Good day, and thank you for standing by. Welcome to the Gentex Second Quarter 2021 Financial Results Conference Call. At this time, all participant lines are in listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today’s conference may be recorded. [Operator Instructions] I’d now like to hand the conference over to Josh O'Berski, Director of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to the Gentex Corporation second quarter 2021 earnings release conference call. I am Josh O'Berski, Gentex Director of Investor Relations and I am joined by Steve Downing, President and CEO; Neil Boehm, Vice President of Engineering and CTO; and Kevin Nash, Vice President of Finance and CFO. This call is live on the Internet and can be reached by going to the Gentex website at ir.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 2021 Financial Results press release from earlier this morning, and as always, shown on the Gentex website. Your participation in this conference call implies consent to these terms. Now, I’ll turn the call over to Steve Downing, who’ll get us started today.

Thank you, Josh. For the second quarter of 2021, the company reported net sales of $428 million, which was an increase of 86%, compared to net sales of $229.9 million in the second quarter of 2020. On a quarter-over-quarter basis, global light vehicle production in the company’s primary regions of Europe, North America, Japan, Korea and China increased 36% when compared to the COVID-19 impacted second quarter of 2020. However, when compared to the mid-April 2021 IHS Markit light vehicle production forecast in the company’s primary regions, actual light vehicle production in the second quarter of 2021 declined approximately 1.1 million units or 7% as a result of industry-wide part shortages and global supply chain constraints. The largest deviation from the forecasted production within the quarter came in North America, which saw an actual light vehicle production decline in excess of 15% compared to the mid-April 2021 forecast. The reduction in light vehicle production compared to forecast was led by certain OEM customers that deploy high levels of the company’s product content, including both interior and exterior auto-dimming mirrors and other electronic features such as Full Display Mirror and HomeLink. In total, the impact from the shortfall in vehicle production compared to forecast, led to an estimated mirror unit shipment reduction of approximately 2 million units versus the company’s beginning of the quarter expectations. While we are very pleased with the net sales increase of 86% over the COVID-19 impacted second quarter of last year, we are still experiencing tremendous volatility and order cancellations as our customers continue to deal with the impact of the ongoing part shortages that are affecting our industry. The initial forecast for the second quarter was for sales to be one of the largest quarters in the company’s history, but the continual changes in releases…

Thank you, Steve. Automotive net sales for the second quarter of 2021 were $420.6 million, an 89% increase, compared to $222.1 million for the second quarter of 2020. Auto-dimming mirror unit shipments increased 98% during the quarter, highlighted by 140% growth in exterior-mirror unit shipments, compared to the second quarter of 2020. Other net sales in the second quarter of 2021 were $7.4 million, a decrease of 6%, compared to $7.9 million in the second quarter of 2020. Within that, fire protection sales increased 31% quarter-over-quarter, while dimmable aircraft window sales decreased by 65% comparatively. The company expects that dimmable aircraft window sales will continue to be impacted until there is a more meaningful recovery of the aerospace industry and the Boeing 787 aircraft production levels. During the second quarter of 2021, the company repurchased 3.4 million shares of its common stock for a total of $115.9 million. The company intends to continue to repurchase additional shares of its common stock in the future in support of the previously disclosed capital allocation strategy, but share repurchases may vary from time-to-time and we’ll take into account macroeconomic issues, including the impact of the COVID-19 pandemic, market trends and other factors that the company deems appropriate. I’ll now highlight some key balance sheet items as of June 30, 2021, as compared to December 31, 2020. Cash and cash equivalents decreased to $353 million, down from $423.4 million, primarily due to cash flow from operations that was more than offset by share repurchases, dividend payments and capital expenditures. Short-term investments were $13.8 million, down from $27.2 million and long-term investments were $193 million -- $193.4 million, up from $162 million. Accounts receivable decreased to $234.1 million from $284.9 million due to the decline in sales. Inventories were $263.9 million, up from $226.3 million. Accounts payable increased $101.3 million, up from $84.8 million, primarily due to month-end payment timing and accrued liabilities were $95.1 million, up from $92.9 million and increases were due to higher accrued salaries and wages, as well as accrued income taxes. Now quickly looking at the cash flow statement. Second quarter 2021 cash flow from operations was $62.4 million, up from $39.2 million in the second quarter of last year. The increase in operating cash flow was driven by increases in net income, but partially offset by fluctuations in working capital. Capital expenditures for the second quarter were $18.8 million, compared with $13.3 million for the second quarter of 2020 and year-to-date capital expenditures were $31.4 million for 2021 and compared to capital expenditures of $28.8 million in 2020. And depreciation and amortization for the second quarter was $25.9 million, compared with $27.1 million in the second quarter of 2020 and year-to-date was $51.5 million, compared to D&A of -- for 2020 of $53.4 million. I’ll now hand the call over to Neil for a product update.

