Good day, and thank you for standing by. Welcome to the 2024 Second Quarter Gentex Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. Please be advised that today's conference is recorded. I'd now like to hand the conference over to your first speaker today, Josh O'Berski, Director of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to the Gentex Corporation Second Quarter 2024 Earnings Release Conference Call. I'm Josh O'Berski, Gentex's 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. This conference call contains forward-looking information within the meaning the Gentex safe harbor statement included in the Gentex reports second 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?

Thank you, Josh. For the second quarter of 2024, the company reported net sales of $572.9 million compared to net sales of $583.5 million in the second quarter of last year. For the second quarter of 2024, light vehicle production in North America, Europe, and Japan and Korea declined by 3% compared to the second quarter of last year. During the second quarter 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 and May, but then saw a significant change in June that left us well below our forecast for the quarter. In total, the company's revenue for the second quarter of 2024 fell short of our beginning of quarter forecast by approximately $50 million, with the biggest impact coming from expected shipments to some of our largest customers. As we look to the second half of 2024, light vehicle production forecasts continue to show weakness versus prior year performance, but we expect a return to meaningful outgrowth versus the underlying market. For the second quarter of 2024, the gross margin was 32.9% compared to a gross margin of 33.1% for the second quarter of last year. The second quarter 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, an 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. 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 second quarter. 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 the progress on the margin recovery plan that we estimated would take until the end of 2024 to complete. While the gross margin for the second quarter 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. Operating expenses during the second quarter of 2024 increased by 12% to $73.7 million compared to operating expenses of $65.8 million in the second quarter 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&D and the launches of new products. Operating expenses, especially R&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 VA/VE initiatives for cost optimization of our bill of materials. Income from operations for the second quarter of 2024 was $114.9 million compared to income from operations of $127.3 million for the second quarter of last year. Other income swung to a loss of $13.5 million for the second quarter of 2024 compared to income of $1.3 million in the second quarter of last year. The change was primarily driven by non-cash losses of $18.3 million, resulting from mark-to-market adjustments of certain holdings within the company's tech investment portfolio, which were partially offset by interest income. During the second quarter 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 second quarter of 2024 was $86 million compared to net income of $109.2 million for the second quarter of last year. The decrease in net income for the second quarter was driven by lower net sales and income from operations compared to the second quarter of last year as well as the previously mentioned changes in other income. Earnings per diluted share for the second quarter of 2024 were $0.37 compared to earnings per diluted share of $0.47 for the second quarter of 2023. Earnings per diluted share for the second quarter of 2024 were impacted by the lower net sales and operating income as well as the previously mentioned changes in other income for the quarter. I'll now hand the call over to Kevin for some further financial details.

Thanks, Steve. Automotive net sales in the second quarter of 2024 were $559.3 million compared to $574.1 million in the second quarter of last year. Auto-dimming mirror unit shipments decreased by 6% during the second quarter of 2024 compared to the second quarter of last year. Other net sales in the second quarter of 2024 were $13.6 million compared to $9.4 million in the second quarter of last year. This was driven by a $2.9 million increase in dimmable aircraft window sales and a $1.3 million increase in fire protection sales compared to the second quarter of last year. Looking at share repurchases. During the second quarter, we repurchased 1.4 million shares of common stock at an average price of $34.43 per share. As of June 30, 2024, the company has approximately 13.2 million 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 consider macroeconomic issues, market trends, and other factors we deem appropriate. Looking at the balance sheet. The balance sheet comparisons mentioned today are as of June 30, 2024, as compared to December 31 of 2023. Cash and cash equivalents were $260.2 million compared to $226.4 million. Short-term and long-term investments combined were $323.6 million, up from $299.1 million, which includes fixed income investments as well as the company's equity and cost method investments. Accounts receivable was $306.6 million, down from $321.8 million due to the timing of sales within the quarter. Inventories were $463.5 million, up from $402.5 million and accounts payable increased to $206 million from $184.4 million. Looking at preliminary cash flow items for the quarter. Second quarter 2024 cash flow from operations was $129.3 million, up from $120.9 million in the second quarter of last year. Year-to-date cash flow from operations was $259.1 million, compared to $241.8 million for calendar year 2023. Capital expenditures for the second quarter were $31.8 million, compared with $47.5 million for the second quarter of last year. Year-to-date capital expenditures were $63.6 million, compared to $90.3 million for calendar year 2023. And depreciation and amortization for the second quarter was $24 million, compared with $24.8 million for the second quarter of 2023. Year-to-date D&A was $47.9 million, compared with $48.9 million for year-to-date 2023. I'll now hand the call over to Neil for a product update.

