Ladies and gentlemen, thank you for standing by and welcome to today's conference call, Gentex reports second quarter 2020 financial results. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your host today, Mr. Josh O'Berski, Director of Investor Relations. Please go ahead, sir.

Thank you. Good morning and welcome to the Gentex Corporation second quarter 2020 earnings release conference call. I am Josh O'Berski, Gentex' Director of Investor Relations and I am joined today 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 at www.gentex.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 any 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 2020 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. Before we begin the formal portion of the call, we want to recognize the passing of our analysts, David Leiker from Baird. David Leiker covered Gentex for over 20 years and had a thorough understanding of our products, the uniqueness of our company and an in-depth knowledge of the automotive industry. But beyond that, David was a kind, thoughtful man who was dedicated to his family and community. His humor and friendship will be greatly missed by our team. We would like to express our condolences to his wife and their boys and to all of his friends and coworkers on the Baird team Now I will turn the call over to Steve Downing, who will get us started today. Steve?

Thank you Josh. For the second quarter of 2020, the company reported net sales of $229.9 million, which was a decline of 51% compared to net sales of $468.7 million in the second quarter of 2019. The impact of the COVID-19 pandemic created extended shutdowns in the automotive industry for much of the quarter in various parts of Asia, Europe and North America. Global light vehicle production ended the second quarter of 2020 down 45% when compared to the second quarter of 2019. However, the majority of the light vehicle production declines occurred in Europe, which experienced a 62% quarter-over-quarter reduction and in North America, which experienced a 69% quarter-over-quarter reduction. The impact of COVID-19, government enacted shutdowns in certain countries and states and the resultant economic impact led to the most severe change in demand in a very short period of time that Gentex has ever experienced. In fact, our forecast in early March for the second quarter of 2020 was estimating a 6% growth rate. A deeper dive into the production environment provides compelling information about what happened in the quarter. For instance, the China market expanded by 9% in the second quarter. However, our historical revenue from China has been less than 10% of sales. So this provided very little help in offsetting the reductions in our primary markets. The company's primary markets include North America, Europe, Japan and Korea. And together, these regions were down approximately 59% for the second quarter of 2020. While these production numbers are incredibly sobering, the silver lining is that we are continuing to find ways to significantly outperform our primary underlying markets. For the second quarter of 2020, the gross margin was 19.1% compared to a gross margin of 37.7% for the second quarter of 2019. Gross margin declined on…

Thank you Steve. Automotive net sales in the second quarter were $222.1 million compared with automotive net sales of $456.6 million in the second quarter of 2019. The 51% quarter-over-quarter decrease in automotive sales was driven by a 51% quarter-over-quarter decrease in interior auto dimming mirror unit shipments as a result of the overall 45% decrease in global light vehicle production and more severe decreases in Europe and North America, stemming from the COVID-19 pandemic. Other net sales in the second quarter of 2020, which includes dimmable aircraft windows and fire protection products, were $7.9 million, a decrease of 35% compared to other net sales of $12.1 million in the second quarter of 2019. Balance sheet update. In terms of the balance sheet, the company maintained it's very strong liquidity position despite the 51% reduction in sales and correspondent reduction in cash flows. I will highlight a few key balance sheet items as of June 30 as compared to December 31 of 2019. Cash and cash equivalents increased to $343.8 million, up from $296.3 million primarily due to year-to-date draw on the line of credit in the first quarter of 2020. Short term investments were $70 million, down from $140.4 million. The company had approximately $70 million of investment maturities during the second quarter of 2020. Long term investments were $171.8 million, up from $139.9 million. Long term investments include FDIC insured CDs, treasury notes as well as corporate and municipal debt. The portfolio continues to be well-positioned with over 90% of the corporate and municipal holdings invested in A-rated or better institutions. Accounts receivable declined to $170.6 million from $235.4 million. The reduction in AR was due to the significant reduction in sales during the second quarter. As of June 30, all of the company's Tier 1 and OEM…

