Earnings Call Transcript - GNTX Q4 2020

Operator, Operator

Thank you for joining us for the Gentex Fourth Quarter 2020 Financial Results Conference Call. All participants are currently in listen-only mode. Following the presentation, we will have a question-and-answer session. I would like to turn the call over to Mr. Josh O'Berski, Director of Investor Relations. Please proceed.

Josh O'Berski, Director, Investor Relations

Thank you. Good morning and welcome to the Gentex Corporation fourth quarter 2020 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, 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 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 Gentex's safe harbor statement included on the Gentex Reports Fourth 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 will turn the call over to Steve Downing, who will get us started today. Steve?

Steve Downing, President and CEO

Thank you, Josh. Before we get started with the financial performance for the quarter, I want to take just a few minutes to thank everyone who has helped us during the last few months. To our customers and the supplier community, we want to thank you for your communication and teamwork that allowed us to keep up with orders during the second-half of this year. We couldn't have done it without your help. To the entire team at Gentex, thank you. Once again, you have outdone yourselves despite the obstacles, and there have been many this year; you found a way to deliver record-setting results. Now, let's dig into the financial summary. During the fourth quarter, the company experienced record net sales of $529.9 million, which represents a 19% increase over the fourth quarter of 2019. We were able to accomplish this sales growth by a combination of a 14% increase in auto-dimming mirror unit shipments and a 96% increase in FDM mirror unit shipments. This growth rate was in contrast to global light vehicle production, which increased by approximately 3% for the quarter. And if you look a little deeper into the global light vehicle production numbers for Q4, you will see that China production was up 6% quarter-over-quarter, but the rest of the regions were only up about 1% versus last year. In total, our outperformance to the underlying market was 16% for the quarter, which represents one of the highest growth rates for the company in many years. For calendar year 2020, the company shipped 1.053 million units of Full Display Mirror, which was a 42% increase when compared to 739,000 shipped in 2019. The growth rate of FDM in 2020 was incredibly strong, especially when compared to a light vehicle production market that declined approximately 16% for calendar year 2020 due to the impact of the pandemic. The gross margin in the fourth quarter of 2020 was 40.9%, compared with a gross margin of 36.5% last year. This was the highest gross margin since the second quarter of 2004 and was a 440 basis point improvement from the fourth quarter of 2019. The gross margin increase was driven by record sales levels, positive product mix, benefits from our cost reduction efforts earlier in the year, leverage on our overhead costs, and purchasing cost reductions that together more than offset our annual customer price reductions. Income from operations for the fourth quarter was $162.4 million, which was an increase of 46%, and a new record. Operating income improved significantly during the quarter as a result of the higher sales and gross margin levels. Net income for the fourth quarter was $143.3 million, which was an increase of 44%, and also a new record. Earnings per diluted share for the fourth quarter was $0.58, which was an increase of 49% versus last year, and was also a record for the company. During the fourth quarter, strong sales levels combined with the cost discipline we have been executing throughout the year resulted in record performance at every level of the income statement. During the fourth quarter, the company repurchased 2.5 million shares at an average price of $31.82 per share. For calendar year 2020, the company repurchased 10.6 million shares at an average price of $27.10 per share. Our share repurchases during calendar year 2020 resulted in a 4% reduction in the diluted share count. For calendar year 2020, the company paid $117.2 million in dividends and repurchased $288.5 million in stock, for a total cash return to shareholders of $405.7 million. When you combine this level of financial performance with our commonsense approach to capital allocation, we believe we have forged a pathway to a significant increase in overall shareholder returns. I'll now hand the call over to Kevin for fourth quarter financial details.

