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. Please be advised, that today’s conference may be recorded. 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 and orders resulted in the push out of approximately 2 million units. The unit shipment changes were most severe in North America where our dollar content per vehicle is above the corporate average. We estimate that the total impact to revenue in the quarter was about $80 million. As we move through the second half of the year and into 2022, we are encouraged that the overall demand for vehicles and our products should still provide opportunities for the company to continue to outperform the underlying market. For the second quarter of 2021, the gross margin was 35.4%, compared to 19.1% for the second quarter of 2020. Compared to the COVID-19 impacted second quarter of 2020, gross margins improved due to higher sales levels, significantly better overhead leverage, the structural cost savings put in place by the company last year, and positive product mix. While the gross margin for the second quarter of 2021 improved significantly versus last year, it was well below our initial estimates for the quarter. The lower than forecasted gross margin was primarily driven by the significant reductions in expected sales during the quarter, our inability to offset fixed and variable overhead costs due to the lower sales, lower than expected price reductions on raw materials, and higher than expected incoming freight costs. The good news, however, is that despite many of the challenges in the quarter, our analysis shows that if sales had hit our initial forecast, then gross margins would have been very close to our previous annual guidance range. Operating expenses during the second quarter of 2021 increased by 2% to $51.7 million, compared to $50.7 million in the second quarter of 2020. Income from operations for the second quarter of 2021 was $99.9 million, compared to a loss from operations of $6.7 million for the second quarter of 2020. During the second quarter of 2021, the company had an effective tax rate of 15% or $15.3 million, which was below our annual guidance range and was primarily driven by the benefit of the foreign-derived intangible income deduction and discrete benefits from stock-based compensation. Net income was $86.5 million for the second quarter of 2021, compared to a net loss of $2.4 million in the second quarter of 2020. The increase in net income was driven by the quarter-over-quarter increases in sales, gross margins and operating profits. Earnings per diluted share for the second quarter of 2021 were $0.36, compared to a loss of $0.01 for the second quarter of 2020. The increase in earnings per share is the result of a higher net income when compared to the second quarter of 2020. I will now hand the call over to Kevin for second quarter financial details.

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, 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, compared to capital expenditures of $28.8 million in 2020. 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 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 OEMs 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 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 a 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 a result of customer order changes, stemming from part shortages that have impacted the second quarter and will likely continue to impact demand into the second half of this year. The company has also updated our cost and profitability model to include impacts due to elevated raw material prices, freight expenses and labor costs. The following guidance is intended to replace our previous guidance. Revenue for the second half of 2021 is expected to be between $970 million and $1.07 billion. Gross margins for the second half of 2021 are expected to be between 37.5% and 38.5%. Operating expenses for the second half of 2021 are forecasted to be approximately $105 million to $110 million. Our estimated tax rate for the second half of 2021, which assumes no changes to the statutory rate, is forecasted to be between 16% and 18%. Capital expenditures for the second half of 2021 are expected to be between $50 million and $60 million. Depreciation and amortization for the second half of 2021 is forecasted to be between $54 million and $59 million. Based on the mid-July 2021 light vehicle production estimates for 2022, the company estimates that revenue for calendar year 2022 will be approximately 10% to 15% higher than the updated 2021 revenue estimates of $1.88 billion to $1.98 billion. We have updated our 2021 and 2022 guidance to include our expectations that the company will continue to see headwinds to demand due to supply shortages that we believe will continue in the second half of 2021 and into the first half of 2022. Our forecast includes manual adjustments to the IHS Markit forecast for light vehicle production. Despite the massive volatility in the industry, we are estimating that buildup demand will provide strong revenue growth next year that is on pace with our initial revenue guidance for 2022. Our industry is enduring severe challenges currently, including issues in order cancellations, component shortages, raw material increases, freight issues, labor shortages and other pressures. But we remain optimistic that the next 18 months has the potential to produce record level revenues and profitability for the company. In conclusion, I’d like to take just a minute to thank the entire team at Gentex for their focus, hard work and immense flexibility during the quarter. The amount of last minute changes in customer orders, combined with the difficulty in receiving raw materials and the necessary volumes and timing made it very difficult to plan operations. But the team coordinated and worked very hard to keep up with the rapidly changing environment, which allowed us to continue our streak of meeting customer shipments without any major downtime for our customers. We believe the challenges facing our industry will continue for at least another 12 months and our forecast assumes that overall light vehicle production will continue to see large changes and increased volatility. These headwinds will also continue to affect the overall profitability of the company. But much of the work we did last year on cost controls has prepared us for the difficult conditions we are currently operating under. Despite these challenges, our forecast for the rest of 2021 and 2022 remains strong. As I mentioned during the first quarter conference call, the combination of our launch cadence, product mix and overall program awards continue to provide us confidence about the future growth rate and health of our business. That completes our prepared comments for today. Thank you for your time and we can now proceed to questions.