Thank you Kevin. In the second quarter of 2020, there were 33 total launches of our interior and exterior auto dimming mirrors and electronic features. Of these new launches, over 60% contained advanced features. As with the previous quarter, HomeLink and Full Display Mirror led the way for the advanced feature launches. During the second quarter of 2020, the company launched eight new nameplates with Full Display Mirror. We are currently shipping on 46 vehicle nameplates for this exciting product. The eight new nameplates continue to drive penetration into new segments and vehicle types. The launches during the quarter are as follows. The Buick Encore GX, Chevy Tahoe and Suburban, the GMC Acadia, Yukon and Yukon XL as well as the Toyota Highlander and the Toyota Harrier. The Full Display Mirror for the Toyota Harrier is the first FDM to launch with digital video recording capability. This new system is launching in the Japan market and combines the superior functionality of the FDM with the added capability to record video from the rear facing and forward facing cameras simultaneously. Per OEM request, the data is stored to an SD storage card. Our integrated solution provides customers and consumers with the features they want while allowing the OEM to control the integration and execution in the vehicle. During CES 2020, the DVR mirror was one of the feature products that we showcased in our booth. And we are excited to now have it in volume production. For the second half of 2020, we are forecasting approximately eight new vehicle nameplate launches for Full Display Mirror. Even with the unique market situation that we all have been facing, it's clear that our OEM customers and consumers value the benefits that a Full Display Mirror system provides to enhance route visibility and driver safety. Our last product update for today is about the integrated toll module. Currently we are shipping ITM on three nameplates in the Audi lineup, the e-tron, the e-tron Sportback and the Q7. In late June of 2020, Audi did a press release on the 2021 Audi Q5 in which they introduced it will also implement ITM as well. We continue to see positive momentum with this technology and we are optimistic that it will continue to rollout over the coming years. As we look to the second half of the year, we realize that many of our customers' expected launch timing of new vehicles may be affected by the pandemic. However, we remain optimistic because we continue to see strong demand for our latest products, like FDM and ITM and some of the other products that we have shown at CES. I will now hand the call back over to Steve for updated guidance and closing remarks.

Thanks Neil. The company's current forecast for light vehicle production for the second half and full year of 2020 is based on the mid-July 2020 IHS market forecast for light vehicle production in North America, Europe, Japan, Korea and China. Based on this information, light vehicle production in the company's primary regions are expected to decline approximately 7% for the second half of 2020 and 20% for the full year when compared to the same periods in 2019. Based on this light vehicle production forecast and the structural changes that the company has made over the last several months, the company is providing guidance estimates for the second half of 2020 as opposed to only updating full year guidance. Given the magnitude of changes this year, we believe this is a more accurate representation of our new cost structure and financial performance, not only for the remainder of 2020, but it should also provide more visibility as we head into 2021. Our current estimate is that net sales for the second half of 2020 will be between $865 million and $915 million. Based on these sales levels, our updated cost structure and currently forecasted product mix for the second half of 2020, we are currently forecasting a gross margin in the 36% to 37% range for the second half of the year. In a normal environment, gross margins are highly dependent upon product mix, our ability to leverage overhead costs and purchasing cost reductions to help offset annual customer price reductions. In 2020, we are also dealing with the significantly smaller vehicle production environment that is resulting in sales being slightly lower in the second half of the year versus 2019. Historically sales declines have resulted in gross margin contraction for the company. However, given our cost control initiatives, we…

[Operator Instructions]. Our first question comes from James Picariello with KeyBanc Capital Markets. Your line is now open.

Hi. Good morning guys.

Good morning James.

Good morning.

Just to start on the structural cost outs here. What's the timing of the remaining actions left? And when do you expect to achieve that full $35 million run rate in savings?

Yes. Well, all of those actions and those numbers are completed. So literally those, we will start running them now through they will begin at the beginning of the third quarter. So [indiscernible] at the start of Q3 and should be basically half of that should be experienced in the second half of the year. So the $35 million run rate is an annualized number, but we would expect to see about half of that during Q3 and Q4.

And would that show up all in SG&A or will some also hit D&A?

