Thank you for joining us for the Gentex First Quarter 2020 Financial Results Conference Call. I would now like to introduce your speaker for today, Mr. Josh O'Berski. Please proceed.

Thank you. Good morning, and welcome to the Gentex Corporation First Quarter 2020 Earnings Release Conference Call. I'm Josh O'Berski, Gentex' Director of Investor Relations, and I'm 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 by way of an icon on the Gentex website at www.gentex.com. All contents of this conference call are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcast, retransmitted, transcribed or otherwise redistributed. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any unauthorized use of the contents of this conference call. This conference call contains forward-looking information within the meaning of the Gentex safe harbor statement included in the Gentex reports first quarter 2020 financial results press release from earlier this morning and as always shown on the Gentex website. Your participation in this conference call implies consent to these terms. Now I'll turn the call over to Steve Downing, who will get us started today.

Thank you, Josh. For the first quarter of 2020, the company reported net sales of $453.8 million, which was a decrease of 3% compared to net sales of $468.6 million in the first quarter of 2019. The impact of the COVID-19 pandemic and the resulting shutdown of the automotive industry in various parts of Asia, Europe and North America resulted in an estimated negative impact on net sales of approximately $40 million for the first quarter of 2020. The company's decrease of 3% in sales was in comparison to global light vehicle production levels that dropped 24% for the first quarter of 2020 when compared to the first quarter of 2019. For the first two months of the quarter, top line revenue growth was progressing in line with our forecast with modest negative impacts coming from reductions in China as a result of the pandemic. But by mid-March, the pandemic was negatively affecting European OEMs more significantly. And then the North American production environment was brought to a grinding halt. The vast majority of the $40 million shortfall in sales occurred during the last 2 weeks of March. For the first quarter of 2020, the gross margin was 34.5% compared to a gross margin of 36.2% for the first quarter of 2019. On a quarter-over-quarter basis, the gross margin was impacted primarily by lost sales due to the pandemic and annual customer price reductions. When compared to the first quarter of 2019, product mix improved, which partially offset some of the sales losses and price reductions. The improvement in product mix was primarily driven by Full Display Mirror and exterior mirror growth. The gross margin for the quarter held up well when considering the significance of the lost sales and how quickly and unexpectedly the demand from our customers changed. During the first 2 months of the quarter, our gross margin was on pace to be in the range of our original annual guidance. Operating expenses during the first quarter of 2020 were up 7% to $51.6 million when compared to operating expenses of $48 million in the first quarter of 2019. The increase in operating expenses continues to be driven by headcount and other resources focused on new product launches as well as research and development of new products. CES 2020 created significant interest in our existing and new technologies, and we continue to believe in the long-term value that our new product offerings and technologies will create for our customers and the resultant trajectory that this can create for our business. In terms of execution to our budget, operating expenses were in line with our original guidance, which were planned to increase at approximately the same rate as sales for the year. Income from operations for the first quarter of 2020 decreased 14% to $105 million when compared to income from operations of $121.6 million for the first quarter of 2019. The reductions in operating income were largely due to the lost sales stemming from the pandemic and the overall lower gross margins in the quarter. Net income for the first quarter of 2020 decreased by 14% to $89.5 million compared with net income of $104.3 million in the first quarter of 2019. The reduction in net income was from the lost sales due to the pandemic and the impact this had on gross margins. Earnings per diluted share for the first quarter of 2020 decreased 10% to $0.36 when compared to $0.40 for the first quarter of 2019 primarily as a result of the impacts of the pandemic on net income, which were partially offset by the impact of share repurchases. In the first quarter of 2020, the company announced a 4% increase in its dividend rate, marking 10 straight years of year-over-year dividend increases. Also during the first quarter of 2020, the company repurchased approximately 7 million shares of its common stock at an average price of $25.48 per share. As of March 31, 2020, the company has 13 million shares remaining available for repurchase under the previously announced share repurchase plan. I will now hand the call over to Kevin for first quarter financial details.