Thank you, Kevin. I'd like to highlight that the second quarter was an extremely busy launch quarter with 32 net new nameplate launches of our interior and exterior auto-dimming mirrors and electronic features. Over 65% of these net launches were advanced feature launches with Full Display Mirror, HomeLink, and outside auto-dimming mirrors leading the way. As we look forward at the third quarter, we anticipate that this heavy launch rate will continue. Now for a Full Display Mirror update. We're excited to announce that during the second quarter, we began shipping Full Display Mirror to three new OEM customers, bringing our total to 19. We're now shipping Full Display Mirror for the Acura ZDX, the Citroen Berlingo, 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. 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 2024 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 Gentex team 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 VA/VE 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. I'll now hand the call back over to Steve for guidance and closing remarks.

Thanks, Neil. The company's current forecast for light vehicle production for the third quarter of 2024 and full years 2024 and 2025 are based on the mid-July 2024 S&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 third quarter 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 year 2025 is forecasted to increase by 2% versus the calendar year 2024 forecast in these markets. Based on this light vehicle production forecast and actual results for the first six months of 2024, we are making certain changes to our previously provided guidance for calendar year '24 as follows: Revenue for the year is expected to be between $2.4 billion and $2.5 billion. Gross margins for the year are expected to be between 34% and 34.5%. Operating expenses are still expected to be between $295 million and $305 million. Our estimated annual tax rate is forecasted to be between 15% and 16%. Capital expenditures are expected to be between $175 million and $200 million. Depreciation and amortization is forecasted to be between $95 million and $100 million. 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 '24, the company is updating calendar year '25 revenue estimates to be approximately $2.6 billion to $2.7 billion. The company continues to be on pace for record revenue in '24 and '25 despite the recent changes to light vehicle production environment, vehicle mix, and regional mix that impacted our performance in the second quarter. Additionally, tremendous work has been accomplished on our gross margin improvement plan despite the temporary setback during the second quarter of this year. 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 '24 and '25 based on the impact of the second quarter 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.

Our first question comes from Luke Junk of Baird. Your line is now open.

Good morning everyone. Thanks for taking the question. Just to start 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 with demand as well. Thank you.

Yeah, thanks, Luke. One of the things that definitely I'll start with is the Q2 impact that we referenced in our prepared comments. A lot of the shortfall that happened in the quarter, almost 60%, 70% of it was in June, which was pretty unexpected. When you look at the data that you've put together in your report about what happened in June from a production standpoint, a lot of our largest customers, including GM, Volkswagen, and Toyota, were significantly impacted in the month. Looking further down that list, other large customers like Hyundai, Kia, and BMW also faced serious headwinds in June. Their actual orders were very different from 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. Taking into account the 5% drop in production for the third quarter and the forecast for light vehicle production is still showing down 2% to 3% across the board. But we still believe we're going to see significant outperformance in the back half of this year. We're taking a very hard look at all that release information from the customer data, but we remain confident in our projections for the back half.

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 500,000 incremental units for the year overall, especially thinking about new launches to the extent you mentioned that these are already live. Should we think of those as really 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?