No. About 60% of it is actually in the overhead or the cost of goods sold area. The rest of it will be [indiscernible] in SG&A. You still there?

Yes. I am here.

Okay. Sorry. Did you hear that?

I missed all of that, sorry.

Yes. So of the savings of the $35 million, about 60% of it is in the cost of goods sold area and not fixed overhead reductions. And then the rest of it is split between research and development and SG&A areas, so OpEx.

Got it. And then the gross margins for the second half, I would say clearly there is some positive mix baked in. Is that mainly driven by FDM and HomeLink? Is there any benefit tied to maybe some visibility within exterior mirrors, which is clear and an obvious margin benefit for you guys in terms of the mix?

Yes. When you look at that, we will obviously continue to expect FDM to continue to grow, which is going to help offset some of the headwinds we are seeing in lower vehicle production. With a lower vehicle production, what you would expect to see is some drop off in overall IEC growth rate. Obviously, is that's base mirrors, then you would expect there would be a little bit of a margin tailwind associated with the stronger mix. But one of the things that we are also looking at is, we are expecting that the other portions of our business, so in aerospace, especially is going to definitely take a hit. And so, what we are seeing is that the strength in automotive and ITM, FDM and really consistency in OEC is going to help offset some of those other headwinds.

Got it. And maybe just one housekeeping one. On the Driver Assist and SmartBeam headwind, you guys kind of talked maybe it was two quarters ago now, you talked about what the headwind looks like for this year and even into next year. How has that changed now with the pandemic?

I would say it's about online and that business basically changed, the pandemic impact basically impacted that the same as it did the rest of the business. So in terms of a headwind, it's pretty similar to what we are expecting for the full year. It's right in line. Obviously, going forward, the question is, as we are winding down those four programs for Driver Assist, are they going to be able to launch on time to finish off those programs with their next supplier. And that will probably take later this year to early next year to see to make sure that stays on course. But we don't expect any delays at this point.

Is there any chance of a reunion with Mobileye now that both Ford and Mobileye are working together going forward?

No. I mean we quoted that product, Ford asked us to quote that project. We declined to engage. When we look at the margin profile of that business in comparison to the business case of what is going to cost to launch and from an R&D standpoint, we just couldn't make the numbers work. It did not meet our business needs. And so we voluntarily walked away from that business and I think our strategy is to continue to say no to those type of projects.

Got it. Thanks guys.

Thank you James.

Our next question comes from John Murphy with Bank of America. Your line is now open.

Good morning guys. This is Aileen Smith, on for John.

Good morning.

Thank you very much for the guidance on the second half. It's really helpful. As we think about ways to COVID outbreaks across the country and possible incremental production shutdowns, has this been contemplated in your outlook at all or any level of conservatism you are applying for possible disruptions of the supply base?

On the supply base side, yes. One of things we have been watching, the good news over the last couple of years, there has been a lot of supply concerns, whether as part shortages or geopolitical issues, you name it. So I mean we have become pretty well versed in making sure we derisk the supply base as best we can anyway. When you talk about it from a production standpoint, though, like would this affect one of our customers, whether it be a plant shutdown or vehicle production slowdown, that's one that's really hard to predict. Obviously, we tend to take a pretty conservative approach when we look at IHS estimates. So are not overly aggressive here. We always assume that there is a little bit of a bias towards the downside when you are going through an issue and we try to reflect that in the numbers that we posted for guidance in the second half.

Great. That's very helpful. And as you think about the second half in production levels that are still likely going to be lower on a year-over-year basis, do you have any expectations for decremental margins and how they will stack up versus the second quarter, particularly in light of your cost containment actions that you discussed? And then as get on the other side of the crisis, is there any idea about how we should be thinking about incremental margins?