Thank you, Steve. Automotive net sales in the first quarter of 2020 were $439.9 million compared with automotive net sales of $455.8 million in the first quarter of 2019. The 3% quarter-over-quarter decrease in automotive sales was driven primarily by a 6% quarter-over-quarter decrease in interior auto-dimming mirror unit shipments due to the 24% reduction in global light vehicle production. Other net sales in the first quarter, which includes dimmable aircraft windows and fire protection products, were $13.9 million, an increase of 9% compared to other net sales of $12.8 million in the first quarter of 2019. Balance sheet. In terms of the balance sheet, the company ended the quarter in a very strong liquidity position. And to bolster that, the company drew down $75 million on its $150 million line of credit. The company has an additional $75 million available to draw on as needed. The drawdown was a precautionary step given the volatile market and unknown length and severity of the pandemic. I'll highlight a few key balance sheet items as of March 31 as compared to December 31, '19. Cash and cash equivalents were $278.5 million, down slightly from $296.3 million primarily due to the cash flow from operations and the proceeds from the $75 million draw on the line of credit, which was more than offset by share repurchases, dividends and capital expenditures. Short-term investments were $131 million, down from $140.4 million. Of the $131 million, approximately $70 million are in CD and investments that are scheduled to mature in the second quarter of 2020. Long-term investments were $177.8 million, up from $139.9 million. Long-term investments include FDIC-insured CDs, treasury notes as well as corporate and municipal debt. The portfolio is currently well positioned with over 90% of the corporate and municipal holdings invested in A-rated or better institutions. Accounts receivable declined slightly to $233.6 million from $235.4 million with all Tier 1 and OEM customers in good standing as of the end of the quarter. Inventories were $251 million, up slightly from $248.9 million primarily as a result of increased raw materials. Our purchasing and supply chain teams continue to manage through supply chain stresses, which have included managing rolling shutdowns in our supply base, managing runout situations on certain components and then adjusting order volumes heading into the second quarter and balance of 2020 based on the current forecast. Accounts payable increased to $100 million, up slightly from $97.6 million. And accrued liabilities were $163.9 million, up from $74.3 million. The increase was primarily due to the $75 million draw on the company's line of credit. Looking at the cash flow statement. The first quarter 2020 cash flow from operations was $151.3 million, up from $133.8 million in the first quarter of 2019. Cash flow from operations was impacted by lower net income in the quarter, but was more than offset by fluctuations in working capital. Capital expenditures for the quarter were $15.6 million compared with $16.8 million for the first quarter of '19. And depreciation and amortization for the quarter was $26.3 million compared with $28.1 million in the first quarter of '19. I'll now hand the call over to Neil for a product update.

Thanks, Kevin. In the first quarter of 2020, there were 12 new nameplate launches of our interior auto-dimming mirrors and electronic features net of previously disclosed feature headwinds. Despite the troubling economic conditions, the net launch rate for inside auto-dimming mirrors and advanced features was the highest first quarter launch rate of the last 3 years. During the quarter, there was a good mix of both auto-dimming inside mirrors and advanced features. The base inside auto-dimming mirror launches included new models in all of our major markets despite the pandemic, while advanced feature launches were led by new models for both HomeLink and Full Display Mirror. Now for an update on our Full display Mirror product. We're excited to announce that we are now shipping FDM on the Cadillac CT5, Land Rover Defender, Lexus LM, Chevy Corvette and the Mitsubishi eK Wagon and eKX vehicles. The newly launched FDM for Mitsubishi is our seventh OEM launch and represents another win with a Japanese OEM, which we believe speaks to the global appeal of this product for our customers. Here's a comprehensive list of the OEMs and the number of nameplates we are currently shipping FDM. General Motors, our initial launch customer, has 19 different nameplates shipping. Subaru is currently shipping on 3 nameplates. At Nissan, we are shipping on 2 nameplates. For Toyota, we are now shipping on 8 nameplates. At Jaguar Land Rover, we are currently shipping on 4 nameplates. Aston Martin was announced earlier this year as our sixth OEM, but shipping will begin around midyear, and today's announcement of our seventh OEM, Mitsubishi, is shipping on 2 nameplates. As we look forward to the second quarter and the balance of the calendar year, we realize that many of our customers' expected launches of new vehicles may be affected by the pandemic. However, we are optimistic because we continue to see strong demand for our latest products, like FDM and ITM, and the new products that we debuted at CES. In summary, we're pleased to be able to show progress in the launches of additional Full Display Mirror systems with our existing OEM customers and are very excited to introduce Mitsubishi as our latest FDM customer despite the difficult vehicle production environment that we are facing. I'll now hand the call back over to Steve for updated guidance and closing remarks.