Kevin Nash, CFO

Thank you, Steve. Automotive net sales during the fourth quarter of 2020 were $521.6 million, representing a 20% increase when compared to $433.8 million in the fourth quarter of '19. Interior auto-dimming mirror unit shipments increased 13% compared to the fourth quarter of '19, and exterior auto-dimming mirror unit shipments increased 16% for the same period. As previously mentioned, strength in FDM unit shipments also contributed to the significant outperformance for the quarter. Other net sales in the fourth quarter of '20, which includes dimmable aircraft windows and fire protection products were $8.3 million, a decrease of 17% compared to other net sales of $10 million in the fourth quarter of '19. Dimmable aircraft window sales decreased by 34% for the fourth quarter of 2020 when compared to the fourth quarter of '19. The company expects that dimmable aircraft window sales will continue to be impacted until the aerospace industry strengthens and the Boeing 787 production levels improve. In terms of the balance sheet, during the fourth quarter, the company increased its activity in share repurchases, but we also continued to keep our focus on maintaining high levels of liquidity so that we remain well-positioned for multiple economic scenarios. Additionally, as mentioned in the press release, the company paid off the remaining $25 million on its revolving line of credit during the fourth quarter of 2020. I'll now mention some key balance sheet items as of December 31, 2020, as compared to December 31 of '19. Cash and cash equivalents increased to $423.4 million, up from $296.3 million, primarily due to year-to-date cash flow from operations and investment maturities which were partially offset by share repurchases, dividend payments, and capital expenditures. Short-term investments were $27.2 million, down from $140.4 million, but the bulk of those maturities were not reinvested during the calendar year. Long-term investments were $162 million, up from $139.9 million. As a reminder, long-term investments include things like FDIC-insured CDs, treasury notes, as well as corporate and municipal debt. As of the end of the year, the portfolio remains in a good position with the bulk of the corporate and municipal holdings invested in A-rated or better institutions. Accounts receivable increased to $284.9 million from $235.4 million. The increase in accounts receivable was due to the significant increase in sales during the fourth quarter, and the timing of sales within the quarter. Inventories were $226.3 million, down from $248.9 million as a result of lower raw material and finished goods levels. Accounts payable decreased to $84.8 million, down from $97.6 million and accrued liabilities were $92.9 million, up from $74.3 million. Increases were due to higher accrued salaries and wages and deferred employer payroll taxes, as well as accrued income taxes. Fourth quarter 2020 cash flow from operations was $135.4 million, up from $122 million in the fourth quarter of 2019. The increase in cash flow was driven by increases in net income for the quarter, but was partially offset by fluctuations in working capital. Year-to-date cash flow from operations was $464.5 million, which compares to $506 million for year-to-date cash flow for 2019. The decrease on a year-over-year basis was driven by the COVID-19 impacted reduction in overall business and related cash flows during the second quarter of 2020. Capital expenditures for the fourth quarter were $14.7 million compared with $26.3 million for the fourth quarter of 2019. And year-to-date capital expenditures were $51.7 million compared to $84.6 million in year-to-date 2019. And depreciation and amortization for the fourth quarter was $26.3 million compared with $25.4 million for the fourth quarter of 2019. And year-to-date depreciation and amortization was $104.7 million, which was the same as calendar year 2019. I'll now hand the call over to Neil for a product update.

Neil Boehm, VP of Engineering and CTO

Thank you, Kevin. Earlier this month, Gentex participated in the 2021 Virtual Consumer Electronics Show. CES has become the preferred platform for Gentex to showcase our technologies and capabilities. This year at CES we had to adjust our normal product-driven approach to the new virtual venue. Gentex created all new virtual tools to help communicate our product evolution and the direction of the technology. The first product area I'll discuss is in digital vision. As we continue to roll out and develop our Full Display Mirror product, we have been focused on ways to add new features that have been either requested by customers or where we see opportunities to leverage the platform as part of the major developing trends in the automotive market. For CES this year, we created individual videos demonstrating how digital video recording and trailer towing could be added to the portfolio. Both of these products utilize the base FDM technology. And by adding additional cameras or recording technology, we've expanded the feature set to meet an ever-increasing demand from our customers. In the sensing product area, we also have shown some new technology paths. First, we announced the acquisition of Vaporsens, a Nanofiber Sensing company out of Utah. The Vaporsens technology is capable of being deployed across multiple verticals to support sensing for hazardous chemicals, explosives or to provide data regarding air quality. We're excited about the potential for this technology because it harnesses our core competencies to create sensing capabilities that surpass anything in the market today. Second, we announced that we're bringing smoke and vape sensing to a robotaxi as part of a new program that we're currently launching. This development leverages our heritage as a particulate smoke detection company, but now expands into the automotive HVAC system. Gentex has the unique abilities to deliver smoke detection while meeting the stringent requirements of automotive. The third area of focus was In-Cabin Sensing. We demonstrated on the virtual platform how the visual sensing system in or near the mirror area could help provide greater visibility into the vehicle. This demonstration showed how our technology can provide In-Cabin Sensing for driver monitoring features but can also provide sensing in the rear seats of the vehicles, so that features like child detection, notification of objects left behind or which seats passengers are occupying can all be seen to provide new safety and convenience features for our OEM customers and consumers. The last product area I'll focus on today is the connected and transactional vehicle. As our Integrated Toll Module product has been rolling out with our lead customer Audi, we've been working and building relationships in different areas to further enable the capability of the ITM product in the area of transactional vehicle. Late in 2020, we announced a partnership with a company called PayByCar. PayByCar is utilizing toll payment systems such as ITM and a hardware infrastructure placed at a gas station to enable payment for fueling through the toll system. We believe this is the first step of many that could utilize the ITM hardware to perform non-toll-based transactions. Additionally, we announced a partnership with Simplenight. Simplenight is an e-commerce aggregator. We are working with them to broaden our offering for the vehicle. This includes the ability to make reservations at restaurants, buy movie tickets, make hotel accommodations, and much more. Gentex is currently working to connect Simplenight to our HomeLink Connect app, which will allow users the ability to perform e-commerce functions seamlessly. While the necessity for a virtual CES format created some challenges for us in engaging with our customers, our marketing team did an outstanding job of creating new tools that helped explain these new products. These tools will support our sales and technology initiatives as we go through 2021 and beyond. We welcome everyone to go to our website at gentex.com and look for the virtual CES link or you can also head to gentextech.com to explore the new product concepts for yourself. I'll now hand the call back over to Steve for guidance and closing remarks.