No. If you look at the launch side, everything has stayed on time during this process. I think the single biggest risk factor is what's happening macroeconomically, particularly regarding the trim level forecast that an OEM puts out and expectations of take rates for a high-end product like an FDM. So far, we haven't seen a drastic change from any of our customers regarding take rates of FDM. In fact, I'd say that over the last 18 months, the trend has been slightly better than forecasted take rates on FDM. The impact in June was primarily driven by overall production levels, not really about changes in take rates.

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 starting to predict some of these market-related things. But at a high level, should we still think 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&L? Thank you.

Yes. I think most of the impact from mark-to-market adjustments has been realized. If you look at our public company holdings, I think they 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 around $2 million per quarter net income going forward. Looking at our fixed income portfolio, that’s offset by ongoing tech losses. So we expect to see about $1 million to $2 million of income in the back half of the year per quarter outside of mark-to-market, but that should mostly be realized at this point.

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

I’ll leave it there. Thank you.

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

Yes, thanks for taking my question. I wanted to kind of touch on one thing and you talked about you're still on track to hit the targets for this year despite some cuts to the light vehicle production forecasted. You've been seeing more and more take rates and new customers, particularly in 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 FDM? And how do you think about the addressable market as it becomes more mainstream and not just a higher-level product offering? How could that kind of supplement growth, not just this year, but longer term, over the next two to three years?

Yes, Josh, that's an excellent point and a great question. I believe the exciting part is seeing these volume OEMs introducing this product. While they may not achieve the same take rates as a higher-end OEM or luxury vehicle, it opens the door for much higher volume opportunities by hitting those volume brands. We knew this was coming and have worked hard to get these vehicles launched. The favorable aspect of FDM is that it doesn't really have geographical bias; it's a globally accepted product, creating significant opportunities. We believe over the next several years, FDM will be a key tailwind to our growth story.

Sure, absolutely. Yes, we're still on target for this calendar year with an OEM on driver monitoring, moving into 2025 and 2026, there are some additional projects that are in launch as well. So we're seeing good momentum and progress, utilizing our geographic real estate in the vehicle to execute that. Large dimming devices are moving forward well. We've talked openly in the past about technical challenges, but we're making good progress. In the next couple of years, we'll be excited to discuss where we can see that getting deployed and executed. We also showcased large dimmable visors at CES this year with a lot of customer interest in that product utilizing our dimming technology that we've developed. While there are still technical challenges, solving these problems will provide us with an advantage. We're excited about where they can lead us in the next couple of years.

And then last question for me, just a follow-up. The driver monitoring is more near term. I'm curious; when you look at the market opportunity there, especially in Europe with different regulations that are likely to expedite adoption compared to other regions, what's your thoughts on the opportunity for how big that product offering could be in a few years down the line? Is it going to be a material growth driver?

Yes. It has the opportunity to be significant for our overall growth. Initially, as a baseline feature set, it will likely be slightly below the corporate average margin profile due to its competitive nature, but the revenue dollars are significant and will provide a strong tailwind to our growth story.

Appreciate. Thank you. I’ll hop back in the queue.

Thanks, Josh.

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

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 expected, especially regarding the lower production of battery electric vehicles. I'm curious if that might have been a driver? What gives you confidence that some of these headwinds might be more temporal when looking at the full year?

Yes. Our primary headwind was really driven by significant impact to some of our largest customers in June. In fact, our performance in April and May was strong, so the unusual decline in June raises questions about whether these impacts are permanent trends or one-time adjustments. However, based on our analysis, it seems production will return to ordinary levels, and our data from July supports a continued recovery.

Thank you. And lastly, could you provide updates on some of the smart home fire protection products and strategy discussed at CES earlier this year? Any updates on potential partnerships with major retailers?

I'll give you a quick update. The initial target was launching in the last half of Q3 here. Right now, we're looking at the first part of Q4 for the actual launch due to some development challenges we're working through, but we anticipate being ready for production by the middle of Q4.

Great. Thank you.