Thanks, Neil. The company's current forecast for light vehicle production for 2020 is based on the mid-April 2020 IHS market forecast for light-vehicle production in North America, Europe, Japan, Korea and China. The company's forecast also takes into account the fact that many of our customers are on full or partial shutdown with some of our customers not scheduled to resume operations until mid-May or later. Based on this information, light vehicle production forecast in our primary regions for the second quarter are expected to decline 42% from last year and for calendar year 2020 are forecasted to decline 20% compared to 2019. Based on this light vehicle production forecast, the company's current estimate is that net sales for 2020 will be approximately $1.58 billion to $1.67 billion for the year, which represents a 10% to 15% reduction when compared with 2019. Based on these lower sales, we are currently forecasting a gross margin in the 34% to 35% range for the calendar year. Gross margins for the second quarter are expected to be the lowest of the year, due to the significant impact of sales that have occurred so far in the month of April, but will be largely dependent on the rate at which our customers begin to emerge from their shutdowns and at what volume they produce. As volumes hopefully build through the second quarter into the third and fourth quarter, we are optimistic that margins will reach their high point in the back half of the year. In an effort to size the company appropriately, given the new lower sales levels, the company is also lowering guidance for operating expenses by $10 million to between $195 million and $205 million for the year. This lower level of operating expenses will be achieved through a combination of headcount reductions and other cost-control initiatives that are already underway at the company. The bottom end of the tax rate guidance has been increased by 1 percentage point to reflect the anticipated lower discrete benefits from stock option exercises of our employees and the reduced FDII benefits due to the geographical mix changes within our customer base due to the impact of COVID-19. In an effort to preserve capital and lower future expenses, the company has undergone a significant effort to lower capital expenditures for the year. We have reduced our capital expenditure guidance for the year by $25 million, which means our new projection for CapEx for 2020 is between $60 million and $70 million. Based on the changes to our CapEx budget, we now estimate that our depreciation and amortization for 2020 will be approximately $3 million less than previously forecasted and will end the year between $102 million and $107 million. Based on the difficulty and uncertainty of global light vehicle production data for 2021, the company is withdrawing its revenue guidance for 2021 until better data becomes available. Despite the fact that we are withdrawing guidance for 2021, the company remains confident in its ability to continue to outperform the underlying market. Over the last several weeks, COVID-19 has created unprecedented circumstances for our industries, which included massive changes to production levels at our customers. Our industry has also been significantly influenced by federal, state, and local governments in each of the countries where our customers operate. Unfortunately, many of these changes have come with little or no advanced warning, which makes it very difficult to forecast sales or build a sustainable operating model. Our focus over the last few weeks was directed at protecting our employees, while still supporting our global customer base from our centralized manufacturing footprint. Over the coming months, we will continue to work to ensure that our cost structure accurately reflects industry production changes and new business realities. Our overall commitment to new product research and development will remain one of our top priorities for investment even as we look to optimize our cost structure. We remain optimistic that we can continue to provide above-market returns for our shareholders, by leveraging our current product strategy and through the execution of our lean organizational structure, which provides the speed and agility necessary to respond quickly to and manage through this new business environment. Thank you for your time today, and we can now proceed to questions.

Our first question comes from Chris Van Horn with B. Riley FBR.

There have been various reports about the restart of production, its timing, and its dependence on specific regions. Could you provide us with an update on your discussions with customers by region and what you are observing in real-time?

Yes. We'll follow the progression of the pandemic and the logical restart. It began in specific areas and then spread out. In China and Korea, for example, Korea experienced minimal shutdowns, with only slight adjustments to production levels during the pandemic. China, however, faced a complete halt but has now mostly restarted. We are noticing an increase in orders in Asia, particularly in China and Korea. Japan is currently facing challenges, so we anticipate impacts in that market over the upcoming months. Currently, factories we supply in Japan are still operating. Europe, similar to the U.S., experienced a significant halt as well. Many of our customers in Europe and North America expect restarts to occur from early to mid-May, but these will likely be gradual, starting with single shifts or reduced volumes before hopefully returning to higher production levels by late May or early June. There are ongoing UAW discussions that could affect the restart plans of the Detroit 3, and we are awaiting further updates this week.

Okay. Got it. And then kind of on that same vein, how is your supply chain holding up? And have you seen disruption on things that you're taking in-house?