Steve Downing, President and CEO

Thanks, Neil. The company's current forecast for light vehicle production for 2021 and 2022 is based on the mid-January 2021 IHS Markit forecast for light vehicle production in North America, Europe, Japan, Korea, and China. Based on this information, light vehicle production in the company's primary market is expected to increase approximately 12% over the 2020 calendar year volumes. For calendar year 2022, light vehicle production in the company's primary markets is forecasted to increase over the 2021 estimated volumes by approximately 3%. Based on these light vehicle production forecasts, we are providing guidance estimates for calendar year 2021 for each of the following areas: Revenue for 2021 is expected to be between $1.94 billion and $2.02 billion. Gross margins for the year are expected to be between 39% and 40%. Operating expenses are currently forecasted to be approximately $210 million to $220 million. Our estimated annual tax rate, which assumes no changes to the statutory rate, is forecasted to be between 16% and 18%. Capital expenditures for 2021 are expected to be between $85 million and $95 million. And depreciation and amortization is forecasted to be between $105 million and $110 million. In addition, based on the mid-January 2021 light vehicle production estimates for calendar year 2022, the company is currently estimating that revenue for calendar year 2022 will grow between 4% and 8%, above our current revenue estimates for calendar year 2021. In closing, as I reflect on 2022, there is no doubt that it was one of the most trying and turbulent years we have encountered as a team. We know these issues have not completely gone away and that there are still many risks ahead for the industries we support and for our business. However, despite these issues, we are hopeful that 2021 will develop in line with our forecast, which suggests a record year for the company. Not in terms of revenue but for the profitability of the business as well. Perhaps the most important reason why I am optimistic is the team. This team delivered world-class operating results within months of encountering crippling shutdowns and changes to our business due to the pandemic. The results this quarter shattered many records of the company and reset the profitability of the business as we move forward. But more importantly, it showed all of us that this team is capable of doing anything it sets its mind to. We believe that our financial discipline and performance combined with our operational efficiency, new product pipeline, and commonsense approach to capital allocation provide the pathway to significant shareholder returns. That completes our prepared comments for today. Thank you for your time. And we can now move to questions.

Operator, Operator

Thank you. Our first question comes from James Picariello with KeyBanc Capital Markets. Your line is open. Please go ahead.

James Picariello, Analyst

Hey, good morning, guys, and congrats on a fantastic quarter. So FDM shipments, I'll start there, finished the year just under 1.1 million, which given that this is a pandemic year, pretty phenomenal. I mean how should we be thinking about FDM unit growth for 2021? Previously I think the idea was to take the average unit growth over the last three years, but I think that exercise would have been far too conservative, even for 2020. So just wondering if there's another way we could look at this?