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

Hey, good morning everybody. I wanted to ask about your base interior mirror volumes. Toyota, your largest customer, announced last night that their global production from August through October was going to be down 2% year-over-year. Based on the timing lead lag between your sourcing with a key OEM customer like that, is it possible that you've already experienced that type of forward-looking decline showing up in your weak first half volume shipments?

Yes, you're spot on. Planned production reductions or volume pullbacks from an OEM perspective happen four to eight weeks in advance of actual production changes. It's highly likely that what we saw in June was a leading indicator of some pullbacks from certain OEMs in the second half.

Just to follow up on this, your interior mirror shipments were down 5% through the first half year-over-year, while industry production has not been down that much. What's going on with your customer mix? It seems your total customer mix isn't down 5%, so what's truly happening here?

When we talked about first quarter results, there were a couple of key Detroit automakers that halted production entirely for the first quarter. There was a carryover effect into the second quarter, as they had heavy dealer inventories. We anticipate growth coming primarily from FDM, so while unit growth in the North American market may be muted, we expect top line growth through content expansion.

Regional mix is important to consider. If you analyze Q2 on a year-over-year basis, Europe was down 5% and Japan and Korea were down 4.5%. Meanwhile, North America was roughly flat. Therefore, the decrease in IEC volumes is primarily due to lower production in our key markets.

Make sense. Thank you guys.

Thanks, James.

Thank you. We will move on to the next question. Our next question comes from the line of John Murphy of Bank of America. Your line is now open.

Good morning, guys. Can you talk about the potential content in take rates on your different products, particularly FDM on EVs versus ICE vehicles, and if the delays in EV production might impact the business short term or long term?

For FDM, we don't have huge exposure to EVs; much of our emphasis is on trucks and SUVs. The impact of EVs on the overall market is mostly felt on the OEC side. We have extensive business with Tesla on outside auto-dimming mirrors and HomeLink products. The other EV manufacturers yield similar take rates on a per technology basis, so we aren't concerned that this slowdown will impact our FDM growth.

That’s very helpful. One more question; if you actually see a continued weak volume environment, is there opportunity internally to take cost out or operate more efficiently?

Yes. We already limited overtime during Q2 due to lower volumes. If this situation continued, we would operate in a zero overtime environment while focusing on throughput. Additionally, we could see reductions in scrap and yield costs. We have opportunities to optimize costs in a lower production environment. This transition period has been tricky with production levels that were previously behind. Customer behavior seems to have returned to normal since the end of June.

And just one last real quick one. The stock is down a fair amount here, far below the $34.43 you bought it back at in the second quarter. Are you in a blackout period? Can you get more aggressive quickly?

Yes, we are currently in a blackout period, but it will end soon. We believe this is an overreaction to our recent results, considering our second half guidance implies a 10% growth rate for the back half of this year. Our cash generation in Q2 was better than last year, and we are optimistic about our position.

Thank you very much, guys. Have a great weekend.

Thanks, John.

You too.

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

Good morning. Thank you for taking my question. My first question is about the second half 2024 revenue guidance. Steve, you mentioned normalization in customer behavior and you're using customer schedules as an indicator for how you're guiding the second half. 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?

We modeled this based on both customer orders and our internal forecast grounded in the global outlook. Our calculations consistently refer back to the guidance provided. The key observation is that the issues in June were abnormal, and customer behavior has shown signs of recovery. While we do maintain a conservative approach, it's not overly drastic, likely 1% to 2% adjustment factored into our second half guidance.

My second question is to better understand the gross margin expansion opportunity. Part of that was coming from improved input costs. Have those efforts been affected by volatility in the industry?

Compared to last year’s second quarter, cost reductions have performed as expected, contributing about 150 to 200 basis points to our gross margin positivity. However, with reduced sales levels, much of that was offset by elevated fixed overhead and weak product mix, impacting FDM and outside mirrors.

Thank you.

Thank you, Mark.

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

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

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