Yes. I mean there are obviously, anything coming from China a few weeks ago was stopped. So that was a problem. Luckily, given our balance sheet, we tend to carry slightly higher inventory levels, and that has helped us weather most of the supply issues. We do see rolling changes happening, like Kevin mentioned in his comments, a lot of it's coming from suppliers in Southeast Asia, where countries are starting to go into shutdown modes in various parts of the world. Mexico, there's definitely some supply constraints that are happening. Fortunately for us, we don't see anything that really impacts us at least through the end of May. So we're watching it closely and trying to work with our supply base to make sure that we have continual flow of product. We don't see anything that should impact sales in the short term.

Okay. Got it. And then last for me. How are the new business conversations going? I mean, I imagine you can still have those remotely and I imagine there's still some expectations that there'll be some return to demand, and certainly, your technologies are going to want to be part of that snapback. So how are those conversations going?

Yes, the conversations are going very well in terms of customers continuing with the quote processes and reviewing the business development plans we've established. Our main concern isn't the level of dialogue, but rather the realization that, in the coming months, OEMs will face budget issues that will affect their product launch rates. Some OEMs have already indicated that they will be postponing some new launches. Budget constraints are expected to become a significant concern for all OEMs. We are closely monitoring our customers' engineering resources to see if they will be able to launch all the vehicles and new product concepts they have been developing. Currently, all discussions are ongoing and progressing positively. However, we recognize that as we move forward, there will likely be a reduction in available resources from some of our customers.

Our next question comes from Ryan Brinkman with JPMorgan.

I would like to follow up on how you are supporting your global customers from Michigan as they begin to restart production. Can you discuss what manufacturing is currently happening in Zeeland? Additionally, can you provide details on the inventory available overseas? It appears that the U.S. is the last major market to experience the impact of the virus, and may also be the last to recover. China seems to be back online, and Europe is likely to follow. How confident are you in your ability to assist with the different timelines for restarting production in various regions?

Sure. Yes. So the state of Michigan has been on a lockdown really since late March. And so one of the things that we've been focused on is making sure we're following our state's orders and mandates. What we're doing is we're just building essential items that are necessary, and we're doing that through a volunteer staff. And so as many people as can be home, we're having them stay home. Really just looking for volunteers to meet those necessary orders. We've taken some of the inventory stuff that's on surface, shipments to our customers out of there. So we're have to go to air freight in certain times to try to meet those demands. So it's not the most efficient shipping situation right now. But we're very confident with the volunteer staff we have. The team has stepped up, and we're very comfortable that we can meet all of our customers' orders with that volunteer team. And obviously, we've done a lot of things differently in our manufacturing floor, including distribution of PPE to our employees to try to make sure we're ensuring their safety without causing our customers, obviously, problems or downtime.

Okay. That's helpful. And then just finally for me, with regard to the buyback, is a bold move, of course, totally manageable in the context of your liquidity. But I guess I'm just curious about how you are viewing this from here on out. What approach might you take going forward? Should we expect you to maybe pause the aggressive approach post the revolver draw? Or do you intend to continue to be opportunistic?

Yes. You'll see that we are where we expected to be regarding repurchases as we reach the midyear point. Our plan for Q2 is to be more conservative with repurchases. However, we are always monitoring the cash flow of the business. We are effectively managing within our targeted cash position that we established about a year and a half ago. Our target is to maintain cash levels above $500 million. As long as we remain above that threshold, we will continue to take advantage of opportunities based on the share price, market conditions, and our future business outlook. Although we were aggressive in the first quarter and will likely slow down in the second, it doesn't mean that we're finished for the year.

Our next question comes from James Picariello with KeyBanc Capital Markets.

So how should we consider the gross profit decrementals as we move through the second quarter? It seems clear that you're not planning to significantly reduce SG&A or R&D due to the new product launches and future investments, which I completely understand. I'm just curious about that.

