Earnings Call Transcript - GNTX Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Gentex Second Quarter 2025 Financial Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Josh O'Berski, Director of Investor Relations. Please go ahead.

Josh O'Berski, Director of Investor Relations

Thank you. Good morning, and thank you for joining us today for our second quarter 2025 earnings conference call. I'm Josh O'Berski, Gentex's Director of Investor Relations. And with me today are Steve Downing, President and CEO; Neil Boehm, COO and CTO; and Kevin Nash, Vice President of Finance and CFO. Please note that a replay of this conference call webcast along with edited transcripts will be available following the call on the Investors section of our website at ir.gentex.com. As a reminder, many of the statements made during today's call are forward-looking statements that reflect our current expectations. These statements are subject to a number of risks and uncertainties, both known and unknown, including those detailed in our second quarter 2025 earnings press release and our annual report on Form 10-K for the year ended December 31, 2024, as well as general economic conditions. If one or more of these risks or uncertainties materialize or if our underlying assumptions or estimates prove to be incorrect, actual results could differ materially from those expressed or implied in our forward-looking statements. I will now hand the call over to Steve Downing for our prepared remarks. Steve?

Steven R. Downing, President and CEO

Thanks, Josh. Gentex completed its acquisition of VOXX on April 1 of this year, and we did our best in the press release from this morning to provide information for both what we call core Gentex, meaning without VOXX and consolidated Gentex, which includes financial performance for both Gentex and VOXX. Additionally, in an effort to not repeat this caveat throughout the call, it is important to remember that for any year-over-year or quarter-over-quarter comparisons, the second quarter of last year did not include VOXX. In the second quarter of 2025, consolidated net sales were $657.9 million, which represents a 15% increase over the second quarter of last year. Core Gentex revenue for the quarter was $579 million, which represents a 1% growth rate versus last year on a decline of 2% in light vehicle production in our primary markets. VOXX revenue for the second quarter was $78.8 million. Given the overall weak light vehicle production in our primary regions, we are very pleased with our sales levels this quarter. This is particularly notable given the impact that tariffs and counter tariffs have had on demand for our products, especially in the China market. Overall, sales into China for Gentex during the quarter were approximately $33 million compared to our beginning of year forecast of $50 million to $60 million for second quarter sales. Despite revenue headwinds related to tariffs and reduced sales into the China market, the company more than offset these challenges through strong growth in Full Display Mirror and other advanced features, along with incremental revenue from the VOXX acquisition. Our consolidated gross margin for the quarter was 34.2%, up from 32.9% in the second quarter of last year. Core Gentex gross margin was 35.3%, a 240 basis point improvement versus last year. Sequentially, we saw a 210 basis point improvement in core gross margin reflecting the continued success of our margin improvement initiatives. The improvements were driven by purchasing cost reductions, favorable product mix, and operational efficiencies, although they were partially offset by tariffs that were not reimbursed during the quarter. Additionally, on an adjusted basis, consolidated gross margin was 34.6%, when excluding a $2.5 million purchase accounting adjustment related to the VOXX acquisition. During an incredibly difficult operating environment, this quarter's gross margin performance is a testament to the hard work and discipline the entire team has put into our margin improvement effort. Operating expenses for the quarter were $106.8 million, up from $73.7 million last year, primarily due to the VOXX acquisition. VOXX accounted for $23.9 million of that increase, plus $1.5 million in acquisition-related costs on the VOXX side and $600,000 in costs relating to severance expenses for VOXX. Core Gentex operating expenses were $80.7 million, up from $73.7 million, but this included expenses of $1 million in acquisition-related costs for Gentex and $6.2 million in early retirement incentives for core Gentex. When we adjust for these one-time items, core Gentex operating expenses were down slightly versus last year, which is in line with our expectations, strategy, and execution of the work we have been doing on our cost reduction program. Consolidated income from operations was $118.5 million compared to $114.9 million last year. However, core Gentex operating income was $123.8 million, up 8% year-over-year. Additionally, when adjusted for the one-time expenses mentioned previously, core Gentex operating income was $130.9 million, a 14% increase over last year. Our effective tax rate for the quarter was 17.2%, up from 15.1% last year primarily due to lower stock-based compensation tax benefits and a reduced form-derived intangible income deduction. Consolidated net income for the quarter was $96 million, up 12% from $86 million last year. On an adjusted basis, net income was $105.8 million, a 23% increase versus last year. Consolidated earnings per share were $0.43, up 16% versus last year. When we adjust earnings per share for the one-time expenses mentioned previously, EPS was $0.47, a 27% increase over last year. I will now hand the call over to Kevin for some further financial details.