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, 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. In 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. As a follow-up to that, what factors could influence the situation regarding your annual price reductions with OEM customers at the beginning of the year and your negotiations on the supply base to gain concessions? How should we approach understanding these dynamics?

I think the main issue this quarter has been lost sales, which is unfortunately largely beyond our control. This is also a challenge for other Tier 1 suppliers, leading to downtime for OEMs. If the OEMs are operating according to our forecasts, we should be in a strong position for the second half of the year and into next year. Therefore, we should closely monitor how our revenue estimates align with actual sales. Additionally, we need to consider factors like the delays in receiving parts, getting them to our facilities, and the associated costs. If we can navigate the first half successfully and meet our sales targets, we are confident in our capacity to manage expenses related to price increases and freight costs.

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 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?

We are still experiencing positive cost reductions; however, the electronics content is somewhat dampening this, roughly equating to about 100 to 150 basis points in some instances. This is mainly what is counterbalancing our usual seasonal ramp. If sales meet our forecasts, that should help mitigate the issue. However, we anticipate a slight discount compared to the IHS forecast, which also negatively impacts our gross margin but should be balanced out in the second half.

I think the significant increase from Q2 actuals to the second half guide reflects the impact of the higher sales levels we expect 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.

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, etc. 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, etc. 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 of 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, etc. 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, etc. 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 looked like. So, 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 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?

I think most original equipment manufacturers, especially at the end of the first quarter and throughout the second quarter, prefer to produce the highest-end vehicles possible. This has led to an interesting shift, as many manufacturers have been dropping certain features due to a lack of support from the supply chain. They are still building the vehicles, often with around 90% of the original content. The focus has been on high-end models. However, by the second half of the second quarter, particularly in May and June, many manufacturers began asking suppliers what components they could actually obtain. While they still prefer high-end models, they are willing to produce anything as long as they can secure the necessary components. There is a certain level of urgency on both the supply and manufacturing sides as they work to develop a plan that allows them to build vehicles. I believe we still have challenges to navigate in the third quarter, but I am hopeful that conditions will improve in the latter part 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 believe that the acquisition alters the FDM landscape in any way. If you consider what it focuses on, it involves a completely different technology and does not align with the features 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 have a question about the second half, and I'm not trying to challenge you because I understand this is a very unpredictable time, which is beyond your control. How confident are you in the volume forecasts for the upcoming months? We're hearing mixed information about the chip supply - some say it’s improving, but there are concerns about whether it will hinge on who you speak with. It appears that increased volumes are being directed more towards consumer electronics and cell phones instead of the auto sector, which might mean the supply won't significantly improve in the latter half of the year. Even with a limited supply of chips, there seems to be some front-loading of demand, which you've hinted at, but that seems to have tapered off by the end of the second quarter. There are a lot of variables at play, and it’s hard to predict how the chip shortage will be resolved in the latter half of this year, or even by next year. How certain are you about these numbers for the second half? Again, I’m not trying to put you under pressure, as I recognize the volatility in the semiconductor industry and the factors beyond your influence.

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 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 lightening. 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?

If you consider the profitability of the lost business along with the benefits of overhead from better planning and leverage, it would account for around 200 to 250 basis points. This is why we believe that for the second half of the year, achieving record revenue is not essential to reach the profitability targets we've set, even with the challenges posed by raw material costs and freight. What we require is sufficient visibility and a high enough sales level to create that leverage.

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 material 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 in 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 apologize, but on a comparison basis, this kind of pressure is expected to continue into the first half of 2022 on a year-over-year basis. Will that potentially ease, given that you’re already seeing or 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 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.