Steve Downing, President and CEO

I think if you look at it, we would guide using the same methodology. If you include last year's performance, you would start to see an increase this year in the growth rate of FDM. So, it would probably be more in line with what a three-year moving average shows for next year's trajectory.

James Picariello, Analyst

Okay. And then just a follow-on to that, any update on the timings for OEMs nine and ten, when they should begin shipping?

Steve Downing, President and CEO

Yes, so I think both nine and ten are in the first-half of this year.

James Picariello, Analyst

Okay. As we think about the cadence for this year, I mean we could obviously see IHS production volumes, but how could we think about the company's growth over market? I mean clearly there will be a difficult fourth quarter comp this year. But I mean also just from a margin standpoint, any color on what we should extrapolate and not extrapolate from this, the second-half '20 performance from a margin standpoint? Thanks.

Steve Downing, President and CEO

Yes, I think if you look at the last six months, you're just over 40% average. We know that that's a hair higher than it will be in '21 for a couple of reasons. We know there's a lot of shortages happening in the industry, which means obviously pricing pressure on components is going to be a little tougher than it was in 2020. But then we also know that sales aren't going to run at the same rate it was, for instance, in Q4, so which would have a slight negative impact on margins going forward. But if you look at that guide for the full year of 39 to 40, we feel pretty comfortable operating in and around that range for the whole year. We don't really see it over-weighted in any one quarter. I think the risk factor, like you mentioned, really comes down to the second-half of the year in terms of what are those comps going to look like. And then we know there's a lot of catch-up happening in the industry right now from the Q2 shutdowns. And the question is, what is the new run rate for production once that catch-up period is done, what is the global SAR and what does that look like for the entire supply base.

James Picariello, Analyst

Got it. Thanks, guys.

Steve Downing, President and CEO

Thank you.

Operator, Operator

Thank you. And our next question comes from the line of David Kelley with Jefferies. Your line is open. Please go ahead.

David Kelley, Analyst

Hey, guys, good morning and thanks for taking my questions. Just maybe following up on the last point, the gross margin discussion, your guide for 2021, it's better than the target you referenced during Q3 earnings specifically. So maybe if you could just talk about what specifically has changed in the last few months, the revenue growth guidance hasn't changed. So, is it product-specific or anything from the cost savings side we should be thinking about?

Steve Downing, President and CEO

It's really a combination of several factors. First, the mix has been very favorable with strong performance in FDM and OEC, which has positively impacted margins. The cost efficiencies and improvements we implemented in the second quarter have exceeded our initial expectations for profitability. These are all positive developments. However, we are facing some challenges, particularly in component supply. We are assessing all these positives along with customer pricing and market shortages. Overall, we believe there has been a net improvement compared to our previous long-term guidance of 38.5% to 39.5%. Essentially, we are roughly 50 basis points better than a few months ago. We are pleased with the discipline of the business and our operational efficiencies at the current levels.

David Kelley, Analyst

Okay, great, that's helpful. And then maybe following up with the OpEx 2021, we have the structural cost savings benefit. At some point I would expect we should see some P&E expenses start to ramp back up. But can you just talk about some of the puts and takes there, and maybe how you're thinking about R&D this year?

Steve Downing, President and CEO

Yes, that's a valid point. As you noted, travel and entertainment have remained relatively low, but we've seen an increase in air shipments, particularly in the latter half of the year, due to a tighter supply chain. We anticipate that as conditions stabilize, freight costs will decrease somewhat and be partially offset by increased travel. However, it seems unlikely that travel will substantially increase until later in the year. Currently, travel restrictions are stricter than they were a year ago. Additionally, the initiatives Neil mentioned come with costs, so we remain focused on managing our R&D budget. We are committed to partnerships that either involve equity stakes or contribute to our long-term goals. We feel optimistic about our progress thus far, and we continue to pursue further investments and allocate resources to the initiatives Neil highlighted.

David Kelley, Analyst

Okay, great, thanks. And then one last one if I could squeeze it in. 2022 revenue growth guidance, I get that's a long ways away, but it is a bit below your usual targeted outgrowth, is there some conservatism built in here just given some of the ongoing market uncertainties you referenced or if you could just talk about if there are any other inputs we should be thinking about that might change the outgrowth cadence that would be great?