Kevin C. Nash, Vice President of Finance and CFO

Thank you, Steve. Gentex automotive net sales were $566.5 million in the second quarter of 2025, which were negatively affected by the company's lower-than-expected sales into the China market due to the impact of counter tariffs, but were more than offset by increased advanced feature mirror sales. Net sales from Gentex's Other product lines, which includes dimmable aircraft windows, fire protection products, medical devices, and biometrics, were $12.5 million in the second quarter of 2025 compared to $13.6 million in the second quarter of 2024. And as previously mentioned, VOXX net sales contributed $78.8 million during the second quarter of 2025. The company continues to work through post-acquisition transition with a focus on aligning product strategies, optimizing customer relationships, and identifying operational synergies across both businesses. During the second quarter of 2025, the company repurchased 5.7 million shares of its common stock at an average price of $22.13 per share for a total of $126.2 million. And year-to-date, the company has repurchased 8.8 million shares for a total of $202.2 million at an average price of $22.97 per share. On July 16 of 2025, the company announced a new share repurchase authorization from the Board of Directors for an additional 40 million shares, representing more than 18% of the company's outstanding shares as of June 30, 2025. This new authorization is in addition to the company's existing repurchase authorization. And with this new authorization, as of today, the company now has approximately 40.6 million shares authorized for repurchase under the plan. 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 will vary from time to time and will take into account macroeconomic issues, market trends, and other factors the company deems appropriate. Shifting over to the balance sheet. Today's comparisons are figures as of June 30 versus December 31, 2024. These numbers include the initial purchase accounting estimates from the VOXX acquisition as of April 1. And while they reflect our best estimates, they may be subject to change throughout the measurement period. Starting with liquidity. Cash and cash equivalents were $119.8 million, down from $233.3 million at year-end, primarily as a result of the VOXX acquisition and share repurchases during the quarter. Short-term and long-term investments totaled $290.1 million compared to $361.9 million at the end of 2024. These investments include both fixed-income securities and our equity and cost method holdings. Total accounts receivable stood at $372.9 million. Of that, $317.5 million was attributable to Gentex and $55.4 million came from the VOXX acquisition. The increase in core Gentex receivables was primarily driven by higher sequential sales and the timing of the sales within the quarter. Total inventories were $473.3 million, with $380.9 million representing core Gentex inventory. That's down from $436.5 million at year-end, largely due to reductions in raw material inventory. The remaining $92.4 million in inventory is tied to the VOXX acquisition, and consolidated accounts payable was $212.6 million. Within that, core Gentex accounts payable was $156.3 million, down from $168.3 million at the end of 2024, primarily due to lower inventory purchases during the quarter, and the remaining $56.3 million reflects payables associated with VOXX. As it relates to cash flow, the company is still in the process of finalizing operating cash flow metrics for the quarter, and will provide those details in its upcoming Form 10-Q filing. Capital expenditures for the second quarter of 2025 were approximately $31.1 million compared to $31.8 million in the same period last year. Year-to-date, capital expenditures totaled $67.8 million, up from $63.6 million in the first half of 2024. And depreciation and amortization expense for the second quarter was approximately $27.4 million, including $0.8 million attributable to VOXX and $26.6 million related to Gentex. This compares to $23.9 million in the second quarter of 2024. And on a year-to-date basis, depreciation and amortization totaled $52.9 million compared to $47.9 million in the prior year period. I'll now hand the call over to Neil for a product update.

