is Mark. As the customers, they have always had opportunities, and in this application space there have always been multiple locations for potential rear camera display. That has not changed. There has not necessarily been an increase in difference in that area. What there has been now is continued consideration now with the delay in KTSA is one aspect of this to evaluate decisions for how they’re going to apply this package in future model.

We’ll go next to David Ling with Wells Fargo Securities.

Just a quick question on – do you have any kind of exposure to this PA-12 resin and if so, how would that affect you guys, or have you guys done any preliminary kind of analysis if there is any actual effect to Gentex?

Yeah, we are currently evaluating that potential impact to specifically Gentex but we do not currently anticipate any significant impact to the company. Now certainly that resin issue at that plant in Germany will likely impact the overall auto industry.

Got you. And then if I may follow up. When it comes to – we’re seeing your mirror delivery growth as well as production. Do you anticipate the spread between production and your mirror deliveries to maintain or is there some sort of slowdown that may occur this year because of RCD or other specific reasons?

Well, I think when you look and we’ve talked about it for the last few quarters that we have had a bit of a tailwind when you look at that delta between the vehicle production growth in the regions in which we operate versus our unit growth. And up through the third quarter of last year that was a tailwind and a lot of that was driven by strengthened Germany specifically with the luxury automakers and the strength in China. And so we talked how in the fourth quarter, this is the case in the first quarter and expected to be the case here for the near term that some of that there is weakness in Europe and there is weakness in China. So it certainly has narrowed but we don’t expect it to significantly change.

We’ll go next to Greg Halter with Great Lakes Review.

Given the decline in the share price today, down to about 22 bucks or so, and your cash position of about $4 a share. Just wondered if you could revisit for us your thoughts on the share repurchase program. I think you talked maybe the buyers around the $15 level but correct me if I am wrong on that.

Well, we have about 2 million shares remaining on our existing share repurchase plan. We previously talked about some of the criteria the company has utilized. One being that we want our share repurchases to be significantly anti-dilutive. And when you look in our historical SEC filings, you will see that in the past we started to purchase around $17. Within our anti-dilutive calculation, we do use a normalized interest rate because obviously given current interest rate environment, that certainly can change the formula. So it’s certainly something that we evaluate on an ongoing basis and it is discussed at the board. And like you said our share price has pulled back a bit. So we continue to evaluate that.

Next we’ll take a follow-up from David Leiker with Robert W. Baird.

One quick question and then a follow-up. How much of your revenue is priced in euro today?

Well, for the first quarter and for the 2012 calendar year, about 91% of our revenues are denominated in dollars. So about 9% are foreign currencies. So it’s not that significant.

That foreign currency is, I am assuming most of that, all of it is euro?

The majority of it.

And then as we look at this, you have this wait and see period that – well, I mean, does it relate to RCD? You made a comment that there haven’t really been any meaningful bookings in the orders. Has that carried over in terms of new product launches for auto-dimming mirrors – has that carried over into that space as well, or is it just RCD related?

No, that’s specific to RCD. So we haven’t seen any impact on our normal penetration and growth within the auto-dimming feature.

And then the one last quick one on the ER&D and SG&A numbers, you lowered the growth rates there. Is that just a function of what the comps are versus last year, or is there a concerted effort to lower the spending rates there?

Well, it’s two-fold. Part of it is the year-over-year comps like you mentioned because we are working on for a larger base. But we are starting to see some gains in efficiencies within the ER&D area. And we previously talked about there has been resources and time devoted within the ER&D group dealing with supply chain constraints and redesigning products. And so as that area has subsided to some degree that is generating some efficiencies for us within that group.

Now take a follow-up from Steve Dyer with Craig-Hallum.

Thanks. I was just wondering on the RCD. You talked about a couple of models or programs, stopping or end of life thing. Has anybody actually removed or taken you guys out of that feature?

Not as a result of the KTSA delays in legislation, no.

But just in general, I am still wrestling with how production is up pretty significantly year over year. In the back half really for you guys it’s down, and I don’t know if it’s strictly a mix shift, lot of downtime for the T900 that sort of thing, or if there is really kind of – some kind of concerted thing where you’re losing platforms here?

Well, I think to some degree it is mix shift in packaging and mix within vehicle production based on our forecast.

And then you guys have talked about a new product or new feature offering this year along with the design win. When would we anticipate hearing about that?

I assume you are referring to the driver assist product that we’ve talked about before?

Yes.

Yeah, we are still anticipating it would be in the first half of 2012.

We’ll take a follow-up next from Adam Brooks with Sidoti & Company, LLC. Adam Brooks - Sidoti & Company, LLC: Just wanted to touch real quickly on the first quarter revenue guidance was up 15% to 20% and production came in considerably better than expected in North America and Europe. Can you maybe give us a sense of why you came at the low end of the range? Was it really a function of your platforms not being better than expected, or is it something else in there?

Okay. When you look at it from a revenue standpoint, there is a couple things. One of them is mix. So we touched on that with the ASP. There was a higher mix of base and exterior mirrors which have a little lower per unit revenue. The other aspect to what you’re getting at is there was some lower than forecasted vehicle production volumes pertaining to some certain customers and platforms within those customers when you look at the beginning of the quarter to the end of the quarter. Adam Brooks - Sidoti & Company, LLC: And was that weakness little bit in Japan, Korea?