Steve Downing, President and CEO

Yes, I believe the main reason for this is not really about being conservative; it's more that our guidance for 2021 is significantly higher than what we expect production to actually be. Considering the growth we've seen in the latter half of this year and the anticipated growth rate for next year, when we analyze these factors together, we notice that 2022 presents some challenging comparisons coming off a strong 2021 figure. If there is any sense of conservatism, it mainly stems from some skepticism regarding the projected vehicle production growth, particularly since a significant portion of that growth is expected from Europe, which is estimated to have a 6% growth rate in 2022. We have some doubts about whether that level of growth will materialize. Looking at the broader macroeconomic context in that area, we’re not entirely convinced by IHS' forecast for such a growth rate in Europe for 2022.

David Kelley, Analyst

All right, got it. Thanks guys.

Kevin Nash, CFO

Thank you.

Steve Downing, President and CEO

Thanks, David.

Operator, Operator

Thank you. And our next question comes from the line of Ryan Brinkman with JPMorgan. Your line is open. Please go ahead.

Ryan Brinkman, Analyst

Hi, thanks for taking my questions. Maybe to start, what is the latest that you're seeing in terms of the semiconductor shortage impact in the industry? Can you talk about the degree to which you're seeing any indirect impact to Gentex from lower customer production? And I know you incorporate chips into some of your devices, are you seeing any direct impact? I think as of the time of CES you hadn't yet. But I thought to ask just given I know a lot of suppliers are scrambling here to avoid direct impacts?

Steve Downing, President and CEO

Yes, it's absolutely impacting the industry, and in two ways. Number one is obviously there's a lot of de-commitments happening from the supply base in terms of volumes that we've put in orders for, and then many times, almost a year out, and suppliers are struggling to keep up. Obviously, it's a complicated supply chain that they're dealing with. And so that has everyone moving around. The couple of safeguards that Gentex has always put into place is we tend to carry a little higher raw inventory than most suppliers to try to help prevent these types of issues. The other one is the team has been working really hard looking at product redesigns, other alternatives where there are issues. Fortunately, so far we haven't had any shutdowns of customers. But to your point, that's the second half of the issue, and that is that many OEMs are starting to take days off or portions of a week at certain plants and certain product lines to give the industry time to catch up on the silicon side. So it's something that we continue to watch. Fortunately, so far it hasn't affected us directly in terms of our ability to supply, but it's always a risk factor. And then number two, what is probably more likely is that it's going to impact overall production levels at some point, probably not an extended period. Most of the industry is looking at the first half of '21 being really tight, and then hopefully the second half will start to free up a little bit.

Ryan Brinkman, Analyst

Okay, thanks. And then just to dig into that earlier discussion of gross margin a little bit more and maybe the trajectory. Throughout the year, I think historically you see a little bit of a step-down in 1Q maybe given a disproportionate number of annual customer price reductions taking place around the turn of the calendar. And then claw that back via performance and productivity throughout the year. Do you see that pattern taking place this year again? And then just also, is the tone and tenor of annual customer price reductions any different this year versus prior year just given maybe some of the stress that some of the customers might be feeling, and then has to adapt, but 39% to 40% gross margin, I don't see why that would necessarily be an embarrassment of riches when 37% to 38% you guys were able to get away with for a long time. But just any kind of thoughts on discussions with automakers, if they're any different from the past, et cetera?

Steve Downing, President and CEO

Yes, as you pointed out, I can see that this year is somewhat unique. Typically, our annual price reductions are front-end weighted in January and April, but this time, many of our customers are still catching up. This has resulted in elevated sales levels. Additionally, supply chain issues and component shortages are giving suppliers more leverage, which is likely to constrain pricing. Overall, I would say the situation is relatively balanced, but we still face the same pressures on APR that may lead to a decrease in first quarter margins, with a potential recovery as the year progresses. And I would say that the pressure on the supply community from OEMs isn't really any different than it has been. I think right what we are seeing is mostly collaboration OEMs trying to work with the entire supply base to make sure that components are being handled and distributed in that they can keep all their supply base up and running. I think everyone is aware of what's going on in the silicon industry. So, I think most OEMs understand there's going to be some price pressure from the supply side on raw components.

Ryan Brinkman, Analyst

Okay, that's very helpful. Thank you.

Steve Downing, President and CEO

Thank you, Ryan.

Kevin Nash, CFO

Thanks, Ryan.