Neil Boehm, COO and CTO

Thank you, Kevin. In the second quarter of 2025, we had 18 net new nameplate launches of our interior and exterior auto-dimming mirrors and electronic features. Over half of these launches in the quarter included advanced feature content with Full Display Mirror and HomeLink being the primary technologies introduced. The launch cadence has been strong over the past several quarters, and the teams have been doing an outstanding job to make them successful. Now for an update on Full Display Mirror. In the second quarter, Full Display Mirror launched on the Cadillac VISTIQ, Ferrari 296 GTB, Genesis GV60, Hyundai IONIQ 9, and the Mitsubishi Outlander. These new launches bring our total number of nameplates launched to 139. With 6 months of actual performance and improved visibility around program launches, we now expect Full Display Mirror unit shipments for the full year of 2025 to increase by approximately 150,000 to 300,000 units compared to 2024. Interest in the Full Display Mirror product family remains strong, even in the challenging production environment, particularly in North America. In addition to the growth in units in 2025, we continue to anticipate announcing an additional OEM customer for Full Display Mirror later this year. Full Display Mirror has been one of Gentex's primary growth drivers, and we remain fully committed to its continued advancement. We're actively investing in next-generation camera and display technologies, new feature content, and a deeper focus on user experience to ensure the platform remains at the forefront of the market. Another product focus area for us has been large area devices. In the second quarter, our teams made strong progress in optimizing initial production lines for large area applications like sunroofs and visors and advanced key technical aspects such as dimming speed and film durability. Our customers remain highly engaged, and we're working closely with them to align product capabilities with their evolving expectations. For large area devices, our target is to bring this technology to production within the next 24 months. Turning to VOXX. Now that we've completed our first full quarter working alongside their teams, we're focused on gaining a deeper understanding of their product lines, cost structures, and operational opportunities. The various technology and product platforms this acquisition brings, like iris-based biometrics and the Premium Audio group, will create some new and unique product opportunities, and we're excited to engage in these areas going forward. We've taken a deliberate approach to not rush the integration so that we can ensure alignment across departments. As with our core Gentex technologies, we're focused on balancing quality, cost, performance, and design, and I remain optimistic about our ability to enhance each of these metrics across our expanded portfolio. Finally, we're excited to announce that we began shipments of our new PLACE product line through a major big-box retail partner during the quarter. PLACE is a suite of advanced multifunctional smoke and carbon monoxide alarms designed to elevate home safety, comfort, and security through room-specific intelligence. The system is managed via an intuitive mobile app and features an industry-first low-frequency sounder, engineered to improve alarm effectiveness for deep sleepers, children, and individuals with hearing impairment. It also aligns with emerging safety standards, including updated residential codes recently adopted in states like California. As a long-standing leader in commercial fire protection and sensing technologies, the launch of PLACE marks a significant milestone in our strategy to bring cutting-edge accessible home safety solutions directly to consumers and further expand Gentex's presence in the rapidly growing smart home market. Gentex is an innovation-driven technology company. Our focus on R&D over the past several years has enabled us to generate a strong pipeline of both automotive and non-automotive products and technologies, and we're excited about the potential to drive our growth into the future. I'll now hand the call back over to Steve for guidance and closing remarks.