Thank you, Kevin. In the second quarter of 2021, there were 29 total launches of our interior and exterior auto-dimming mirrors and electronic features. Of these new launches 45% contained advanced features with Full Display Mirror leading the way. Now for some updates on Full Display Mirror. We’re excited to announce that during the second quarter of 2021, the company began shipping Full Display Mirror to our ninth OEM Maserati. The Maserati MC20 now has Full Display Mirror and we’re excited to continue to grow this product across other vehicles in the future. Also during the second quarter of 2021, we began shipping Full Display Mirror on the Jaguar XF and the Buick Envision Plus for the China market. We are now shipping Full Display Mirror on 56 vehicle nameplates and are forecasting at least 10 new vehicle nameplate launches for the second half of 2021. It’s been a few quarters since we provided an update on the number of OEM customers that have awarded us full display mirror programs. As of the end of the second quarter of 2021, we have been awarded Full Display Mirror programs with 14 OEMs and we’ll be announcing OEM 10 and 11 in the second half of this year. OEMs 12 through 14 will be launching and bringing to market the Full Display Mirror product over the next two and a half years. Even with the unique market situation we’ve been off facing, it’s clear that our OEM customers and consumers value the benefits that a Full Display Mirror system provides to enhance rearward visibility and driver safety. In summary, even with the current challenges our industry is facing, our product launches, product rollouts and new technology developments are continuing to help propel the company forward and we’re excited to see the impact of these over the coming years. I’ll now hand the call back over to Steve for guidance and closing remarks.

Thanks, Neil. The company’s current forecasts for light vehicle production for the second half of 2021 and full year’s 2021 and 2022 are based on the mid-July 2021 IHS Markit forecasts for light vehicle production in North America, Europe, Japan Korea and China. Light vehicle production in the company’s primary markets is forecasted by IHS Markit to decrease 4% for the second half of 2021 versus last year. This forecast from IHS Markit assumes that many of the supply chain related issues that began at the end of the first quarter of 2021 and continued throughout the second quarter of 2021 will improve during the second half of the year. While the vehicle production volumes are reduction versus second half of 2020, this forecast represents a 9% increase in light vehicle production when compared to the first half of 2021. Based on this light vehicle production forecast, the company is providing guidance estimates for the second half of 2021. Given the significant changes in vehicle production volumes in the second quarter and the associated impact on the company’s actual results and the challenges in our current operating environment driven by supply chain and freight issues, the company believes that guidance specific to the second half of the year is more accurate and indicative of actual performance for the remainder of the year than only providing full year 2021 updated guidance. The company also believes that this approach may help provide a more accurate projection for calendar year 2022 performance. The company’s current estimate is that net sales for the second half of 2021 will be between $970 million and $1.07 billion. This revenue forecast is based on the IHS Markit light vehicle production forecast for the second half of 2021, but also includes manual adjustments to the company’s forecasts as…

[Operator Instructions] Our first question comes from James Picariello with KeyBanc Capital Markets.

Hey. Good morning, guys.

Good morning James.

Good morning James.

Can you start by, maybe just quantify the actual semiconductor and premium freight costs in the quarter? I believe the number was $6 million or so last -- in the last quarter. So curious how that trended? And then can you share, which you now have baked for the second half, does the cadence alleviate by the fourth quarter? And how should we start thinking about these extraneous costs persisting next year within the cadence for the second half? Thanks.

Sure. So, the -- what we’ve seen in the first half is a little lower than what we’re expecting in the second half. But if you look at kind of what the premium is on electronics right now versus what it would have been last year. On the first half of this year probably 50 basis points to 100 basis points, the second half we’re expecting to be 100 basis points to 150 basis points and that’s talking gross margin impact. The freight is right around 100 basis points on the gross margin. And just to point that out that’s all incoming freight costs, which is what impacts the gross margin line. There’s also expedited freight costs on the outgoing, which affect our sales expense.

Okay. Got it. And then as we think about next year then is this second half gross margin guidance of 37.5% to 38.5%, is that a good starting point in terms of thinking about gross margins for next year?

Yeah. We think that’s pretty much probably going to be in line. The only reason why we say that it’s in a very volatile environment when it comes to pricing on the semiconductor side, but we believe most of the negative impacts will be hitting in the second half of this year. So we don’t expect additional starting in 2022 at this point.

Okay. And just a follow-on to that, I mean, what are the levers that could swing that one way or the other in terms of, you’ll have your annual price reductions with your OEM customers at the start of the year and then you’ll be what negotiating on the -- on your supply -- on your trip supply base to get concessions there? Just so how should we be thinking about the dynamics?

Yeah. I think that big -- I mean the single biggest dynamic and the single biggest negative impact this quarter was just the lost sales. So the – really, the thing we’re watching the most is unfortunately somewhat out of our control. But that is what other Tier 1 suppliers are struggling on their causing OEM downtime issues. If the OEMs are up and running based on our forecasts, we’re going to be in great shape throughout the second half and heading into next year. So that would be the single biggest thing to watch as how close we come to our revenue estimates. From there, it’s about the factors that you mentioned, right? How to length -- lengthening of time to get parts into the space, how do we get them into our facilities and then at what price point? So, if we can handle that first half and sales actually hit and we feel pretty confident our ability to manage the expenses around the price increases and the freight expense.

Got it. Thanks, guys.

Thank you.

Thanks, James.

Our next question comes from Luke Junk with Baird.

Good morning.

Good morning. So first question I want to ask is on China, so you said that, China sales has increased significantly in both the first quarter and second quarter now. So it does seem like we are seeing some sustained momentum there. While I know it was a negative for mix this quarter. If we take a step back and look at the company’s strategic positioning in China, wondering how you’re feeling about that today versus, say, a year or two ago or do you feel like you’re on the front foot in China now?

Yeah. See, I would say, we’re definitely making great progress in the China market. If you back up five years ago, I’d say, we were a little bit behind in the China market versus where we should have been. And so in the last few years, especially we’ve made tremendous progress. So these are, what we’re launching and the sales increases were awards that we were given two years to three years ago, and just going into production now. So we’re definitely excited about the opportunities of the China market and it’s good to see their production levels returning to normal.

The next question I wanted to ask is in terms of the disclosure that you gave us on the 14 OEMs that are now on Board for the Full Display Mirror. So I know we’re not going to get anything specific here, but I am just wondering if there is anything in way of commonality for looking at geography, market segment or similarly. Just trying to get an idea of where you’re seeing momentum in terms of bookings on the FDM?

Yeah. Actually, it’s broad spread. You see markets in luxury vehicles down to volume vehicles and everywhere from standard fit non-vehicle to optional take rate. So it’s, I wouldn’t say, that it’s a particular segment or a particular region, because we’ve got vehicles that have launched in China with it. The Buick Envision Plus is Chinese market. We’ve got Japanese-based products. Europe has been picking up for the European market. And, of course, North America is where a very large portion of it is. So we’re seeing growth in outside of North America lately.

Great. Thank you. Then if I could just sneak one last question in on gross margin, hoping to put it in context of your second half guidance relative to sort of this typical seasonal pattern that we would see at Gentex. And specifically what I am wondering is to what extent can the normal activities that you would undertake to offset any price downs help to address these pressures that we’re seeing right now in terms of material and freight costs?

Yeah, I think we are seeing still have positive cost reductions. But the electronics content is kind of muting it out a little bit to that tune of about 100 basis points or 150 basis points in some cases. So that’s really what is offsetting kind of our seasonal ramp. Now if sales come in as forecasted that should help offset it. But I think we’re talking about a little bit of a discount to what the IHS forecast is showing. So that also was a negative -- a little bit of a negative on the gross margin that would -- that should -- would be offset in the second half.

Yeah. I think -- to Kevin’s point I think the big increase from Q2 actuals to the second half guide really what you’re seeing there is the impact of the higher sales levels that we’re anticipating in the second half of this year.

Okay. Great. Well, I appreciate the context there and I’ll – yeah, I’ll leave it there. Thank you.

Thanks.

Thanks, Luke.

Our next question comes from Ryan Brinkman with JPMorgan.

Hi. Good morning. Thanks for taking my question.

Hey, Ryan.

Hey. We’ve heard from a couple other suppliers that the recent industry backdrop has been distracting as management time and attention has had to be diverted away from long-term projects and initiatives instead toward putting out various fires like figuring out increasingly tricky logistics and sourcing. I know you guys seemingly more than most other suppliers are always working on long-dated projects skunkworks like medical, et cetera. And so, I thought to ask about your experience and continuing to execute against your long-term projects, including new products under development, the ability to pitch new ideas to customers who may themselves be distracted, et cetera. I guess, what was your experience kind of walking and chewing gum in the second quarter and then how do you see the outlook for the same in the back half?

Yeah. It’s actually a great question, Ryan. Thanks for asking. As you can imagine, the backdrop is distracting. However, we continue to make great progress on the skunkworks types projects that we always have going. A lot of those are looking at verticals outside of our traditional vertical and we feel very comfortable in our ability to continue to do both of those at the same time. The one thing I’ll point out is on our existing book of business, having a forward-facing conversation with an OEM, whether that’s an aerospace or an automotive. It has become more difficult, not just because of the environment what’s going on and part shortages and downtimes, but also because of the lack of travel and ability to go internationally and see our customers face-to-face. But that hasn’t stopped us as sales teams on the ground in those countries, have done a great job, continuing to show the new product concepts and what we’re working on. What we’re excited about is the second half of this year and heading into next year, we’re fully anticipating being able to do see us again and we’re pretty excited to build a show some new product concepts at that show.

Okay. Helpful. Thanks. And then just what has been the early experience here in the first few weeks of 3Q relative to the supply chain constraints that you’ve talked about the volatility in the customer production schedules, et cetera. Are you seen any or do you expect any improvement in these issues in 3Q versus 2Q, perhaps, on the cycling past of the Renesas fire or any other issue, I was just curious if maybe, you said some of the customers that were negatively impacted had higher take rates, et cetera. I was just thinking I don’t know F150 or anything like that and maybe those customers that were disproportionately impacted in 2Q maybe that was because of Renesas and there could be some improvement, I know what you’re seeing?

No. I mean really what we’re seeing in July is pretty much a continuation of what second quarter look like. So, what we’re -- what we believe will happen is, issues will continue to exist in the second half and then into next year. Hopefully just not as dramatic. In other words Ford being down for as long as they were, some of the other Detroit 3 really struggling with communication and data. I think what will happen in the in the second half of this year is not that there won’t be problems and when you talk about problems it’s not really eliminate the one supplier, it’s really kind of rolls every day, you find it, get a call, it’s a different supplier or different problem and so unfortunately it’s inconsistent. You have to adjust each one of them. But one of the things that we believe will happen and has started to happen is communication in the industry is getting better. So the suppliers are communicating with OEMs more effectively. Our suppliers are communicating with us more effectively. And if nothing else that gives you a better chance to plan and to react. So even though we believe they’ll continue to be shortages we think the amount of time you have to spend on it will start to shorten.

Very interesting and helpful. Thank you.

Thank you.

Thank you.

Our next question comes from David Kelley with Jefferies.

Hi. Good morning, everyone. Thanks for taking my questions. Maybe just starting with the advance feature take rate, it was a bit more resilient than we expected, just given the ongoing headwinds. So just curious what you’re seeing customer prioritize and has that or do you think that’s changing into the back half of the year, given the lingering disruption?

Yeah. I think most OEMs in general, especially at the end of Q1 and really throughout Q2, if they had a preference they’re going to build the highest end vehicle they can and that’s been an interesting transition. There’s been a lot of vehicles and there’s a lot of articles about this where OEMs are dropping certain features if they can’t get the support from the supply base to produce it. They’ll build the vehicle still, maybe with 90% of the content that it would have had. So the bet is towards the high end. But by the second half of this, the second quarter really so in the May, June what you started to see were OEMs basically saying, okay, what can you get us if anything, right? Now it’s -- we prefer to go high end. But to be honest we’ll build anything as long as we can get components. So I think, there is a certain level of desperation at the end of the Q2 for all of us on supply side and the OEM side, just trying to put together a plan of what can we get you there to allow you to build a vehicle in general. And so, I think, there is a little bit more that we have to get through here in Q3 and then, hopefully, it gets a little better in the back half of the year.

Okay. Got it. That’s helpful. Maybe just to follow-up, a medium-term question, but is there better visibility than average to the out here kind of advance feature take rate if we think about dealer inventory levels where they’re at and OEM scrambling to content vehicles. Just curious if, the medium-term visibility could perhaps even be better than we would historically see, despite some of the shorter term headwinds that are out there?

Yeah. I think, OEMs are doing a better job of trying to provide you information about what their intentions are and what they want to build further out to help with this issue of planning. The problem is that so far that information hasn’t been very useful, because it’s too optimistic, and unfortunately, the supply base can’t support those levels. So as much as every day, like, I mentioned the communications improving, unfortunately, it hasn’t really turned into reality yet. But I think in the next 12 months or so that will start to turn the corner and the information that’s being provided will be quite useful.

Okay. Got it. Thank you. And then maybe one last one if I could sneak it into, a potential FDM competitor announced significant ADAS acquisition last night. So just curious if you have or maybe you are seeing any changes in the FDM competitive landscape or prioritization by potential competitors that are out there?

No. We don’t think that acquisition changes the FDM landscape at all. I mean if you look at what that -- what that’s focused on it’s a totally different technology and isn’t really in our feature set of any of our FDM products.

Okay. Got it. Thanks everyone.

Appreciate it, David.

Thanks.

Our next question comes from John Murphy with Bank of America.

Good morning, guys.

Good morning.

Hey, John.

I had a question about the second half and I am certainly not trying to give you guys a hard time because this is a very volatile time and it has nothing to do with what you guys are controlling at the moment. But, I mean, how comfortable are you with these volume forecasts going forward. I mean, because I mean, we are hearing and I am sure you’re hearing conflicting views of like chips are coming back. But maybe they’re not depending on they’re talking to you and maybe volumes are increasing. But some of that volume increase is being allocated towards consumer electronics and cell phones more than the auto industry is, the supply actually really might not be getting better in the second half of the year. And it seems like despite there not being a lot of chips around there is almost some pull-forward and I think you’ve actually kind of just alluded to this from the third quarter into the end of the second quarter, but then that started to dry up at the end of the second quarter. So it just -- there’s just a lot going on here and there’s not a clear picture as to exactly how the chip shortage is going to resolve itself in the second half this year. Hopefully, well, next year. I mean how confident are you in these numbers for the second half. And once again, I am not giving you a hard time, because this is the volatility in the industry -- in the semi’s industry and not the autos or even what you can control?

Well, no, that’s a good question, John. And yeah, we’re not offended by it. In fact it’s the million dollar question that we’re just trying to answer every day. What I would say is, if we do a bottoms-up forecast based purely on IHS Markit, our estimates for the second half would be much higher. We reduce those based off of a change in demand that we’re seeing from our customers. So we’ve got pretty good quarter, and I mean, I won’t say pretty good quarter, pretty good information in the quarter at least to give us...

Yeah.

...some indication of how much volatility and likely order changes. So what we’re also comparing that against is, what are we hearing from our suppliers on the silicon side in terms of what can they hit in the second half versus the constraints they had in the first half. And so we do see some lightning. That also includes a tremendous amount of work that our team has done here to change product concepts and designs to make sure we’re getting out of more constrained components and into others. So in the background of all this we’ve been doing a tremendous amount of work on redesigning circuit boards, re-laying out, designing around components that have more availability. These are all very quick turn engineering projects, expedited testing procedures and then, obviously, coordinating with OEMs on approval for all that. So it’s not just that we’re sitting and waiting for supply to get better. We’re also actively redesigning products to try to get out of those constrained areas as much as possible and that’s what gives us a little more confidence in the second half than what we had in Q2.

Got it. Okay. That’s very helpful. And the second thing on the variable cost side, I mean, obviously, if you had better visibility and even schedules were not good, but if they were steady and predictable, I would imagine, you could respond a whole lot better than you did in the second quarter. I mean if we saw something more normally in the second quarter as far as the shipments that you saw with some level of predictability. What is your ability or how pretty you reacted on a variable cost side that would have been much more effective than what you got jammed with the variability?

Yeah. If you look at -- I’ll kind of combined two things. One of them is what is the profitability of the loss of business plus the overhead benefits if we could have planned better and just having better leverage and that would have been 200 basis points, 250 basis points by itself between those two areas. So, that’s why we look at the second half and we don’t need it to be a record setting quarter from a revenue standpoint to get back to that profitability measure we gave, despite the headwinds on the raw material side and freight. What we need is just enough visibility and then high enough level of sales that give us that leverage point.

Okay. And then just lastly on the raws, it sounds like it didn’t go up, but they were not, they were little bit worse than you’re expecting in the quarter. As you look at the second half of the year, I would imagine, I mean, you’re saying that they’re getting a bit tougher and increasing. As you go into 2022, is that still an issue in the first half and it might ease in the back half of the year. I mean there is, once again, it’s another volatile factor, but it does seem like as supply comes on there on the raw mat side, you may actually get some easing sometime in 2022. What’s your take on that? Well, what’s happening in the near-term and what’s your take?

Yeah. We estimated…

Not giving any guidance for 2022?

Sure. Yeah. The second half of this year, we’re estimating and really into next year about 100 basis points 150 basis points of gross margin headwind based on raw material increases. And that includes the semis, but it also includes a lot on the metal side and the precious metal side that affects our coating and a lot of what we do on the display side. So that’s kind of our estimate for the second half of next year. We don’t really see that easing any time next year. We think 2023 would be the first time before you start to hopefully have some stability and then some more normal type conversations around long-term productivity from the supply base.

I am sorry, on a comparison basis, so this kind of pressure would consist -- would continue into the first half of 2022 on a year-over-year basis. Would that potentially ease, because you’re already seeing or you expect to continue…

Yeah. On a year-over-year, on a comp basis absolutely, because we’re expecting a lot of that to hit in the second half of this year. So in the second half of next year, you would already have some of that incorporated in your cost structure. So you wouldn’t expect a full, in Q4 in essence next year you wouldn’t expect a full 100 basis points to 150 basis points. Again, it would just be the income, whatever changes in the second half of next year.

Okay. That’s great. Helpful. Thank you, guys.

Thanks, John.

Our next question comes from Josh Nichols with B. Riley.

Yeah. Thanks for taking my question. I know there’s a lot of uncertainty around the semiconductor supply chain right now, but clearly you guys are seeing a lot of traction with Full Display Mirror offering, a lot of new nameplates that are launching here. Are you in a good position, any impact there as far as your ability to continue to supply those offerings and it’s also been a very favorable gross margin contributor? Is there any major impact there, is there still a lot of favorable gross margin impact that you’re seen in that business and just curious about the growth trajectory there and the margin profile? There’s been a change on that business?

On the product side, FDM is one of the more challenging products because of the amount of electronic content in that product, so getting components and also making sure you’re managing through the headwinds on price increase side. So LCDs, especially drivers for LCDs have been and it will continue to be really for the next six months to 12 months a cost issue as the industry is facing cost increases on those type of components. But also obviously on a larger end microprocessor side, which is in -- of -- inside of our FDM product. So that product has been incredibly popular. At the same time, it’s difficult to get those components and then that’s one of the challenges is controlling the cost structure of that product as well.

But as we continue to launch FDM, we’re typically moving out of base mirrors into FDM, which has a higher price point and does have higher margins overall. So incrementally it is a benefit to the corporate overall margins.

And that will continue to go up despite these issues.

Thanks, Kevin.

Yeah.

Thanks. And then just separately as a second question here. I know that you trimmed your IHS estimates a little bit. I assume as far as geographically as most of that cutting that you’re seeing in North America relative to outside the US and then, well, demand -- well, supply is a little bit challenge right now. It seems that there’s very low inventory levels right overall. I am curious about your take whenever we think a little bit more about next year hopefully things start to normalize to some degree. How long it may take for these OEMs to kind of rebuild the inventory levels, given that the demand for vehicles is actually quite high right now?

I think you’re 12 months to 18 months before OEMs can reasonably get back to the inventory levels they would like to be at that. Like, you said from a backdrop standpoint it’s actually exciting. I mean, there’s very low inventories, which historically in our industry problems have always been around too high of as inventory levels and what impact does I have. So honestly, I can’t tell you the last time inventory levels have been this low. So that that, if you look at the big picture, the fact there’s low inventory levels and great demand from the consumer side and also for our products in particular, that’s what gives us the confidence that in the next couple years should be a great opportunity for us to continue to grow and focus on profitability. The bigger picture is, when does it finally start to lessen and when can OEM start to play catch up on the other issue is even as suppliers catch up immediately, it’s difficult for an OEM to ramp up capacity in a short time period. And so I think that’s the one that we would tend to say it’s going to take much longer for inventory levels at the OEM level to get back to where they would like them to be.

Great. Thanks guys. I’ll hop back in the queue.

Great.

Thank you.

[Operator Instructions] Our next question comes from Mark Delaney with Goldman Sachs.

Yes. Good morning and thank you for taking my questions. I guess first on the input cost increases that you talked about and some of that potentially has been sustained into next year. Could you talk about what capability you think you may have to be able to pass some of these higher cost in terms of raw materials and freights onto OEMs that you start going through these negotiations, and perhaps, neutralize the impact to your margins as you think about 2022?

Yeah. Typically, I mean, we’re a market based pricing company. So, a lot of -- we don’t have contracts that would dictate if raw materials go up by 10% that we get to pass those along. But every year is a new year from an annual customer price reductions negotiations and so putting those cost increases into our argument, as far as like negotiating more price downs, is typically our best argument how we approach it on an annual basis. So, we have those conversations, we’re having those conversations about last year still with some OEMs, because, obviously, volumes didn’t live up to the expectations and so that’s really our best chance of kind of offsetting the increase in raw materials is getting a lower price down on average at any given customer going into next year.

Got it. That’s helpful. And then in terms of the outlook, the company was giving around light vehicle production expectations for 2022. I believe the number of units the company is expecting is pretty similar this quarter compared to what you had last quarter around $76 million. And you’re talking about potential for some of these chip shortages to be sustained and still causing some degree of difficulty next year. So it was that something you are already trying to bake and even last quarter into the 2022 outlook and that’s why it hasn’t changed or is there some other puts and takes that are allowing you to make any similar volume outlook for 2022?

Well, the published IHS numbers, we didn’t change those and changed that in our press release. But we’re talking about our topline forecasts that we’re discounting that in when we provide our revenue gains it’s got our internal kind of manual adjustments in there. So we still publish, what IHS is for the regions just for a benchmark, but just anecdotally talking about we -- we’re discounting it so that it helps with modeling going out.

Got it. That’s helpful. And then maybe just one last one you guys -- as you’re thinking about the second half of the year, you’ve already given some helpful color on how you are hearing from customers about the billing schedules and how that may ramp up. But can you share a little bit more about the linearity in the second half goals in terms of where you are running today and how that starts to improve. I understand is still tight throughout the whole second half but to what extent later 3Q maybe it gets better. Is it -- or is it really more of a 4Q phenomenon before you think absolute volume start to increase? Thanks.

I’ll say…

Yeah. Go ahead.

I’ll say the first half of Q3 is going to be much very, very similar to Q2. And we think as Q3 progresses, is when you’re going to see your first opportunity for things to start to get better. Typically Q4 is a little lighter than Q3 and so if you look at holiday downtimes and some of things that OEMs have done historically, we think there’s going to be a lot of changes to that. And the OEMs are going to be more aggressive, Tier 1s as well in terms of working through the fall and into the winter and so, we think there’s upside especially in Q4 to what’s going on, because historically, if you look at what’s going on right now, right? I mean on the consumer electronics side you got a lot of bills happening right now to get ready for a holiday season. Once you get into Q4 there should be a lightening in demand on the consumer electronics side versus what’s happening right now. And that obviously would hopefully free up some capacity for automotive and other industries. But that’s kind of our expectation is that Q3 is going to start basically like Q2 and then hopefully it continues to get better throughout the end of year.

Thank you.

Thank you.

Our next question comes from David Whiston with Morningstar.

Thanks. Good morning. I wanted to go direct to a comment Steve that you made earlier in the Q&A that to me imply that there has been some maybe inadequate communication from the OEMs to the suppliers. And I realize OEM supplier relationships are a bit of a soap opera, but how on earth is still poor communication going on after so many decades of working together and how serious this chip issue is?

Well, I think, it’s less to do with intentional poor communication and more about what OEMs were planning to do this entire time what they wanted to do and then not hearing. I mean, what happened really is, during the quarter, as a lot of our suppliers told us at the last minute or we found out when a shipment didn’t arrive that we were short components or never shipped. And so a lot of suppliers were dealing with the same problem which is poor communication from the supply base. And then suddenly you realize you have a problem and you’re trying to find out are you going to get the parts or you’re not, what kind of volumes. And then that information led upstream to the OEMs later than it should have and then they had to make decisions with it too. So it’s not that it was a deliberate -- deliberately poor communication. I would argue that it’s actually gotten a lot better over the last few years and its gotten better during this. The issue is, is that on the supply side, especially on the silicon side, there is a lot of last minute information coming in, there are a lot of short ship and no shipments that happened that obviously took a few weeks. And then what happens is, obviously, once that information matriculate up to the top and OEM then has to make a decision and then that has to work its way back down and problem is, is they change what they wanted. Now you have to like redesign your entire production process around what part number they want, when do they want it? And so, I wouldn’t blame this on the OEMs. I would really say it was kind of a bottom up issue on from the supply base that caused OEMs to struggle with these issues.

So the last minute changes are those coming from the OEM or from upstream for you?

Well, it started with the Tier 2, Tier 3, Tier 4 supply base and that was really driven by still playing catch up from last year’s shutdowns all over the world. If you look at the supply chain for an electronic component, it’s a very complex, very drawn out process that goes through more efficient microchip side, goes through multiple countries and a lot of areas and so that caused a lot of problems. Each of these countries going on shutdowns at different times caused tremendous -- and still dealing with them causes a tremendous backlog and in information and processing. And so that started really on the supply side on multiple levels below Tier 1s and then obviously has impacted everything above it. And that communication historically hasn’t been as good as it necessarily should have been on a Tier 2, Tier 3 or Tier 4 basis. And I think that’s where the Tier 1s ended up struggling and then obviously causing problems for the OEMs at the last minute.

So given what you just said is that why in the press release you don’t say shipper semiconductor shortage and just a card shortage?

Well, yeah, because it’s more than just that. I mean other things that affected us is, OEMs we’re struggling with plastics at times, foams for seats. There’s been multiple different commodities that have been affected by this. And ultimately those didn’t affect us directly and that we didn’t have foam that we needed to put in a mirror. But what did happen is as an OEM can’t get the seats that they need or a certain component, whether it’s plastics or leather, they’re changing what they’re going to build or not build in that case and so that causes OEM to go down. Meaning we’re planning to build, we might have even built the component for them and then at the last minute they’re like, what don’t ship it, we don’t need it, because we’re not going to be able to build those vehicles right now.

Yeah.

And so the reason why we talk about shortages in general is, because we’re aware of all those different commodities causing problems in the industry. It’s not just electronics.

Okay. That makes sense. And then it’s probably for Kevin, but there’s a chance that Biden administration is going to raise the U.S. federal tax rate. And I was just curious roughly you think that would be on Gentex’s rate would it be like a one-for-one impact in terms of every 100 bps in the federal rate or would it be less or …

Yeah. No. I think that there’s a lot of speculation about the FDII or the FDII, which is a big benefit to the company. So if it’s a -- if the headline rate just goes from 21% to say 28% then we would expect it to move linear. But if the rate goes up and the FDII goes away then it’s going to be a bigger impact than that. So I think we’re -- we’ll continue to stay close to it. There’s speculation back and forth if the FDII is going away or if there’s a replacement for the FDII. But, yeah, it would -- if it’s just the headline rate, we would expect it to move linear for now.

Okay. Thanks, guys.

Thanks David.

Thanks David.

Our next question comes from Charlie Sloan with Oak Family Advisors.

Good morning and actually a great quarter. I mean, you guys are amazing in terms of your ability to generate cash during this time and as you look forward and the Board’s tenure around your excitement and the enthusiasm around FDM and your position in the industry. How does the Board look at ASRs or any kind of shareholder or other shareholder purchases as we are going forward?

Yeah. I think, well, I mean, that focus is very deliberate and very intentional in terms of providing shareholder return as you can imagine. One of the things that we’ve looked at is, this philosophy in the last couple years of consistent share repurchases driven around and supported by our estimates of future growth and profitability has given the Board the confidence to say we’re going to be aggressive there try to return basically 100% of free cash flow to shareholders in the form of dividends and share repurchases is absolutely our strategy intention. The one thing I do always abbreviate that with is by saying, if there’s great M&A opportunities, that right valuations that are a good fit for the company those will move up and take the precedence over those prior to. But in the absence of something that we feel very confident about creating shareholder value we’re very confident and our ability to continue to grow the business organically and be very focus -- hyper focus really on making sure returning capital to shareholders in those two forms.

Sure. And then as the management team how do you look at the current price of the stock knowing that you don’t control it -- you just control the fundamentals and the investors control the stock price. But the Board via your -- I think what do you have just over a $0.5 billion in net a rainy day funds?

Yeah. Yeah.

Yeah. Okay. And sir -- yeah. Go ahead, sir.

Oh! Sorry, so I’ll speak for myself personally when I talk about the share price.

Yeah. Yeah.

But if you look at what’s happened I felt like right over, back up three months, four months ago the price in that $36, $37 range seemed like a very fair price given our trajectory. We look at opportunities like what’s happened right now with the retrench and the stock price as an opportunity to get a little more aggressive than what we have been on share repurchases, because we think this is more industry-wide background and it’s not long-term fundamental issues with the company. If you fast forward 18 months two years whatever that time period is, if the fundamentals don’t change economically then, i.e., there’s no recession, cost of borrowing remains low and consumer demand for autos and especially our products remains high. There’s no reason why the next couple of years can’t be a great growth opportunity and great profitability time for the company and so then we think that $32 a share right now is probably undervalued.

Well, we would share that opinion and you are in compliance while your debt covenants, correct?

Yes. Yeah.

Okay. Because you don’t have any debt, right?

That’s correct.

Okay. Okay. Good. And then second -- lastly are you going to have any Analyst Day coming up?

No.

What’s the status of that?

Josh, I’ve been working on that. We were planning one, but then obviously would still travel…

We go to Grand Rapids, it’s hard, it’s...

Well, and last time, what we were talking about doing one, the next one we will do…

Yeah.

We’re toying with the concept of doing it in New York again, because it’s been a couple of years since we’ve been able to do one in New York. So we’ll…

Yeah.

…Josh will reach out to you and let you know, we make firm up those plans. But we’ve been trying to be trying to be reasonable obviously people getting here is difficult and then how do we make sure...

Yeah.

… we’re doing something at a time period that’s appropriate.

Yeah. We would always encourage…

Yeah.

…everybody to take part in CES and join us on the show for there, it’s much more fun to actually see and test out our products and introduce than it is to hear our story about it.

Right.

And you don’t have to wait for an Analyst Day…

Yeah.

…when I come visit West Michigan anytime, you’re welcome.

Right. I mean, it’s pure Michigan. I don’t know why the east coasters won’t come out, that’s an…

Exactly.

Okay. Thanks guys.

Appreciate it.

Thanks Charlie.

We’re showing no further questions in queue at this time. I’d like to turn the call back to Josh O'Berski for closing remarks.

Thank you everyone for the time and questions today. We appreciate your attention and hope you have a good weekend.

This concludes today’s conference call. Thank you for participating. You may now disconnect.