Yes. Well, if you look at decremental first, I mean really if you take the midpoint of that guidance you are seeing the 50 to 60 basis point on a year-over-year basis in the second half is what that would indicate. So we would see the slight sales decline driving a slight decremental margin. But honestly 50 to 60 basis points is really more about product mix and overall sales levels, our ability to cover overhead costs at the sales levels. So we feel really good about where we are at right now. We are not expecting, unless something really drastic happens to the revenue, the Q2 margin is really an anomaly because there was not enough sales to even come close to covering the fixed overhead portion of the business. so we don't think that's anywhere in the vocabulary of what we are expecting for second half. Literally that 36% to 37% margin that we guided to for the second half, we feel pretty confident about as long as sales are within your 5% or 10% of what we guided.

Okay. Great. And last question. You cited customer price reductions as an additional margin headwind in the quarter. I think you have commented in the past that those customer price reductions are typically seasonally toughest in the first quarter. Was there any spillover effect into the second quarter or perhaps OEMs getting tougher on cost as the macroenvironment collapsed? Or was it pretty consistent with what you have seen seasonally?

Great question. They are pretty consistent. It's pretty much weighted towards the first half of the year. But when you compare it to, when we are looking at Q-over-Q, so second quarter last year, second quarter this year, we know that on average our pricing is down 2% to 2.5% and we haven't seen anything that's higher weighted at this point versus other years. So it's been pretty consistent.

And one thing I will point, the reason why you would see a bigger impact in Q2 is many of our Asian customers are on a traditional fiscal year, which would be April 1 price downs for those. So if you look at the business during Q2, North America basically shutdown completely, Europe was the pretty much nonexistent. A lot of our business was in Japan and Korea and in places where you have little later than January 1 price down to take effect. So those customers that were shipping, most of them were weighted towards an April 1 price down date.

Perfect. That's very helpful. Thanks for taking the questions.

Our next question comes from David Kelley with Jefferies. Your line is now open.

Hi. Good morning guys. Thanks for taking my questions.

Good morning.

I guess jumping back to last quarter, you talked about shipment timing and the impact inventory work down can have early in a downturn. I was curious if you could provide some color on the Q2 impact you saw from that inventory work down? And may be how you are seeing channel inventories stacking up today?

Yes. Well, at the end of Q1, it was interesting, you know the actual shutdowns had started right at the very end of Q1. We were continuing to ship. So we definitely think that a little bit of sales that normally would have happened in Q2 happened at the very end of Q1. And so what we were expecting and hoping for and we will see as we progress through the quarter is that you would expect to see some shipments at the early part of Q3 start to ramp-up to help catch up with what did not happen obviously throughout Q2. So what we do know for sure is that OEM inventory levels are pretty low, especially in GM's case. If you look at between the UAW strike at the end of the first quarter and the impact that had on their overall inventory levels and then the shutdowns, we feel like there is going to be a step-up in the GM business for a while based on them needing to get inventory back on the dealer lot. So we are hopeful that that helps drive sales in Q3. The bigger question for us and the one that I think is a million dollar question obviously is how long does that last and what is the long term economic impact to a consumer and how the consumers handle Q4 and what is the overall sales and SAR levels going to be in the second half of the quarter of Q3 but then also into Q4 and next year. That one is going to be tougher one. We think Q3 is going to be solid, primarily just because of inventory levels being where they are at and needing to play catch-up. But then the question is, the longer term economic impact of these shutdowns and of the pandemic.

Okay. That's great. And maybe on that playing catch up point. Do you see any risk, whether it's from the supply chain standpoint or sourcing risk if we have to and seem to be ramping up pretty aggressively here in North America?

Yes. There is definitely, we definitely see some suppliers that are trying to get employees back in the buildings, trying to follow social distancing guidelines. Each state kind of has their own requirements of what that looks like. So trying to get the same number of people back into the same footprint is difficult for certain of our supply base and for ourselves at times as well. So what we have been doing though is, throughout this entire shutdown period, trying to stay in communication with the supply base to make sure when this does fire back up again, what is their confidence level. What percentage of their employees are coming in and reporting and working. What percent of capacity are they at? And so we feel like we have done the best we can to make sure we have mitigated those risks. And any place we do have concerns, we are aware of that and watching those suppliers carefully.