Steven R. Downing, President and CEO

Thanks, Neil. Our light vehicle production forecast for the third quarter and the remainder of the year is based on the mid-July 2025 S&P Global Mobility outlook for North America, Europe, Japan, Korea, and China. For the third quarter of 2025, global light vehicle production is expected to be relatively flat compared to the third quarter of last year, while light vehicle production in our primary markets is projected to be down approximately 1% for the quarter. In the fourth quarter, global production is expected to decline by approximately 6% with similar declines anticipated for our primary markets. For the full year 2025, light vehicle production in our primary markets is now expected to be down 3% year-over-year, with North American production projected to fall by approximately 4% compared to last year. Based on this updated production outlook, our first-half performance, reduced demand in China due to the recently implemented counter tariffs, and the expected contribution from the VOXX acquisition, we are revising our full year 2025 guidance. This updated guidance reflects the anticipated impact of all known tariffs effective as of today. We now expect consolidated revenue, including VOXX, to be in the range of $2.44 billion and $2.61 billion, which is higher than our previous estimate of $2.15 billion and $2.32 billion without VOXX. Revenue from Gentex's primary markets is expected to be in the range of $2.1 billion and $2.2 billion. Revenue from the China market is projected at $100 million to $125 million, and VOXX revenue is estimated to contribute between $240 million and $280 million. Consolidated gross margin, including VOXX, is expected to be between 33% and 34%. Core Gentex without VOXX is now expected to be between 34% and 34.5%, which is a significant improvement from our prior range of 33% to 34%. VOXX gross margin is anticipated to be in the range of 27% to 29%. Consolidated operating expenses, excluding severance, are expected to be between $370 million to $390 million. Core Gentex operating expenses are expected to remain unchanged at $300 million to $310 million. VOXX operating expenses are projected to be between $70 million and $80 million, excluding severance. Our effective tax rate is now expected to be in the range of 16% to 17% versus our previous estimate of 15% to 17%. Capital expenditures remain unchanged at $100 million to $125 million for the year. And lastly, consolidated depreciation and amortization is expected to be between $91 million and $98 million. This includes $90 million to $95 million for Gentex and $1 million to $3 million for VOXX. The second quarter began with a flurry of activity that has not slowed down. We closed the VOXX acquisition on April 1, and then moved very quickly into a chaotic period of global trade uncertainty that lasted for the entire quarter and remains unresolved. It was nevertheless a very productive quarter as we continue to make progress on our path toward improved profitability. Our teams are performing at a very high level, and our operational efficiency is improving significantly versus the same time last year. These improvements played a key role in driving strong revenue and profitability improvements despite revenue reductions in the domestic China market and the lower-than-expected light vehicle production in our primary markets. Over the next several quarters, the company will continue executing the margin improvement initiatives that are targeted to get the core margin profile in line with our long-term target of 35% to 36%. We are working on those targets while we are working with the VOXX team to ensure the combined organization is appropriately structured to support long-term profitability and shareholder value. That completes our prepared comments for today. We can now proceed with questions.

Operator, Operator

[Operator Instructions] Our first question comes from the line of Luke Junk with Baird.

Luke L. Junk, Analyst

Steve, maybe if we could start with just the underpinnings of gross margin, certainly, I think one of the big stories this quarter. And just curious to get your thoughts on the factors that are now within your control, we're starting to see the gross margin improvement efforts internally really showing up in the P&L and continuing to work on that versus some of the uncertainty that's still out there, be it industry production volume, trim mix, that feels kind of like you've turned the corner on getting your arms around the margin trend. Is that how you feel as well?

Steven R. Downing, President and CEO

Yes, I believe that over the past two years, we've focused on improving margins, especially following the required increases in electronics costs that we faced after COVID. During this time, we encountered various challenges, including a labor crisis and other industry factors that created obstacles. It seemed that whenever we made progress, something would come along to lower our expectations. However, this quarter reflects the effort we've put in, and it positively impacts our income statement. In terms of our analysis, there was a negative impact on margins from pricing and tariffs, estimated between 50 to 100 basis points. On the positive side, we achieved savings from our supply base, contributing 100 to 150 basis points, and labor and overhead savings added another 150 to 200 basis points. Looking ahead, we anticipate that these trends will continue in the second half of the year. The commodity pricing we rely on seems stable for the remainder of the year, and if our revenues stay within the current range, we expect to maintain operational efficiencies that indicate further improvement in our performance moving forward.