Operator, Operator

Thank you. And our next question comes from the line of John Murphy with Bank of America. Your line is open. Please go ahead.

John Murphy, Analyst

All right. Good morning guys. And thanks for taking the time. First question on vehicle mix, I mean obviously the automakers are hustling to rebuild inventory and meet growing demand. So, they are building everything sort of with a higher end. I am just curious what you see in schedules, and if you expect that to continue into 2021? And maybe it is sort of a new phenomenon that produces a little bit less with better and better mix? Just curious your thoughts on that?

Neil Boehm, VP of Engineering and CTO

Yes, I think as a beginning you are absolutely right when they are coming out of their shutdowns, they were obviously trying to build a very rich mix of vehicles. I think now that's kind of settled down. It's more about what's the demand from the consumer side. That's probably the most shocking part of coming out of the pandemic is the flow and optimism in the consumer base like how many vehicles themselves are being purchased. I think that was a little surprising to us. Watching inventory levels overall for each OEM and what's happening. There's still a little bit of work to do. But, I would estimate that sometime in Q2 we will be through that catch-up period and back into a normalized run rate. The question about mix is always a fascinating one. It's really about interest rates, borrowing, and what a consumer wants. So, we don't see anything changing that drastically. One thing we know for sure is our features right now are doing really well with the consumer; they're desirable, they're priced appropriately; products like FDM have a lot of pull right now with the consumer.

John Murphy, Analyst

Okay. And then just a second question, sort of the raw complex going to the vehicle is generally kind of inflating. I am just curious what you are seeing on that side? I mean obviously it's being driven by strong demand and volume, so it's a good thing. So, the reason it's rising is because there's demand pull. Just curious what you are seeing there and how much of the headwinds or not that might be in 2021?

Steve Downing, President and CEO

Yes, we are not expecting to achieve the same results from our supply base as we have in the past. We do have some contracts that extend longer-term pricing for certain products. However, for anything being negotiated this year, there is indeed pressure from the supply side, possibly leading to price stability or even increases in some cases. When we assess the situation, we take into account all these variables along with the efficiencies we gained from our suppliers, which offset our customer pricing this year. Next year, we may not achieve the same level of performance. This is certainly a factor we consider as we prepare our margin guidance.

John Murphy, Analyst

Got you. And lastly, as you look at the current situation, we are still in the middle of it, but considering the actions you've taken initially because of COVID and what you worked through last year, what kind of structural changes do you think you will be able to capture? What changes have you made that you believe will be structural over time and might contribute to incremental margins or margins in general?

Steve Downing, President and CEO

Yes, I think all the changes that we made in Q2 were structural and that we expected those to continue as we build back the business, the cost that we have for the last several years, the costs we are adding back online with growth rates and supports of the business, you shouldn't see anything change from that model which is you would expect our costs both on the gross, on the COGS side all the way through operating expenses to move roughly in line with sales growth.

John Murphy, Analyst

So this 39% to 40% gross margin, you think is the new baseline off of where you will potentially grow or improve in 2022? Is that a fair statement?

Steve Downing, President and CEO

Yes, like we mentioned before, the 38.5%, 39.5%, we had talked about for the last year. So, we didn't believe that there was any reason why we couldn't sustain that for at least a couple of years. And I would say that that new guidance, I mean we haven't looked at product mix all the way into 2022 yet, but if we manage the costs, the way we're describing, there's no reason why that's not attainable.

John Murphy, Analyst

Okay, great. Thank you very much.

Steve Downing, President and CEO

Thank you.

Kevin Nash, CFO

Thanks, John.

Operator, Operator

Thank you. And our next question comes from the line of Luke Junk with Baird. Your line is open. Please go ahead.

Luke Junk, Analyst

Good morning, everyone. First question want to ask about ITM and connected cars. So based on your announcement over the past few months, you're increasingly leaning into this space relative to PayByCar and Simplenight partnerships, but I'm wondering is how that's being informed by the interest level that you're seeing in general from the OEM community? And if we look ITM specifically, how that's tracking versus your expectations a year ago? And then second part of the question would just be in terms of the value proposition for some of these elements that could have maybe recurring elements to them? How you sort of position half of the OEMs as well, at a high level?