Okay. You had some connection issues at the end, so I'll quickly address your first question. The decremental margins changed from 36.2% last year to 34.5% this year, primarily due to two weeks of lost sales at the end of the quarter. If we look at April, it seems to be following the trend of the last two weeks of March, indicating very low sales levels. If we assume the entire month of April will be at that reduced level, it gives us a rough idea of revenue and associated profitability. The key question for this quarter is how May will perform. We need to see how quickly customers return and at what production volumes. If things revert somewhat to normal, we would expect the second quarter to be significantly lower than the first quarter in both sales and profitability. Evaluating the full year, the first quarter had a negative impact of 170 basis points connected to about a $40 million sales drop. Had we not experienced that $40 million loss, we would have been aligned with our guidance for the year. You can estimate the effect of that $40 million on overall decrementals and consider how a bigger impact in the second quarter will influence gross profit. James, can you please repeat your second question?

How would you describe the mix for the year considering the production challenges in the market? Is the mix favorable for Gentex this year?

It's challenging to predict the vehicle content that will be built in the second half of the year on a year-over-year basis. However, we've seen a positive mix in Q1, with overall OECs performing well and FDM exceeding expectations despite economic challenges. This is encouraging compared to our base auto-dimming mirrors. Looking ahead to the second half, it's hard to determine the pandemic's impact on the mix, but so far, the mix has been solid through Q1, and we are optimistic that this trend will continue.

Got it. And then just within the revenue guidance, there's a clear outperformance baked in. FDM is an obvious driver. I thought ITM was more of a ramp-up for next year. So just would be interested in any clarification there. And then exterior domestic shipments once again held in exceptionally well. So just curious if you can maybe help generalize or bucket where the outperformance is deriving from for the year.

Yes, you're correct that ITM is expected to ramp up more next year rather than this year in terms of volumes. The primary source of our growth has been our performance in outside mirrors, but it's predominantly driven by FDM performance.

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

I have a question about the ramp-up. There are estimates regarding the timing to begin, but it's uncertain how this will play out. I'm curious if you consider early to mid-May as the rough timeframe that most automakers are looking at. What if that gets pushed back to early June or mid-June? How do you plan to adjust or restart your operations? What is your capacity to say that the May timeline is unrealistic and that you need to move to June? What steps do you need to take to get back up and running, and how adaptable are you to handle what will undeniably be a variable start date that remains unknown?

Yes, the good news for us is that our centralized manufacturing operations make it easier to restart since we have already been operational to support our international customers. Now, it’s about achieving scale. Assuming we are operating at 30% to 50% depending on staffing for exports, we believe we can effectively increase our production capacity back to 80% or 90%. This relies on ensuring we have the right personnel, staffing, and necessary safety equipment to protect our employees. On the incoming parts side, our teams excel at managing inventory. We are dependent on our supply base, so it’s essential to provide them with ample notice, clearly communicate our expectations, and allow time for transportation, which has become more challenging in the current environment.

So you're saying April, you guys are, depending on the day or the week, operating somewhere between 30% to 50% cap? Is that what you're kind of indicating there?

Yes, definitely. The first couple of weeks in April were almost nonexistent because China was still down but getting ready to recover, resulting in very minimal operations during that time. Currently, that's about the rate we're operating at.

Okay. That's very helpful. And then just a second question. As you kind of go through these tough times, often it elucidates some cost opportunities going forward as you get aggressive on cutting costs and some of that cost does not return as you ramp back up to normal. Do you think there's any potential for uncovering some costs that might just not need to return as you ramp back up, hopefully completely in the third and fourth quarter of this year that might help margins ultimately for the long run?

We truly believe there are many challenging tasks ahead in the coming months to align our business with future expectations. It's clear that this year, and likely the early part of 2021, will not match our initial budget plans for 2020. We are projecting revenue close to $2 billion. As we work to adjust our size to reflect the current business environment, there will certainly be costs that we will eliminate and not bring back. Some of these are discretionary expenses, things people have grown accustomed to that we will need to forgo temporarily. This process will instill a level of discipline at the business level that will not revert to the previous cost structure. While these are undoubtedly tough times, we see potential in a 3- to 5-year horizon to improve and align costs for sustainable growth.

Okay. That's helpful. And then just lastly, how are the discussions going with your automaker partners as far as pricing? Has there been any kind of step-up in price concessions that they're looking for? Or are there any other actions? I know you said that some programs might be delayed, tough to call at this point. So leave that out for a second. But I mean as far as price concessions or even conversely sort of a more collaborative environment with them that actually might be somewhat better. I mean, is it a little bit more combative where they're looking for more help on price? Or are they kind of play a ball and being pretty collaborative because they obviously need you?