Okay. Perfect. Thank you. And then last one for me and I will pass along. Just curious if you could talk about the gross margin cadence throughout the quarter? We are hoping to get a sense of run rate in June. And then as we think about the second half, any thoughts on sequential ramp? Will gross margin be more Q4 weighted? Just curious about cadence go forward as well.

Well, I think first I will jump in on Q2 and say that April and May and when you look at sales in Q2, April and May were basically nonexistent other than some of our Asian customers. In June, we started to see a pickup in sales and margin. Margins in the month of June were far better than they were in April and May. Much more, not quite to the level that we just gave guidance, but much closer to. And that's what gives us the confidence when we give that guidance in the second half of the year, that 36% to 37%. We expect sales to be slightly better than they were in the month of June and should have a positive impact on gross margins. So I wouldn't expect Q3 to be drastically different than Q4. We think both quarters really should be in that range that we gave for the gross margin guidance.

All right. Perfect. Thanks again.

Thank you.

Our next question comes from Josh Nichols with B. Riley. Your line is now open.

Yes. Thanks for taking my question. I did wan to ask, could you comment a little bit about what you are seeing as far as the penetration rates for the company is, like dimmable glass and interior and exterior mirrors, particularly in North America? And any commentary as far as the mix of vehicles that are being sold today, if you are seeing more or less that may have these like higher-end features that typically have these add-ons like dimmable glass?

Yes. Penetration rates have actually held up, I mean really well. The bigger challenge, so we haven't seen content change for any of our products. And we haven't heard anything from our customers that would imply that they are going to change how we are packaged or that our penetration rates will change through this. Whether it's good or bad, we are not entirely sure but if you actually look at the segmentation during Q2 and the forecast throughout the rest of this year, it was pretty evenly spread across all segments. In other words, it's not like D and E cars continue to sell and A, B and C's didn't. Literally, the production happened across the board across all segments. So if you look at those down rates, there is a little bit of variability but for the most part it was pretty much evenly spread across all the regions at those rates and across all segments in those regions. So as of right now, we don't expect anything to change in terms of our mix or overall penetration rates in our primary markets.

And one thing to add is, Neil's commentary about eight new launches with FDM, very heavy in the GM lineup. They are very strong vehicles. And as they launch and build back that inventory, like Steve mentioned, you would expect that there may be a little bit of overweight volume on the advanced features in the quarter.

Great. And then on that question, like how are you looking in terms of inventory level at the company's large customers right now? And do you feel comfortable with where you guys stand right now for this reramp that we are seen take place at lot of auto manufacturers in the U.S. and also in Europe?

Josh, do you mean our inventory at the OEM or the OEM's inventory at dealers?

Both. I guess, how are the OEM's inventory right now for your products? And tow, are you comfortable with where you stand to be able to fit the needs of the reramp as that accelerates in the coming months?

Yes. On our ability to meet demand from our customers, we feel very good about that. I mean the hard part about Q2 is that given our commitment to automation and what we have in terms of capital equipment, it's really hard to scale that in a quick downturn. That's really why you saw the massive decremental margin in Q2. However, it also does give us the upside of being able to respond to demand if that ramps quickly. So obviously we would need people to help us build those parts. But at the same time, the structure, the infrastructure, the capital equipment is here and ready to go. So we don't feel concerned about a ramp up and not be able to meet demand for our customers. In terms of where our customers themselves are, I think the good news of this, if there is any, is that vehicle inventory levels are pretty low on a historical level, especially with certain OEMs. And so that really should set us up well, at least in Q3 as they look to rebuild those inventory levels at the dealerships. That should really help bolster our sales in the quarter.

Great. Thanks guys.

Thank you.

Thank you. Our next question comes from Ryan Brinkman with JPMorgan. Your line is now open.

Hi. Good morning. This is Binh Phung, on for Ryan Brinkman and thank you for taking the questions.

Yes, Binh Phung.

I just have two questions. One is, of the 6% reduction in the OpEx in the second quarter from wages and discretionary spending, how much of that will you expect to permanently eliminate from the cost structure? And thinking about when the spending starts again, how should we think about spreading those numbers over the next few quarter? And I have one more question. Thank you.