Thank you. For my second question, I noticed that you have made slight reductions to your IHS estimates. I assume most of this adjustment is happening in North America compared to outside the US. Currently, supply seems to be somewhat challenging, with overall inventory levels quite low. I'm interested in your perspective on how long it might take for OEMs to rebuild their inventory levels as we look toward next year, especially considering the high demand for vehicles 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 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 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.

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?

We are a market-based pricing company, which means we don’t have contracts that allow us to automatically pass on a 10% increase in raw materials. Each year brings new negotiations for customer price reductions, and we typically use those cost increases as part of our strategy to negotiate lower prices. We’re currently still discussing last year’s issues with some OEMs because volumes didn't meet expectations. Our best opportunity to mitigate the rise in raw material costs is to secure a lower average price for each customer as we plan for the 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 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?

We did not modify the published IHS numbers and reflected that in our press release. However, we are discussing our topline forecasts, which incorporate our internal adjustments when reporting our revenue increases. We continue to publish the IHS figures for the regions as a benchmark, but anecdotally, we are discounting those figures to assist with modeling moving forward.

Got it. That’s helpful. As you consider the second half of the year, you’ve provided insight into how customers are responding regarding billing schedules and potential ramp-ups. Can you elaborate on the linearity of your goals for the second half, particularly how your current performance compares to expectations for improvement? I realize conditions are expected to remain tight throughout the second half, but do you anticipate any improvements in the latter part of the third quarter, or is it more likely that significant increases in volume will occur in the fourth quarter? Thanks.

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 implies that there has been some perhaps 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?

I think the situation is less about intentional poor communication and more about what OEMs were planning and then not being informed. During the quarter, we discovered through our suppliers at the last minute, or when shipments were delayed, that we were short on components. Many suppliers faced similar challenges due to inadequate communication from the supply base. Consequently, it became apparent that we had a problem, and it was uncertain whether we would receive the necessary parts and in what quantities. This information reached the OEMs later than it should have, which forced them to make decisions based on incomplete data. I wouldn't say it was a deliberate failure in communication; in fact, I believe it has improved significantly in recent years. However, the issue stemmed from the supply side, particularly concerning silicon, where we encountered a lot of last-minute updates and unexpected shipping issues that delayed our response. Once that information reached the OEMs, they had to make decisions and communicate those changes back down, leading to alterations in their demands. This forced us to redesign our entire production process based on their revised requests. I wouldn’t place the blame solely on the OEMs; instead, it was largely a bottom-up issue from the supply base that impacted the OEMs.

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

The situation began with the Tier 2, Tier 3, and Tier 4 supply bases, which were affected by last year's global shutdowns. The supply chain for electronic components is quite complex and involves multiple countries, leading to various problems. The staggered shutdowns in these countries resulted in significant backlogs in information and processing, which impacted the supply side at multiple levels beneath the Tier 1 suppliers and ultimately affected everything above them. Communication among the Tier 2, Tier 3, and Tier 4 suppliers has historically been inadequate, which led to challenges for the Tier 1 suppliers and, consequently, difficulties for the OEMs at critical moments.

Okay. That makes sense. And then it’s probably for Kevin, but there’s a chance that the 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 ...

I believe there is a lot of speculation regarding the FDII, which provides a significant advantage to the company. If the headline rate increases from 21% to around 28%, we would anticipate a linear adjustment. However, if the rate rises and the FDII is eliminated, the effect would be more substantial. We will continue to monitor the situation closely. There's ongoing speculation about whether the FDII will be removed or if a replacement will be introduced. For now, if it’s simply the headline rate, we would expect a linear response.

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?

I believe our focus on providing shareholder return is very intentional. Over the past couple of years, our strategy of consistent share repurchases, supported by our estimates of future growth and profitability, has led the Board to feel confident in being aggressive. Our intention is to return nearly 100% of free cash flow to shareholders through dividends and share repurchases. However, I should note that if there are compelling M&A opportunities at favorable valuations that align with the company's goals, those will take priority. In the absence of such opportunities, we remain confident in our ability to grow the business organically and are dedicated to returning capital to shareholders in these two forms.

Sure. As the management team, how do you view the current stock price, knowing you don’t control it but rather the fundamentals and the investors do? However, the Board has over $0.5 billion allocated for unexpected circumstances.

Yeah. Yeah.

Sure. Go ahead.

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. Good. Are you planning to hold any Analyst Day soon?

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.

Yeah. We would always encourage...

...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.

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.