No. I think there's always a step-up in intensity of price reduction conversations anytime something like this happens. It's just kind of natural part of the business cycle. Probably the one that you watch the most and what's happening the most with a lot of customers is really talking about payment terms. Obviously, everyone's trying to keep their hands on as much cash as humanly possible. So one of the conversations you have is about price itself and then the other you have is about what are your payment terms and how do you make sure that the liquidity for our customers is there, that they have access to the cash they need. And obviously, payment terms become a large part of that discussion.

Our next question comes from David Kelley with Jefferies.

This is Gavin Kennedy on for David. A question on the OpEx guide, it looks like you cut less than sales and you referenced new product launches and R&D. I was just curious if you could provide some more color on the moving parts of the guide, and if there's any other significant drivers we should consider there.

I think when looking at operational expenses, it's important to remember that any improvements only provide partial benefits when you alter headcount and implement cost-saving measures. There are often initial costs involved to achieve these savings. Therefore, the actual savings we mentioned for operational expenses is what's reflected in our income statement for the year. Long-term, if you were to annualize those figures into 2021, you would see different numbers. This is why the change in operational expenses percent is slightly lower than the sales impact. Additionally, this analysis is informed by the technology we are using, our commitments to customers regarding product launches, and the engineering staff needed to support those efforts. It's about balancing the revenue from the business and the engineering requirements to deliver on our customer commitments.

And then one other thing, this is Kevin, that is important to note that some of the things Steve mentioned earlier about inefficiencies in the supply chain, having to go off of the ocean and do airfreight to our customers. That is a cost that is in the SG&A line that will be higher than normal to partially offset some of those savings this year.

Got it. And then switching gears a little bit. Do you expect to see any changes in the SmartBeam and Driver Assist headwinds given the broader industry pressures? I think you were targeting about 175 basis point headwind in 2020 before the COVID impact.

No, I think those are expected to remain about the same. They could change, honestly, because they are closely tied to a specific OEM. The performance and overall production of that OEM could alter the impact. In other words, it's not so much about the products themselves but rather about our exposure to Ford and how they utilize those products in the upcoming 18 months.

Our next question comes from David Whiston with Morningstar.

I guess, first, on the headcount reductions you mentioned, can you say any more detail on that? Are they more in the hourly or salary side? And if salaried, what parts of the company?

The ones we're referring to on the OpEx side are all salaried.

Okay. Do you anticipate that being one big cut that you've already done? Or do you think you're going to be to do a few more in the next few months? Or is it just a wait and see-type ploy?

No, we're taking a very controlled approach and trying to meet with everyone individually to have specific conversations and make sure we're doing this the best way possible, not only for the company but also for the individuals impacted. So this will be something that will take a couple of months for us to work through. It's not typically in our culture. We don't go and make massive changes all at once. We try to do this on a personal level on a one-on-one basis. And so we're working through that real time.

And hourly workers, it doesn't sound like you need them all, given your capacity utilization. Are they on furlough? Do they still get full pay? Or how is that working?

We are currently providing compensation for workers who are not actively working, with a set number of paid hours each week that may change as we navigate this period. We are assessing the necessary headcount from an operational perspective to align with the future size of the business. Our intention is to adjust the workforce in tandem with the overall business growth as our OEMs begin to ramp up again. The challenge we face is avoiding significant changes at this stage since we are uncertain about the volume of orders expected in May and June when operations increase. Therefore, we are being cautious in scaling the business to ensure it aligns appropriately with demand. There are still many uncertainties regarding our return—will we be operating at 90%, 80%, or even 100% of our previous capacity? What will be the demand in the latter half of 2020? We are being very deliberate in making decisions daily.

You mentioned what the situation will look like when we restart. We can look to China for some insight. As you're aware, China was experiencing a slow market even before COVID. How does it appear to you now? Is there significantly more demand compared to pre-virus levels, or is it still slow?

No, I would say that it has actually shown a good return in China. The challenge is that due to language barriers and other differences, it’s always a factor. Whenever there’s a shutdown like this, you tend to see a significant spike in returning to normal for a brief period. The key question is whether those volumes can be sustained for the rest of the year, or if it’s just a major improvement that will eventually decline back to a more typical level. Another question is what that return to normal looks like and what the normalized level will be. Even in China, it’s still too early to determine. Will it be at 80%, 85% of what it was? Will it reach 90%, 95%, or even 100%?

Okay. And Kevin had mentioned you guys already have a raw material buildup. So once your customers already open, do you expect to not have that bad of a working capital outflow because you already have a lot of the inventory in place?

Yes. I think a lot of the stuff in March was already committed to from an inventory perspective based on planned builds for the back half of the quarter. We did have a little bit of increase there. But our purchasing and supply chain teams are doing the same thing that we are on the business side is evaluating what our order flow looks like through the second quarter and adjusting our purchase materials appropriately so that we don't have a major build in inventory throughout the quarter.

But we wouldn't expect it to go much higher than it is currently in order to support the ramp back up of our customer base.

Our next question comes from Mark Delaney with Goldman Sachs.

I was hoping first to better understand how you're thinking about inventory digesting at your customers. I think the company seemingly outperformed auto production in the first quarter, right, about 20 points and your guidance implies about 7 points of outgrowth for the year. So do you think that the inventory gets digested as your customers pretty quickly in the second quarter or more spread out over the course of the year? Any color on that would be helpful.

Yes. Our expectation is that two things will occur. On the supply side, we anticipate a higher outperformance in a downturn like this on the front end, while the return will be slightly lower. The primary reason for this is that we are shipping weeks ahead of time before parts are fitted into vehicles, creating a natural lag. This is why our outperformance was notably higher in Q1. As we ramp back up, we don't expect the same level of outperformance because the parts we shipped in March will be utilized in May or June. We believe our outperformance will return to a more normalized level for the year, which has been in the mid-single-digits range for the last few years, and we are confident about that. Regarding what's happening in the industry, we are closely monitoring overall inventory levels, particularly the number of vehicles available. One major concern for us is when showrooms will reopen and how consumer sentiment will affect their willingness and ability to buy a vehicle. We believe these factors are long-term drivers of our business, more so than just auto production. It’s important to assess consumer sentiment: if someone is going to buy a car, what type will they choose? How much are they willing to spend on features? What's the average purchase price? These aspects will significantly influence our business beyond just raw production levels.

That's helpful. My second question is about Gentex and its growth relative to the market. Initially, the guidance for 2020 indicated that Gentex revenue would grow about 6 points above auto production at the midpoint. I believe the current guidance has increased to about 7 points above auto production. I'm trying to understand how your views on growth compared to the market have changed today versus 90 days ago.

Yes. I think it's really about the same. The hardest part is that it's such a chaotic environment, and the IHS data for vehicle production has changed drastically in the last 3 weeks. Global production has dropped by about 8 million to 10 million vehicles during this time. Coming into this year, the forecast for global light vehicle production was 88 million, but it has now decreased to 70 million. This situation is evolving on a weekly basis. We are analyzing a bottoms-up forecast for the next 12 weeks, which includes customer orders and our business expectations based on our customer base. We are also incorporating insights from the IHS data for the months ahead. There’s a modest change expected, around 6% or 7% outgrowth, which is consistent with where we’ve been over the last couple of years.

Okay. That's helpful. And just finally for me in terms of your outlook for revenue outside of the auto market. Can you just talk about some of the trends that you're seeing? I know there's some product wins in the commercial plane market, but it's also a new market that's had some challenges. So just any more color on how you're thinking about 2020 for the non-auto business?

Yes, absolutely. We're very excited about what we're doing in the aerospace business. It's been a nice growth driver for the company. Definitely opens up some new opportunities for us with all of our technology, not just the dimmable glass. Obviously, that industry has been impacted by this as well. So it's difficult right now for pretty much any production environment. And so it's hard to predict exactly what the impact will be on our customer base from a dimmable glass standpoint in aerospace. Obviously, production what's going on, on commercial construction side, which is really what drives our fire protection industry. A lot of that has stopped or slowed. Currently, our customers are doing quite well. So we continue to ship our fire protection products very regularly. And we're optimistic that, that business will continue to hold up well through the second half of this year. It's really difficult to predict exactly what's going to happen, especially on the construction side because you're talking about local state and local governments kind of controlling what is allowed to and not allowed to happen on the construction side.

I'm not showing any further questions at this time. I would now like to turn the call back over to Josh O'Berski for any closing remarks.

Thank you, everyone, for the questions and your time this morning. Stay safe, and have a great weekend. This concludes our call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.