Yes. So on the wage reductions, really that $35 million savings on an annual basis, about 40% of it is coming through the operating expense category. So if you were to take the half of that for the back half of the year, you would be able to get to that number. And then the discretionary spending, I mean things like travel are still impaired severely, means there is shutdowns where our travel is limited severely. So we would expect that that to come back slowly over time. But as long as there is still the pandemic, travel is going to be impacted. And then things like other discretionary items, we are keeping a close lid on as we continue to ramp sales and things like that. But we continue to fund program related costs and things needed to continue our launch and development of programs. So we are taking a much closer look at that but I would expect it's still going to be depressed expense wise over the next 12 to 18 months.

Thank you. And a follow-up to that, when is spending coming back, when is the CapEx slowly comes back, how should we think about Q3, Q4 and then the first two quarters of next year?

Yes. I think we had given guidance for that $60 million to $70 million on an annual basis. We spent about $30 million through the first six months. We have a couple of projects that were in process and those are continuing throughout the year. It's going to be pretty even flow throughout the back half of the year. Next year, I would expect it to be, it really depends on how light vehicle production ramps. But we do have, from an equipment perspective, capacity that's obviously underutilized right now. So we feel pretty good that it will probably be in a little bit lower capital expenditure budget going into 2021 as well, just given the fact that the light vehicle production market has dropped considerably. Things that would change that, that we have considered considerable growth in FDM that we don't have capacity for and some of the other advanced projects.

I want to be clear, we would expect, if the business continues to grow into 2021, it will be higher than the CapEx spend was in 2020. So $60 million to $70 million for this year, $30 million to $40 million in the second half is what our CapEx guidance is for Q3 and Q4. We would expect if the business responds the way we hope it will in 2021, that it would definitely be higher than that $60 million to $70 million range for this year, but not all the way back to that $100 million dollars range we are running at or guided to last year.

Got it. That's really helpful. And just my last question relating to the large dimmable sunroofs. What is the progress on the large dimmable sunroof? I know that you showcased the product back in at CES earlier this year. And so far we are only seeing this product on vehicles --

Yes. So we are continuing, Neil's team is continuing to focus on the development aspects of what that product looks like. A lot of testing. There is a tremendous amount of work that have taken place and will need to continue to take place, especially that allow us to give samples and prototypes, proof of concepts to our customer. So we are really looking at kind of a 24 to 36 month window before we probably will have, hopefully get to the point where we have a program announcement or at least feel confident enough to take that next step with an OEM customer.

Great. Thank you. That's all for me. Thank you so much.

Appreciate it. Thank you.

Our next question comes from Mark Delaney with Goldman Sachs. Your line is now open.

Yes. Good morning and thanks very much for taking the questions. My first question is on the new 2020 guidance for revenue that's implied based on the 2H guidance and 2Q results. And I think if I put that together, the new 2020 revenue outlook is a bit below what the company had been expecting as of last quarter and the IHS production numbers that the company is using, I think, are pretty similar, down about 20%. So I am hoping to understand what's the bridge to the new implied 2020 revenue outlook compared to the prior view?

Yes. Well, it is slightly lower than what our previous guidance was. But you have to remember, in April 24 when we posted Q1, the pandemic was just starting. We were all expecting that the state shutdowns would be over by mid-April. That obviously continued into May and those rolling shutdowns happened not only in North America but then in Europe. And if you look at production estimates then versus what they changed to now, it's drastically lower than what it was then. And that's what the primary driver of the change in revenue guidance. Actually, our revenue in the second half has held up very well in comparison to what our initial forecast was for the second half of the year. The majority of the impact that you are seeing was all actuals in Q2 and it was really driven by the extended state shutdowns and production shutdowns at our customers.

Okay. That's helpful. An my follow-up was to understand qualitatively what the operating environment is in terms of engaging in new products with your customers? And is the company being able to still complete projects and win bookings in a more virtual environment? Or is there anything that's taking place there that's still problematic? Thank you.