Yes.

We’ll go next to Brett Hoselton with KeyBanc.

Gentlemen, two follow-on questions. First just pride-downs, in the past you talked about down 3% to 5%, recently you talked about down 2% to 4%. Has there been any change in the general trend of price-downs for you?

No. So we’ve said now for like a year and a half to continue in the 2% to 4% range and that is still currently accurate. That’s the expectation for the 2012 calendar year.

And then as we think about the RCD, even after the legislation was signed for a long period of time, the thought was that NHTSA the actual implementation of the law was going to, let’s say, small cars, possibly allow them to use sensors rather than cameras and so on and so forth. And everybody was surprised in the fall of 2010 when NHTSA said hey, everybody needs to use a camera, so 100% of all vehicles. And your stock obviously went up quite significantly. My question is do you have any sense of whether NHTSA is being – is considering the possibility of maybe altering the implementation, the ruling such that they might allow small cars to be excluded in some way, shape or form?

We are not aware of that, no.

We’ll go next to a follow-up from John Murphy with Bank of America, Merrill Lynch.

Thanks for squeezing me in again here. Just on, to beat a dead horse on these RCDs a little bit. As you’re talking about your shipments being flat, do you think the RCDs for the entire industry are going to be flat, or do you see sort of the delivery through the Nape system actually increasing?

We’re not a 100% sure about Nape penetration but we are not seeing a significant shift of increased penetration within the Nape if that’s the question.

So you think the penetration of RCDs which is running in the low 20% range for the U.S. industry, for this year, you’re going to see no incremental penetration, in fact, it’s actually going to be going down because production is going up. Is that – I mean, that’s the math?

Potentially you are talking about all the various alternatives, Napes and everything else. But we are not seeing any significant increased penetration of Nape systems for rear camera display.

Okay. So what you are seeing is for the industry in aggregate though the penetration is going to have to go down – is going down this year?

With vehicle production, as we continue to improve, that certainly would be a good conclusion.

Okay. And then just lastly, as you look at this legislation, it seems like it just keeps getting delayed, delayed, delayed. And it sounds like it just keeps getting pushed back on the dock because there’s a lot of stuff going on in DC these days. Would it be better for you if these were not enacted and we just saw sort of the consumer pull of these RCDs, might that give you better content or revenue per RCD sold and better margin?

Hi, this is Mark. Hi John. I don’t know that we could make that kind of claim. We have had good road and success with the product without kids transportation safety act. With KTSA automakers in the United -- for the United States vehicles are evaluating carefully. A multi-pronged option capability to satisfy customers if this does go into law. Right now we’re being cautionary on where we are seeing this going at this point. Because of the continued delays I think it’s probably what we want to propose here and I don’t know that we could say that without this, would life be better?

And just one follow-up question. How long ago was that you sold your first RCD? I am just trying to understand the penetration curve because it sounds like we’re in the low 20s right now in the U.S. When was it with euro? Was that 3 to 5 years ago?

We started shipping in 2007.

So we are kind of 5 – we’re almost 5 years in and we’re at the low 20% range of penetration.

Yes.

We’ll next to Peter Nesvold with Jefferies. H. Peter Nesvold - Jefferies & Company, Inc.: Good morning. Now my star 1 was broken there for a while. So you got clearly lot of questions about RCD penetration and it seems like there are lot of moving parts here. I mean, you got the regulatory delays which are holding up the new platform awards. You’ve got some platform retirements, you’ve talked about that. You got the T900 downtime and sort of all these things are kind of getting thrown into the mix. Is there maybe another way of looking it if you were to look just on an apples to apples basis, products where this feature is offered today, what is the take rate today versus the take rate a year ago? Is that leveling off as well?

The take rates vary significantly depending on the customer and certain vehicle platforms. But if the question is if there is significant shift from maybe what a take rate is on a particular vehicle platform, a year ago to today there we haven’t experienced significant shift. H. Peter Nesvold - Jefferies & Company, Inc.: And then my follow-up question, historically when I look at 1Q to 2Q typically earnings EPS are roughly flat plus or minus a penny. Last year was a little bit of an anomaly. This year when I kind of build up to the guidance, I kind of get to about $0.29. And that would be about a $0.03 decline sequentially from 1Q to 2Q. Is that primarily due to downtime by T900 or is there something else that explains why sequentially EPS is down a little bit more this year seasonally than we normally would see?

Some of it is going to be the sequential decline of vehicle production in the regions in which we operate from Q1 to Q2 as well. H. Peter Nesvold - Jefferies & Company, Inc.: So what region would be influencing that so much? Is it 5% to 10%

As you think of Europe is down sequentially from Q1 to Q2. North America, even though it is strong sequentially it’s down a little bit as well as Japan and Korea. H. Peter Nesvold - Jefferies & Company, Inc.: Okay. If I go through sort of country by country, I will see industry wide production being down sequentially more in 1Q to 2Q for the industry, little bit more so this year than in historical years?

Yes.

At this time, I will turn it back to our speakers for any additional or closing remarks.

Great. Thank you for joining Mark and I on the call today for our first quarter results. And if you have any follow-up questions, you certainly can contact us and we’ll get back with you and answer your questions. Thank you.

That concludes today’s conference. Thank you for your participation.