Luke L. Junk, Analyst

And then just switching gears to China. Certainly, that's coming up in the guidance relative to now less bad tariff situation. But just curious how you're thinking about China strategically, incrementally. I mean, clearly, the market is open again to some extent, but still a challenging market with respect to competitiveness, payment terms, etc.

Steven R. Downing, President and CEO

For us, the biggest challenge in the China market is that almost all of our sales are exports from the U.S. to China. The threat of counter tariffs exceeding 100% has led our customers in China to reconsider their use of our product. Many have either sourced from local suppliers or removed our product from their vehicles entirely. This situation is compounded by declining profitability for OEMs in the domestic China market, a trend that is well known in the industry. As a result, some features and content are being eliminated from product planning. We are currently reevaluating our strategy in the China market to find ways to grow there. Given the current uncertainty regarding tariffs, we haven't yet identified a successful formula. Historically, the market has lower than average margins, so while a decrease in business is not beneficial for revenue, it does positively impact margins.

Luke L. Junk, Analyst

Got it. And then lastly, Neil, just hoping to get a little more commentary on large area devices as of midyear. So I guess what you're sharing today sounds like good news in terms of engineering unlocks and aligning to what customers are expecting. But for that view to bring production within the next 24 months, could there be some conservatism in there potentially?

Neil Boehm, COO and CTO

There could be a little bit. The team has done an amazing job over the past six months, improving processes to enhance the visual characteristics and performance of the product and technology at the customer level, which can really help us accelerate its market introduction. I believe 24 months is a reasonable timeframe, and we may achieve our goals sooner, although there are still many variables to consider in delivering the product that the end customer is seeking. We are still working diligently. The team is doing a phenomenal job, and I feel confident that within those 24 months, we should be able to reach our objectives.

Operator, Operator

Our next question comes from the line of Joseph Spak with UBS.

Joseph Robert Spak, Analyst

A couple of questions, I guess, on VOXX now that you've had another sort of quarter to digest it and it's in the guide. Obviously, the EBIT is breakeven this year. It looks like it's a $100 million annualized OpEx run rate. How should we think about that level on a go-forward basis in terms of either synergies or cost savings that could come out as we think about the next couple of years?

Steven R. Downing, President and CEO

Yes. If you look at the overall OpEx on the VOXX side, we know there's some synergies in combining the 2 organizations. Part of that is you have 2 separately publicly traded companies going down to one. We know that will bring about a lot of those. We also know as Neil's team engages with their engineering teams, there's definitely some overlap and some synergies that we think we can accomplish there. The same thing with the back office side of the house. We definitely know that working together, we can definitely find ways to be more efficient. One of them will take a little longer, but that's also ERP integrations. Our system, we believe, is a more efficient system that will help with the workload that's manually required today inside of the VOXX system that we believe we can help with. So this is a 12- to 18-month process, but definitely want to get that OpEx on a percentage basis, probably won't get all the way to the Gentex level, but definitely closer to that.

Joseph Robert Spak, Analyst

Yes, as a percentage of sales. Okay. So over a couple of years, you think that's sort of a reasonable...

Steven R. Downing, President and CEO

Yes, very much so.

Joseph Robert Spak, Analyst

Yes. Okay. And then just sticking on VOXX. I know with the audio side of the business, when you sort of talked, when you first bought it at the height of sort of tariff uncertainty, there were maybe some decisions that had to be made about sourcing from China versus sort of other alternatives. And that seemed more clear when tariffs were 145% or higher, maybe less clear at current levels. I know it's not like we have full tariff certainty yet, but do you have any sort of harder views of what you plan to do there or when you think a decision would be made?

Steven R. Downing, President and CEO

Yes. The audio teams, particularly Klipsch and Onkyo, have done an excellent job of making sourcing decisions to minimize risk. As a consumer electronics company, they have more flexibility than an automotive supplier. They have already made decisions with their current supply base to reduce exposure to tariffs from China and are actively working on relocating their manufacturing. I expect that within 12 months, most of those transitions will be completed. As a result, the actual risk will be far less than the 100% that was previously a concern. While some tariffs will likely remain due to ongoing trade deals between the U.S. and other countries, they will be significantly lower than the previous risk factor.