No. That's actually a great question. It's probably one of the harder things to do with how do you bring up, especially given what we sell and the type of products that we tend to introduce to our customers. It's really difficult to introduce new technology in a virtual environment. Obviously, the other factor is that many of our customers are dealing with cost and pricing pressure issues and trying the work from home issues, so it has definitely put a slowdown in terms of how you can ramp new product concepts with your customer. Certainly you are not dropping off proof of concepts and let them drive vehicles the same way. So that's probably been the most difficult part of this is looking out three to five years how do you make sure that you keep an eye on growth rates and new technology that will help propel the company in that three to five year window. And so that one is one we are still working through. And so there is a lot of creative ideas. Fortunately, in some of our markets, like Neil mentioned, the Toyota Harrier DVR launch in Japan, Japan continued to work through a lot of the pandemic. And so we are able to, our team in Japan was able to do a great job continuing to push our technology with that customer and fortunately that's got a lot of excitement at Toyota for new products and new product concepts of what we can do and not only with mirrors, but literally with our camera systems and digital drive recorder. So we are excited about that. There is no doubt though that with certain customers, it's more difficult now to introduce new products. The fortunate part is, if there is anything good in news in there, it's same for everybody. All suppliers are struggling with how do you engage with the customer working remotely or through some of the job eliminations that have been announced for certain of the OEMs.

Thank you very much.

Thanks Mark.

Our next question comes from David Whiston with MorningStar. Your line is now open.

Hi. Good morning. First on the $35 million cuts. I was just curious how much of that is just straight byproduct of headcount reduction? What percent of headcount fall in due to these cuts?

100%.

So it's all people, okay.

Yes.

Okay. And on the supply chain, I guess two questions there. Going upstream for you, is there any weakness in getting, any shortages in terms of getting raw materials, electronics? And then do any Tier 2 or Tier 3 players have working capital issue with the ramp up coming now?

Right now, we are not seeing any issue in terms of supply chain making sure we get enough volume. The one nice thing, I mean if you think about where we were 18 months ago, automotive had grown quite a bit. There was a lot of constrained suppliers in terms of capacity. Given the slowdown and the lower volumes, we feel pretty good about not having that issue for the foreseeable future in terms of bumping up against capacity issues and the supply base. Sorry, Dave, there was a second part of that?

I was just asking about the availability of things and then also do any of your players have a working capital issue ramping as the OEMs are ramping up?

Well, that one is probably the most concerning, quite honestly. As you look at the supply base, automotive is pretty notorious for having pretty thin margin profile. So as you take 20%, 30%, 40% of the volume out of the game, what does their decremental margins look like, what is their ability to maintain profitability and stay liquid through this. So that's one that our team, our purchasing team continues to look at as one of the key factors that they have been better at over the last several years is understanding the overall financial health of the supply base. So that's one we will continue to look at. We do have, we do know that the suppliers that have issues with those and it's something we continue to watch and monitor to make sure that they are okay financially, not just their ability to produce parts but ability to stay solvent.

Thanks. And then going downstream from you guys at the automaker level, are there any disruptions at your customers' plants from either part shortages unrelated to Gentex or worker absenteeism that's preventing Gentex from making shipments to your customers?

Nothing I would that is preventing us from making shipments. Early in the process, there were definitely some issues around other suppliers, based on where they were, government based shutdowns, you may not able to get parts and it caused some automaker some problems. So that definitely probably did impact the quarter, especially in Q2. We are not anticipating that being a huge problem going forward. The supply base for the most part is pretty much up and operational and most of our suppliers are running at pretty high levels, in terms of their efficiency versus where they were pre-pandemic. So we don't feel like there is a huge risk factor to that right now. If the strength continues to happen through Q3 and Q4, obviously that could be a problem as it relates to availability of labor but then also availability of components at our customers.

Okay. Thanks.

Thanks David. Thanks very much David.

I am showing no further questions in queue at this time. I would like to turn the call back to Mr. O'Berski for closing remarks.

Thank you everyone for your time and attention today. We appreciate the questions in the call and we hope everyone has a great weekend.

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect.