Gentex Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2024

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the 2024 Second Quarter Gentech Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I'd now like to hand the conference over to your first speaker today, Josh Waberski, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning and welcome to the Gentex Corporation's Q2 2024 Earnings Release Conference Call. I'm Josh Wiebersky, Gentex Director of Investor Relations, and I'm joined by Steve Downing, President and CEO Neil Boehm, CTO and Kevin Nash, Vice President of Finance and CFO. 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.

Speaker 1

This conference call contains forward looking information within the meaning of the Gentex Safe Harbor statement included in the Gentex Reports 2nd quarter 2024 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. I'll now hand the call over to Steve Downing for our prepared remarks. Steve?

Speaker 2

Thank you, Josh. For the Q2 of 2024, the company reported net sales of $572,900,000 compared to net sales of $583,500,000 in the Q2 of last year. For the Q2 of 2024, light vehicle production in North America, Europe and Japan, Korea declined by 3% compared to the Q2 of last year. During the Q2 of 2024, light vehicle production weakened in most of our primary markets. In fact, the quarter began with sales coming close to forecast for both April May, but then saw a significant change in June that left us well below our forecast for the quarter.

Speaker 2

In total, the company's revenue for the Q2 of 2024 fell short of our beginning of quarter forecast by approximately $50,000,000 with the biggest impact coming from expected shipments to some of our largest customers. As we look to the second half of twenty twenty four, light vehicle production forecast continue to show weakness versus prior year performance, but we expect to return to meaningful outgrowth versus the underlying market. For the Q2 of 2024, the gross margin was 32.9% compared to a gross margin of 33.1% for the Q2 of last year. The Q2 of 2024 gross margin was primarily impacted by sales levels that were well below our forecast for the quarter and slightly lower than prior year levels. Additionally, unfavorable product mix resulted from lower than expected shipment levels with full display mirror unit shipments and exterior mirror unit shipments being the most affected.

Speaker 2

Unfortunately, the lower sales levels and weak product mix more than offset the positive impact of purchasing cost reductions for the quarter. While our material cost reductions are in line with our estimates for 2024, our gross margin recovery plan for the year is partially dependent on sales growth and product mix improvements that did not materialize during the Q2. Given our historical contribution margins on incremental sales, we believe that our gross margins would have been in line with our overall plan for 2024 had revenue been close to our forecast. Overall, we are very pleased with our progress on the margin recovery plan that we estimated would take until the end of 2024 to complete. While the gross margin for the Q2 did not meet our expectations, we continue to believe that we have the right plan and team to execute our full gross margin recovery plan.

Speaker 2

Operating expenses during the Q2 of 2024 increased by 12% to $73,700,000 compared to operating expenses of $65,800,000 in the Q2 of last year. Operating expenses increased quarter over quarter primarily due to staffing and engineering related professional fees. Our operating expenses are trending in line with our expectations for the full year with increases primarily focused on R and D and launches of new programs and products. Operating expenses, especially R and D expenses, are expected to continue at the current pace for the rest of this year as we continue to invest in innovative products and technologies, new business awards and VAVE initiatives for cost optimization of our bill of materials. Income from operations for the Q2 of 2024 was $114,900,000 compared to income from operations of $127,300,000 for the Q2 of last year.

Speaker 2

Other income swung to a loss of $13,500,000 for the Q2 of 2024 compared to income of 1 point $3,000,000 in the Q2 of last year. The change was primarily driven by non cash losses of $18,300,000 resulting from mark to market adjustments and other market adjustments of certain holdings within the company's tech investment portfolio, which were partially offset by interest income. During the Q2 of 2024, the company had an effective tax rate of 15.1%, which was primarily driven by the benefit of the foreign derived intangible income deduction. Net income for the Q2 of 2024 was $86,000,000 compared to net income of $109,200,000 for the Q2 of last year. The decrease in net income for the Q2 was driven by lower net sales and income from operations compared to the Q2 of last year as well as the previously mentioned changes in other income.

Speaker 2

Earnings per diluted share for the Q2 of 2020 were $0.37 compared to earnings per diluted share of $0.47 for the Q2 of 2023. Earnings per diluted share for the Q2 of 20 24 were impacted by the lower net sales and operating income as well as the previously mentioned changes and other income for the quarter. I'll now hand the call over to Kevin for some further financial details.

Speaker 3

Thanks, Steve. Automotive net sales in the Q2 of 2024 were $559,300,000 compared to $574,100,000 in the Q2 of last year. AutoDIMMIRROR unit shipments decreased by 6% during the Q2 of 2024 compared to the Q2 of last year. Other net sales in the Q2 of 2024 were $13,600,000 compared to $9,400,000 in the Q2 of last year. This was driven by a $2,900,000 increase in dimmable aircraft window sales and a $1,300,000 increase in fire protection sales compared to the Q2 of last year.

Speaker 3

Looking at share repurchases, during the Q2, we repurchased 1,400,000 shares of common stock at an average price of $34.43 per share. And as of June 30, 24, the company has approximately 13,200,000 shares remaining available for repurchase from the previously announced plan. We remain committed to repurchase additional shares in support of our capital allocation strategy, but share repurchases will vary from time to time and will take into account macroeconomic issues, market trends and other factors that we deem appropriate. Looking at the balance sheet, the balance sheet comparisons mentioned today are as of June 30, 24 as compared to 4

Speaker 4

as compared to December

Speaker 3

31, twenty twenty three. Cash and cash equivalents were $260,200,000 compared to 226,400,000 dollars Short term and long term investments combined were $323,600,000 up from $299,100,000 which includes fixed income investments as well as the company's equity and cost method investments. Accounts receivable was $306,600,000 down from $321,800,000 due to the timing of sales within the quarter. Inventories were $463,500,000 up from $402,500,000 and accounts payable increased to $206,000,000 from 184,400,000 dollars Looking at preliminary cash flow items for the quarter. Q2 2024 cash flow from operations was $129,300,000 up from $120,900,000 in the Q2 of last year and year to date cash flow from operations was $259,100,000 compared to $241,800,000 for calendar year 2023.

Speaker 3

Capital expenditures for the 2nd quarter were 31,800,000 dollars compared with $47,500,000 for the Q2 of last year. And year to date capital expenditures were $63,600,000 compared to $90,300,000 for calendar year 2023 and depreciation and amortization for the Q2 was $24,000,000 compared with $24,800,000 for the Q2 of 2023 and year to date D and A was $47,900,000 compared with $48,900,000 for year to date 2023. I'll now hand the call over to Neil for a product update.

Speaker 4

Thank you, Kevin. Like the Q1 of 2024, the Q2 was an extremely busy launch quarter with 32 net new nameplate launches of our interior and exterior auto dimmers and electronic features. Over 65% of these net launches were advanced feature launches with full display mirror, home link and outside auto dimming mirrors leading the way. As we look forward at the Q3, we anticipate that this heavy launch rate will continue. Now for full display mirror update.

Speaker 4

We're excited to announce that during the Q2, we began shipping full Display Mirror to 3 new OEM customers, bringing our total to 19. We're now shipping Full Display Mirror for the Acura ZDX, the Citroen Burlingo and the Peugeot Partner. The addition of these OEM customers helps to further demonstrate the global appeal of this technology as well as its acceptance on different vehicle architectures. In addition to the new OEM customer launches, we continue to see great growth and expansion of our technology at our existing customers. We are currently shipping Full Display Mirror on over 115 nameplates globally.

Speaker 4

And despite the impacts of the second quarter, we're still on track to achieve our 2024 FDM unit shipment guidance of shipping an incremental 500,000 FDM units above the 2023 unit shipments. The first half of twenty twenty four has been extremely busy as we've launched more projects than ever before. We're excited about the continued growth we're seeing with our technologies and appreciate all the hard work and dedication that the team at Gentex is putting in to ensure we execute flawlessly. Also, while we're launching a lot of products and technologies, we continue to evaluate opportunities to reduce the bill of materials on existing programs as well as execute the VIVE launches we are currently having in process. These changes are critical for our margin recovery and stabilization plan as we move into 2025 and beyond.

Speaker 4

I'll now hand the call back over to Steve for guidance and closing remarks.

Speaker 2

Thanks, Neil. The company's current forecast for light vehicle production for the Q3 of 2024 and full years 2024 and 2025 are based on the mid July 2024 S and P Global Mobility forecast for light vehicle production in North America, Europe, Japan, Korea and China. Light vehicle production in these markets is expected to decrease by approximately 5% for the Q3 of 2024 versus the same quarter last year. For calendar year 2024, light vehicle production in these markets is now forecasted to decline by approximately 2% when compared with light vehicle production in calendar year 2023. Light vehicle production for calendar year 2025 is forecasted to increase by 2% versus the calendar year 2024 forecast in these markets.

Speaker 2

Based on this light vehicle production forecast and actual results for the 1st 6 months of 2024, we are making certain changes to our previously provided guidance for calendar year 2024 as follows. Revenue for the year is expected to be between $2,400,000,000 $2,500,000,000 Gross margins for the year are expected to be between 34% 34.5 percent. Operating expenses are still expected to be between $295,000,000 $305,000,000 Our estimated annual tax rate is forecasted to be between 15% 16%. Capital expenditures are expected to be between $175,000,000 $200,000,000 and depreciation and amortization is forecasted to be between $95,000,000 $100,000,000 Additionally, based on the company's updated forecast for light vehicle production for calendar year 2025 as well as year to date actual results for calendar year 2024, the company is updating calendar year 2025 revenue estimates to be approximately 2.6 $1,000,000,000 to $2,700,000,000 The company continues to be on pace for record revenue in 2024 2025 despite the recent changes to light vehicle production environment, vehicle mix and regional mix that impacted our performance in the 2nd quarter. Additionally, tremendous work has been accomplished on our gross margin improvement plan despite the temporary step back during the Q2 of this year.

Speaker 2

We fully expect to achieve our ultimate goal of a 35% to 36% margin for the company even if there is a slight delay in achieving those results. Given the market conditions, we have adjusted our estimates for 2024 and 2025 based on the impact of the Q2 of this year, but we continue to forecast strong growth and profitability as we head into the second half of this year and prepare for 2025. That completes our prepared comments for today and we can now proceed to questions.

Operator

Thank you. At this time, we'll conduct Our first question comes from the line of Luke Yunck of Baird. Your line is now open.

Speaker 5

Good morning, everyone. Thanks for taking the questions.

Speaker 6

Good morning.

Speaker 7

Just start

Speaker 5

with on the guidance, Steve. Hoping you could just square some of your expectations in the back half of the year on the top line. It looks like you're essentially taking the 2Q miss versus your expectations out of the revenue guidance. Can you just maybe talk about what you're seeing in July thus far and in schedules more broadly relative to how you're guiding the back half both overall sales and then the mix impacts to gross margin within that as well? Thank you.

Speaker 2

Yes. Thanks, Luke. Well, one of the things that definitely I'll start kind of with the Q2 impact. And when we referenced in our prepared comments that a lot of the shortfall that happened in the quarter, almost 60%, 70% of it was in June, pretty unexpected. When you look at the data that you even put together in your report about what happened in June from a production standpoint, a lot of our largest customers, so GM, Volkswagen, Toyota, they were very significantly impacted in the month.

Speaker 2

If you look further down that list, other large customers, Hyundai, Kia, BMW, Stellantis, these were all pretty significant customers for us that faced some serious headwinds in June. They were very different. The actual orders were very different than the releases coming into the quarter. If we look out now in the second half, we look at the same OEMs expectations of their production levels and take rates of our products and some of the new launches that Neil referenced. We continue to see a lot of strength in the back half of this year.

Speaker 2

So taking into account the 5% drop in production for the Q3 and the Q4 forecast for light vehicle production is still showing down kind of 2% to 3% across the board. But we look at that and we look at what our take rates are, where our forecasts and releases show, we're still seeing a pretty significant outperformance in the back half of this year. So we're taking a very hard look at all that release information and the customer data, but we still believe we're going to get back to that strong outperformance in the back half.

Speaker 5

And then similarly, could you maybe talk about line of sight to ramping FDM volumes specifically in the back half? I appreciate the confirmation of still 500 ks incremental units for the year overall, thinking about new launches to the extent you mentioned these are already live. Should we think of those as really already in flight at this point, which would reduce the launch risk? Or is there still some potential movement on timing, which could impact FDM specifically?

Speaker 2

No. If you look at the launch side, pretty much everything stayed on time during this process. I think the single biggest risk factor is what's happened macro when it comes to FDM is what's happening macroeconomically, and is the TRIM level forecast that an OEM puts out and expectation of take rates for a high end product like an FDM, are those going to hold given the interest rate environment? So far we haven't seen a drastic change from any of our customers in terms terms of take rates of FDM. In fact, I'd say over the last 18 months, the trend has been slightly better than forecasted take rates on FDM.

Speaker 2

That's one that obviously impacted June was primarily driven, but it's about overall production, not really about changes in take rates.

Speaker 5

Got it. And then maybe for Kevin, just relative to how this all flows through to EPS, how should we think about other income in the back half of the year? I appreciate it's

Speaker 2

hard to predict some of

Speaker 5

these market related things, but at a high level, should we be still thinking there's some mark to market risk that could offset underlying interest income and just any way to better calibrate that piece of the P and L? Thank you.

Speaker 3

Yes. I think most of the impact from mark to market adjustments has been realized. If you look at we have a public company holdings that I think that are fairly discounted at this point. We will have some of our tech investments that will be ongoing offsets to our other income. But that should be we would expect those to be about $2,000,000 per quarter net income going forward if you look at our fixed income portfolio offset by the ongoing tech losses.

Speaker 4

So that's kind of where $1,000,000

Speaker 3

to $2,000,000 of income in the back half of the year per quarter outside of mark to market, but I think that that should be mostly realized at this point.

Speaker 2

Yes. Most of the risk out of the portfolio has already been expensed in the second quarter.

Speaker 5

Got it. I'll leave it there. Thank you.

Operator

Thank you. One moment for next question. Our next question comes from the line of Josh Nichols of B. Riley. Your line is now

Speaker 7

open. Yes, thanks for taking my question. I wanted to kind of touch on one thing is you talked about you're still on track to kind of hit the target for this year despite some cuts to the light vehicle production forecast. And you've been seeing more and more take rates and new customers, particularly in like larger OEMs and stuff that's more midstream as opposed to just higher end than what we've seen historically. What's your expectation longer term for FPM?

Speaker 7

And how do you think about the addressable able market as it becomes more mainstream and not just a higher level product offering? And how that could kind of supplement growth, not just this year, but longer term over the next 2, 3 years?

Speaker 2

Yes, Josh, that's an excellent point and a great question. I think one thing's for sure, the launches, especially this quarter, you start talking about volume OEMs introducing this product. They're not going to be at the same take rates as a higher end OEM or a luxury vehicle or even trucks and SUVs. However, it starts to open the door for much higher volume opportunities by hitting the volume brands. And so very exciting we knew this was coming.

Speaker 2

Obviously, we've been working on it for quite some time to get these vehicles launched. The one thing that's interesting and I'd say that's probably the most favorable part of FDM is the fact that it doesn't really have a geographical bias. A lot of our products are focused on certain markets, whether it's home link or other features that are very specific to an industry or region, FDM is really a globally accepted product. And so it opens up a lot of opportunity for us. We do believe over the next several years that FDM will continue to be a tailwind to our growth story.

Speaker 6

Thanks. And then you're

Speaker 7

also working on some other technology offerings. You talked a lot more at your Investor Day. Just curious like your thoughts about what the progress the company has been making in terms of driver monitoring, right? I think at least one OEM was expected to launch at some point this year, dimmable glass longer term and how that's trending and what the expectations are as we kind of continue to think beyond the current year?

Speaker 4

Sure, absolutely. Yes, we're still on target for this calendar year with a OEM on driver monitoring and then into 2025 and 2026, there are some additional projects that are in launch as well. So we're seeing some good momentum, some good progress and using our geographic real estate in the vehicle to be able to execute that. So great momentum there. Large dimming devices is moving forward really well.

Speaker 4

We've talked pretty openly in the past about technical challenges and issues and the push to get there. We're making really good progress there. And I think that in the next couple of years, we'll be excited to talk about where we can see that getting deployed and executed. And we're also one of the things we talked about at CES this year and showed a lot of demonstrations on is large dimmable visors. Great momentum from CES, a lot of customer interest in that product using dimming technology that we've been working on and developed and the processes that we've been working on even with large area devices to help deploy visors to the vehicle.

Speaker 4

So we're excited about where it is. There's still some technical challenges and hurdles like there always are and that's why it's hard to do and why to be successful at it. We solve the problems and will give us an advantage. So we're excited about where they can lead us in the next couple of years.

Speaker 7

And then last question for me, just a follow-up just as the driver monitoring is more near term. I'm just kind of curious when you look at the market opportunity there, even if it's just in Europe where there's like different regulation, if it's likely to expedite adoption relative to some other regions, What's your thoughts on the opportunity for how big that product offering could be if we look a few years down the line for the company? Is it going to be a material growth driver? I'm just curious how you think about that driver monitoring market?

Speaker 2

Yes. I think it has the opportunity to be material to the overall growth of the business. The beginning, if it's a baseline feature set, it will be slightly it will be below corporate average margin profile because it is a more competitive product. But the revenue dollars are definitely significant and can and will really over the next few years provide some tailwind to our growth story.

Speaker 7

Appreciate it. Thank you. I'll hop back in the queue.

Speaker 3

Thanks, Josh. Thanks, Josh.

Operator

Thank you. One moment for next question. Our next question comes from the line of Ryan Brinkman of JPMorgan. Your line is now open.

Speaker 8

Hi, great. Thanks for taking my question. I was hoping you could elaborate a little more on some of the customer or vehicle segment or product mix headwinds you faced during the quarter that contributed to the softer revenue than one might have expected just looking at the headline production numbers. I know one of the things that changed the most during the quarter was lower production of battery electric vehicles. So curious if that might have been a driver and then what gives you confidence that maybe some of these headwinds might be more temporal in nature when you look at the full year?

Speaker 2

Yes. If you look at our primary headwind, was really driven by some of our largest customers were very impacted in the month of June. And in fact, what's the spare part of the quarter was in April May, those same customers were absolutely hitting their numbers or very close to their numbers. So what happened in June was very unusual in terms of, what the impact was, how severe, how quickly. And then obviously the $1,000,000 question is how long lasting are those impacts?

Speaker 2

Are they permanent trends? Are they one time adjustments? From everything we're seeing, right, and I always hesitate to be optimistic or after something like that happens, but based on what we're seeing, it seems as though production will go back to pretty much an ordinary course. And the data so far in July also suggest that. Right now, as we sit here at this point, July is off to the start we had expected.

Speaker 2

We're right in line with where we expect the month to come out. So, whatever happened in June, definitely appears to be at least at this stage to be a one time event. One of the things we are watching though is that those OEMs that were most impacted and that affected us the most, we're making sure that we're keeping an eye on releases, take rates, looking at the data as it rolls out to make sure if we see anything start to happen or repeat that we can adjust quicker to those changes than what we were able to in June.

Speaker 8

That's very helpful. Thanks. And then lastly, could you just maybe provide an update on some of the smart home fire protection products and strategy that you talked about at CES earlier this year? I know you were looking to maybe sign one of the big box retailers at some point during the year, maybe this summer. Any kind of update there?

Speaker 6

I'll give you a quick update relative to

Speaker 4

the product launch. So the initial target was launching in the last half of in Q3 here. Right now, we're looking at the 1st part of Q4 is when the launch will actually go. We've had some development challenges in some of the testing on some of the features that we're working through right now and should be ready to go in the middle of Q4 to actually go to production.

Speaker 8

Great. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of James Picariello of BNP Paribas. Your line is now open.

Speaker 6

Hi, good morning everybody. Good morning. I wanted to ask about your base interior mirror volumes. And look, your largest customer is Toyota as a percentage of sales. They just announced last night that their production, global production August through October was going to be down 2% year over year.

Speaker 6

I'm just curious based on the timing lead lag between your sourcing within a key OEM customer like that. Is it possible that you've already experienced that type of forward looking decline and that's showing up in your weak first half volume shipments?

Speaker 2

Yes. I would say you're spot on. If you're talking about planned production reductions or volumes from an OEM perspective happening starting in July or August, more than likely given the lead times, especially with the international shipment piece, we're going to see a lot of that play out 4 to 8 weeks in advance of when an OEM actually experiences those pullbacks. So it is highly likely that what we experienced in June was a leading indicator of some pullbacks from certain OEMs, in the second half of this year.

Speaker 6

Yes. And just to follow-up on this and to get your perspective, again, going back to the base or not base mirror, but your interior mirror shipments, right, down 5% through the first half year over year. Industry production, global LVP has not been down 5%. We obviously covered the Toyota dynamic, but yes, just what is going on in these first half volume trends based on your customer mix? I mean, I imagine your total customer mix isn't right.

Speaker 6

I mean, we could track it. It's not down 5%. So yes, what's truly happening here? Thanks.

Speaker 3

Well, if you remember, when we talked about Q1 results, there was a couple of key Detroit automakers that were essentially halted production for the entire Q1. And so I mean you're having a little bit of that carryover into the Q2 as they have heavy dealer inventories that are still carrying through. But we know that if with our vehicle mix and where we're highly contented in North America, we know that growth is coming from FDM. So you're not necessarily going to see unit growth in the North American market. It's going to be content growth and that's how we grow the top line.

Speaker 3

So it's nothing more than seeing specific OEMs having overweight production loads as they try to manage their inventory.

Speaker 2

Well, and I think regional mix is one of the comments we made at the end of the prepared comments and that's an important one to look at. If you look at Q2 on a year over year basis, Europe was down 5%, Japan, Korea was down 4.5%. And so if you look at our primary markets, right, being Europe, North America, Japan, Korea, so North America was relatively flat in total production volume. But you look at the weighted average of the 2 thirds of that of our primary markets being down basically 5%. That was the single biggest impact.

Speaker 2

The other one is that obviously the business that we do have in China is primarily weighted on base auto dimming and that's a very volatile market, much tougher to predict than the rest of the world. And so those are the primary contributors to why you see IEC volumes being down on a year over year basis.

Speaker 6

Yes, makes sense. Thank you guys.

Speaker 7

Thanks, James.

Operator

Thank you. One moment for next question. Our next question comes from the line of John Murphy of Bank of America. Your line is now open.

Speaker 9

Good morning, guys. I had questioning sort of similar lines as everybody else, but maybe just can you talk about the potential content intake rates on your different products, particularly FDM on EVs versus ICE vehicles? And is sort of this, sort of deluge of EV delays when push downs on volume to the right, something that might impact the business short term or potentially even long term? And just trying to understand sort of the delta you see on opportunity between ICE and EVs. Yes.

Speaker 2

I think if you look at the impact of FDM and you look at our take rates, the interesting part there is that, we actually don't have a huge exposure to EVs for FDM. If you look at FDM, trucks, SUVs, a lot of the weight is more towards that side. So we're set up really well in the future as it relates to the impact. The impact of EVs, especially on the Tesla model is really the OEC impact. So we don't have the IEC business at Tesla.

Speaker 2

We do have a tremendous amount of business on outside auto dimming mirrors and home link product with Tesla. And so those are kind of your risk factors. If you look at the rest of the EV manufacturers, especially, the traditional OEMs, really our take rates are very similar on EVs, by a on a per technology basis, very similar on EVs versus what we see on ICE vehicles. And so we're not anticipating with this push out or slowdown in bev rollout, impacting our FDM. And that's really why we want to reinforce our outgrowth this year on FDM and picking up the 500,000 units.

Speaker 2

We really want to focus on that because despite some of the trends that are happening between ICE and BEV, we still feel comfortable with our take rates and where our FDM trajectory has taken us.

Speaker 9

That's very helpful. And then just a second question. I mean, we're not expecting this, but God forbid, you actually see, sort of a continued weak volume environment going forward. And like I said, that's not what we're expecting. I don't it's sort of rational, but there's always you have to consider the risk to the downside.

Speaker 9

Is there opportunity internally sort of on a micro basis to take cost out or operate more efficiently? I mean, you guys are usually pretty good at that. I'm just curious if there's room there.

Speaker 2

Yes. And you really started to see it already in the second quarter. We are able to limit the amount of overtime we are working during Q2 because of the lower volume side. There's obviously if this unfortunately continued, we'd expect to operate in a 0 over time environment, and then obviously be focused on throughput. In a more controlled or slower processing platform like that, we would also expect like scrap and yield costs to drop.

Speaker 2

Obviously, freight and some of those other expenses are things you can look to optimize when the business slows down slightly. So there's plenty of opportunity in a lower production environment for us to continue to cost optimize. It's kind of a wild transition, right? If you look at coming out of last year where we're behind almost the entire year, working overtime like crazy and then finally starting to stabilize throughout the beginning of this year. June was a weird month.

Speaker 2

In fact, if you look, there was actually quite a few shipments that we had built for delivery that OEMs didn't pick up at the end of the quarter, which also impacted things. Those are always difficult, right? When OEMs kind of bail towards the end of a quarter, end of a month, it's always a tricky environment, right? You have releases you're building to, you build those products, whether they choose to actually pick them up or not, it's entirely up to them. It's one of the abnormalities of our industry for sure.

Speaker 2

So we're watching though. And if you look at pretty much since the end of June, most customer behaviors have returned to normal. And so that's why cautiously optimistic about what's going to happen and roll out through the second half of this year.

Speaker 9

And just one last real quick one. I mean the stock is down a fair amount here, far below the 34%, 43%, you bought it back in the second quarter. Are you in a blackout period? Can you get more aggressive quickly because it seems like an interesting pullback here?

Speaker 2

Yes, we are today, but let's just say Monday we won't be. And honestly, we think this is a way overreaction to what just happened, especially when you look at our second half guide, which if you take the midpoint of that guide, we're actually implying a 10% growth rate in the back half of this year. So despite obviously what happened and some one time charges on some write downs, the quarter wasn't that bad. If you actually look at cash generation on the business in Q2, it was better than last year. So we feel really good about where we're at.

Speaker 2

And whenever the market overreacts, you tend to see us get a little more aggressive.

Speaker 9

Okay. Thank you very much guys. Have a great weekend. Thanks.

Speaker 2

Thanks. You too.

Operator

Thank you. One moment for next question. Our next question comes from the line of Mark Delaney of Goldman Sachs. Your line is now open.

Speaker 6

Yes, good morning and thank you very much for taking my question. The first one is about the second half twenty twenty four revenue guidance. Steve, you mentioned some normalization in customer behavior and you're using customer schedules as an indicator for how you're guiding the second half of the year. Do want to better understand given the gap you saw in June between schedules and actual sales, Is there any extra conservatism you're using in the second half of this year, some sort of haircutting you're doing relative to those schedules is perhaps a bit more than typical that's been baked into the second half twenty twenty four guidance?

Speaker 2

Yes, I'd say we modeled this both 2 fully customer orders and our internal forecast based off of the global forecast. We also look at customer orders and behavior. In all these scenarios, we keep kind of popping back to the numbers that we provided today for the guide. And one of the things that's interesting there is, you look at what happened in the month of June and if you take the rest of the year out of it, so the 1st 6 months of the year, that was an abnormality that happened in the month. It's always interesting when something like this happens and you can't put your finger on exactly what that issue was.

Speaker 2

But what we're seeing in terms of customer behavior, releases and light vehicle production forecast for the second half, we truly believe that these numbers are achievable. Normally when IHS comes out and they have or S and P, sorry, when S and P comes out with their production numbers, we usually are a little more conservative than they are when it shows growth. I would say we're still doing that. It's not a drastic change, but I would say normally a 1% to 2% like it's kind of our pessimism that we build into most of their forecast. And so that's pretty consistent with what we're doing in the second half guide.

Speaker 6

Very helpful. Thanks for that. My second question was to better understand the gross margin expansion opportunity. Part of that was coming from improved input costs, I think supply redesigns as well as trying to get some improved pricing from some of your materials and from your suppliers. Maybe you can provide an update on how that's tracking and have you been affected at all with those efforts by some of this volatility in the industry?

Speaker 6

Thank you.

Speaker 3

Yes. So great question. If you look actually through the quarter comparing it to last quarter or last year's Q2, PPV or cost reductions on our input side really performed as we had hoped, kind of like what we had talked about at the beginning of the year. It stepped up from the Q1 of this year sequentially and last year. I mean, it contributed about 150 basis points to 200 basis points to the positive on the gross margin.

Speaker 3

Unfortunately, with the sales levels the way they were, a lot of that was offset by fixed overhead and the mix weakness that we talked about in the prepared comments as it relates to FDM and outside mirrors. So outside of that, yes, we're really happy with how the purchase cost reduction, have contributed to the margin expansion so far this year.

Speaker 6

Thank you.

Speaker 3

Thanks Mark.

Operator

Thank you. One moment for our next question. Our next question comes from the line of David Whiston of Morningstar. Your line is now open.

Speaker 10

Thanks. Good morning. It sounds like the pullback was really across the board. It wasn't just in crossovers, it was just SUVs primarily, correct?

Speaker 6

That's correct.

Speaker 10

Okay. And it sounds to me too that your customers really didn't give you any explanation as to what happened in June?

Speaker 2

No, unfortunately, they only tend to talk to us when they need us to do something that helps them. So yes, there's been unfortunately, it's very quiet from the OEM side in terms of what happened. I think personally, if I'm guessing, I'm going to say that there was a lot of the inventory on the door lots has definitely improved. So I think there was a portion of it that was, hey, inventory is there. We're not going to necessarily try to shove as many cars through this environment and kind of right size.

Speaker 2

The other part of it is, I believe, is that probably from an overall raw material side, if you're an OEM, I think they probably had been building inventories given the shortages that happened over the last couple of years. They're probably at a point where they're at a level of like normalcy when it comes to inventory. So I think there's probably a little bit of both things happening that drove this kind of one time change in shipment.

Speaker 10

Okay. So what about the Stellantis news this week that they want to pull back pretty hard in the second half of this year? That doesn't concern you for meeting your revised guidance?

Speaker 2

No, it does. I mean, it's one of the things that's honestly, is partially reflected inside of the global light vehicle production data is assuming that there is some pullback, with them in the second half of this year. How severe that is? The comments are tough because if you look at where they're at, I mean, if that's in France, if that's more in Europe for volume vehicles, that's not going to impact us nearly as much as if it's Dodge or Chrysler vehicles, where we have better content. So the question isn't just about whether or not they're going to pull back.

Speaker 2

The question is in what markets and on what vehicles and what platforms.

Speaker 10

Okay. And finally, what drove the aircraft window increase?

Speaker 2

Really, this is Zim just finally starting to build planes again. The last couple of years have been very little revenue with Boeing especially. Now we're actually into the launches with Airbus as well. So Boeing getting back on their feet in terms of 787 production, a little bit on the 777 side and then the Airbus A350

Speaker 3

product as well. And we're in refresh cycles on some of the original planes. So you get a little bit of aftermarket or not aftermarket, but refurb replacement sales of existing clients. Okay. Thanks, guys.

Speaker 2

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Ron Yatsikov of Guggenheim Securities. Your line is now open.

Speaker 11

Good morning and thanks for taking my question. Good morning, Rob. Maybe just first want to clarify the comment that if revenues came in line with your expectations that your gross margins also would have been in line with plan. I guess we're calculating like a 79% decremental margin versus the Q1 on at the gross profit line. So the downside, at least optically, does look like there's a bit more than just revenue downside.

Speaker 11

Anything any color you can provide on whether mix or some operational challenges caused by the late changes to schedules that you saw in June? And I guess also it sounds like that's normalized into July, but just kind of to repeat that that it has?

Speaker 2

Well, I think if you take the $50,000,000 and you look at a contribution margin of 45% to 50% on those incremental sales, you can model out pretty closely that gets us roughly in line, by itself gets us pretty darn close to in line with Q1 gross margin performance. The mix issue that we talk about was really OECs being weaker than expected. And that's not because not saying that they were down and certain not talking about just the fact that it's down, it's really the percentage of total revenue driven by OECs. So whenever that's a higher percentage, obviously, that's a tailwind. That's what we were expecting was, the amount of OEC as a percentage of sales basis being stronger than it was.

Speaker 2

So that's the one big factor. The other was the regional mix. If you look at Q2, like I mentioned before, regional mix, right, Europe was down 5%, Japan, Korea was down 4.5%. China was up 7.7%. So given the fact that we're underweight China, and that that was really the only growth story in the quarter from a LVP standpoint.

Speaker 2

Obviously that didn't set up well for us. If you look at basically our primary markets, North America barely up, like up 1 percent or something and then Europe and Japan, Korea both down close to 5%. That's really the regional mix issue. And then the product mix issue was that we being a little light, FDM on a percentage of sales being lighter than we expected. Those are the single biggest drivers of the margin weakness.

Speaker 11

Okay. That makes sense. And the drop in tax rate being driven by foreign derived intangible income, I think that implies foreign shipments are tracking better at least as a percentage of the business relative to North America. Is there anything you would call out? You called out the China business being up this quarter, least for Base Mirror.

Speaker 11

But anything that's driving the lower tax rate? Or is there kind of other noise in that line?

Speaker 3

I mean, it's a combination of the discrete benefits from stock based compensation, R and D tax credits. I mean, the biggest reason that gets us from 21 down to 15 is FDII. I wouldn't say it's heavily outperformed or higher or lower than what we were initially expecting. It just ends up pushing us a little bit lower on the guide and tightens up for the year.

Speaker 11

Okay. And then for FDM launches, I think last quarter, Neil and the team called out one more launch customer this year and had 3 this quarter. So is the expectation for any additional customers as we move through this year? Or is there a timeline for the next customer that you can provide?

Speaker 4

Yes. I'm looking here. I think it looks like well, there's a little bit of hesitation on my side because it's looking like it's later this year. We'll see an additional one. It might move into the beginning part of next year.

Speaker 4

So right now it looks like we'll have an additional one late this year or early 2025. And there could be an additional one in 2025 then as well.

Speaker 11

Okay. Thanks. Appreciate that. And I'll hop back in the queue. Thanks for taking my questions.

Speaker 3

Thanks, Ron. Thanks, Ron.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Josh Wiebersky for closing remarks.

Speaker 1

You everyone for your time and questions today. Hope you have a great weekend.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Gentex Q2 2024
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