Steve Downing, President and CEO

Sure, absolutely. Good morning. I think one of the interesting parts with ITM in general is that product continues to roll out across the Audi fleet like we've described before; this coming year, there'll be more platforms that we'll deploy it. And I think they'll be on every platform when we get into 2022, if I'm not mistaken. So it's continued to grow. When we talk about expanding the features and capability of the transactional vehicle, that's not just something we're dreaming of; it's something that our customers are looking for an expansion of. So, as the technology and the hardware platform gets added to the vehicle, how do you continue to add more value to the vehicle itself or to the consumer, and how it gets used? So the PayByCar is a great example, leveraging the existing technology, but now offering to the consumer, that next step advantage of a transactional piece at the gas pump using that platform they've already paid for. So we see that continuing to build. Simplenight is another stretch on that, where it's now getting into additional features and functions, reservations and beyond, where we believe the consumers want that seamless interface from their computer to their car to their phone. And that's what Simplenight enables, is that ability to bring all those together and offer one complete system. So we're excited about it, we think there are some great opportunities on how that can help grow and expand, the PayByCar is a great initial one leveraging the hardware, and the Simplenight takes it beyond just a hardware play.

Luke Junk, Analyst

Good, that's great, really helpful. Follow-up question on the adoption rate curve for the full display mirror, and what I was hoping you could comment specifically on is what you're seeing in terms of take rates right now relative to what you've disclosed in the past. You commented earlier in the call that products like FDM have a lot of pull, seems to suggest there's some movement there, and just hoping for any additional color you could share?

Steve Downing, President and CEO

Yes, I think if you look at the last half of the year, for instance, the product mix was really strong. One of those, like we mentioned, was partially because OEMs were building higher content vehicles. And with that, what we're seeing is very high take rates on the vehicles we were on. So, initially we had said, we would expect on a high-end luxury vehicle like Cadillac when they first launched, you're running 50% to 70% take rates, and then as you move down the trucks, higher-end trucks and SUVs, maybe in the 20% to 30%. And then on entry-level vehicles, you're going to have much lower take rates. What we've seen in the last six months are actually running even above those levels. And the fundamental question is, how long will that last? Is it the new norm? Or is it going to come back down to more standardized packaging? What we're seeing for the first-half of 2021 would imply that that trend continues at higher take rates. And so, we're pretty optimistic. One thing is for sure, there have been some studies and some consumer engagement from OEMs that really liked the feature. So we think, regardless of what goes on with the whole product line, we think we're going to continue to see a lot of pull on the full display mirror side because of the customer interest.

Luke Junk, Analyst

Good, I'll leave it there, thank you.

Steve Downing, President and CEO

Thank you.

Kevin Nash, CFO

Thanks, Luke.

Operator, Operator

Thank you. And our next question comes from the line of David Whiston with Morningstar. Your line is open. Please go ahead.

David Whiston, Analyst

Thanks. Good morning. First on gross margins, I know for this year, it's 39% to 40% guidance, but were you saying long-term you still think it's 38.5% to 39.5% or do you think it's now better?

Steve Downing, President and CEO

No, I think there is the potential for it to run at that guidance for '21 into '22. We have obviously a lot of work to do to make that happen, but that's definitely feasible.

David Whiston, Analyst

But you don't want to talk about beyond that at this point, right? It's too uncertain?

Steve Downing, President and CEO

Yes, I believe it's difficult to predict that far out, but once we reach that point, we won't be looking to backtrack. I assure you that by the time we get close, we will do everything we can to ensure we maintain it.

David Whiston, Analyst

Right. And your guidance for this year right now though, it does not include any shutdowns related to the shift orders even if they're beyond Gentex's control?

Steve Downing, President and CEO

Yes. IHS was actually modeling in downtime that most OEMs not extended for very long periods, but kind of rolling shutdowns a week or two at a time for the first-half of the year and then there's not much contemplated in the second-half due to supplier issues or power shortages. So it's a fairly modest impact. I forget. There is a few hundred thousand vehicles, I think, when IHS made their latest update globally. So it's not a huge change to overall production, but there is some of that build into the forecast.

David Whiston, Analyst

Right. And you were talking earlier about skepticism about IHS' EU number. Was that for 2022 only or both this year and next year?

Steve Downing, President and CEO

Really more for 2022.

David Whiston, Analyst

Okay. And then just one last big-picture question, strategically, have you considered developing software for ABs, or do you believe that it's not something you're focused on since there are already many players in that space?

Steve Downing, President and CEO

We are open to the idea if an OEM partner seeks our assistance, but actively marketing that is not something we feel we have the credibility to do at this point. We approach each day ready to explore new opportunities and evaluate if we can create a value proposition. Currently, we would consider ourselves not the best partner to develop and provide that, but if circumstances shift, we would certainly look into creating a new business model that benefits both the OEM and us.

David Whiston, Analyst

Okay, thanks.

Kevin Nash, CFO

Thanks, David.

Steve Downing, President and CEO

Thanks, David.

Operator, Operator

Thank you. And our next question comes from the line of Josh Nichols with B. Riley. Your line is open. Please go ahead.

Josh Nichols, Analyst

Yes. Thanks for taking the question, exceptionally strong quarter. I was wondering if you could maybe provide a little bit more detail about the cadence of the revenue trajectory, given that this is a little bit of a different setup here, but OEMs are still playing catch up right as far as inventory levels, especially in 1Q probably into 2Q? And are you expecting that 1Q to be a little bit stronger and how may that trend to the rest of the year?

Steve Downing, President and CEO

Yes, you're exactly right. I mean, Q4, Q1 don't look too dissimilar outside of the chip issues if there are any pickups there. It's really strong into the second quarter, but then I think like Steve mentioned already, count starts to get hard and then the normalization of what production actually looks like in the second-half probably starts to play out a little bit more. So you have a little bit of strength and then maybe a little taper heading into the back half of the year.

Josh Nichols, Analyst

Yes. As you kind of mentioned as always a number of things up in the air right, especially this year is a little bit different than obviously what we've seen before. I just wonder kind of your thoughts about the impact of Gentex we've been seeing one some higher end vehicles and an increasing percentage of mixed light trucks and SUVs, also the potential for fiscal stimulus on the federal side and a return to more aggressive maybe manufacturing symptoms as inventory is normalized and just kind of your thoughts on those areas.

Steve Downing, President and CEO

You're correct. The strength we are seeing in the second half of this year, as well as the first half of next year, is largely driven by a recovery plan from the second quarter, where activity was minimal in many markets. Once this recovery phase concludes, we will need to refocus on consumer demand. A long-term question that we must consider is the enduring economic effects of the pandemic and the various policies implemented. We are monitoring this closely, which is why we made several structural changes in the second quarter—we wanted to be prepared for any potential scenario, and fortunately, that has proven effective so far. We need to keep an eye on the situation, as no one can predict if we will entirely move past this or if we are entering a recessionary phase for the coming years, or if the market will stabilize. One certainty is that we have significantly reduced the fixed costs of our business, and we feel ready for either a stagnant or a growing market. Even if the market contracts, we believe we have established the appropriate discipline and adapted our cost structure to address the initial impact of any downturn or recession.

Josh Nichols, Analyst

Thanks. And then last question for me, this is a little bit longer term question, I guess, but you're seeing an increasing number of auto-OEMs talking about moving to a much larger percentage of their line-up going to EV right over time, also some legislation out of states like California, right, where that tends to be the new shift going forward, if you look at these five to 10-year horizon, how is that might Gentex positioned for that? Does that, are you kind of indifferent to whether you're using gas or EV, is there better mix shift for you or just kind of curious about the longer-term opportunity puts and takes on that?

Steve Downing, President and CEO

Yes, the short answer is that, we're really not affected by the powertrain whether that is gas, diesel, or electric. So there's nothing structurally there that will impact it. The one side benefit to us is what we've seen is most EVs right now are selling on the higher end of the marketplace, which tends to be good for us. We would look at and say that's not necessarily correlated. But it is a happy accident of sorts, where most of the EVs that are rolling out right now tend to be by luxury OEs or higher-end builders. Most of the cost-focused EVs have even added higher technology features. And that's worked out really well for us over the last several years.

Josh Nichols, Analyst

Great, thanks for the color. I'll hop back in the queue.

Operator, Operator

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to Mr. Josh O'Berski for any further remarks.

Josh O'Berski, Director, Investor Relations

This actually concludes our call. Thank you everyone for your time and the great questions. Hope you have a great weekend.

Operator, Operator

Ladies and gentlemen, this concludes today's program, you may all disconnect. Everyone have a great day.