Joseph Robert Spak, Analyst

Okay. Last one for me, just on the core Gentex mirror business. I think the second quarter production definitely came in better, which benefited from you. We're noticing signs of softening schedules for the second half. Do you see this as any kind of pull forward or timing shift? How do you view the production cadence from the second quarter through the rest of the year?

Steven R. Downing, President and CEO

Yes. If you examine the second quarter and what we're observing in the third quarter, we anticipate that the third quarter will closely resemble the second quarter. We believe the real softening will occur in the fourth quarter. Specifically, looking at our main markets, North America and Japan, along with Korea, are likely to experience the most significant year-over-year declines in the fourth quarter. There was some anticipation of accelerated shipments ahead of trade deadlines. We communicated with our customers about this, noting that while we could accommodate those requests, it would result in significantly higher overtime costs. Most of our customers made choices based on that cost difference when deciding whether to adjust their delivery schedules. Therefore, I don't believe the situation was as pronounced as has been suggested. There was some pull forward, but it wasn’t a major part of our revenue moving from the latter half of the year into the second quarter.

Operator, Operator

Our next question comes from the line of James Picariello with BNP Paribas.

Thomas Jacob Scholl, Analyst

This is Jake, on for James. Now that you've had a chance to have a full quarter owning VOXX and really dig into the business, how do you think about what portion of VOXX revenue should be considered non-core and could be divested versus what you guys definitely want to kind of fold into the core business?

Steven R. Downing, President and CEO

I believe that when you look at the overall business, it divides into two main segments in terms of revenue. One segment is premium audio, which excites us due to our PLACE launch and our aim to expand the HomeLink brand into home automation. Both our PLACE product and the Klipsch and Onkyo brands play a role in our strategy to integrate this business and increase our presence in the home automation sector while also utilizing our manufacturing capabilities in home electronics. This was a significant factor in our acquisition of VOXX. The other two segments are quite similar to our existing operations. VOXX manages an OEM segment in electronics and also has an automotive aftermarket business. They have been our distributor for a long time, and we are well-acquainted with their distribution model. Currently, both segments remain appealing to us, and we see opportunities to enhance their overall profitability. We aim to leverage our supply chain for cost reductions while also speeding up product market launches at a lower operational expense.

Kevin C. Nash, Vice President of Finance and CFO

The final aspect to mention is biometrics, which has always been part of our growth strategy for mirror growth. We are gaining access to the underlying algorithm through that acquisition. The EyeLock component is more of a long-term strategy, but owning that technology was also crucial.

Thomas Jacob Scholl, Analyst

All right. And then I just wanted to quickly follow up on China. How should we think about the first half, second half split? And then what does the run rate look like going forward into 2026 and beyond?

Steven R. Downing, President and CEO

Yes. If you look at the first quarter, it was almost a normal quarter for us really in terms of exports into China. I think that was at $43 million, I believe, and then $33 million. I would say probably in the back half, you're probably more like $25 million per quarter roughly. And then after that, I mean, who knows? But if a deal gets done that sub-50% tariff rates, then I would say it's probably a $75 million to $110 million book of business for us going forward versus the $240 million, $250 million we're anticipating this year.

Operator, Operator

Our next question comes from the line of Josh Nichols with B. Riley.

Michael Joshua Nichols, Analyst

Great to see the margin and the revenue bump coming here. I know I think last quarter, things have been shifting a lot with the tariff news and whatnot. Mix was a big question, right, last quarter. And clearly, mix has become a pretty big tailwind for this quarter. You're seeing FDM, other advanced feature mirrors move higher. I'm kind of curious what's changed a little bit and what you're hearing from your customers for how they're focusing on mix for some of these higher-value products and what continues to be a little bit of a challenging light vehicle production market.

Steven R. Downing, President and CEO

Yes. Overall, we're seeing a return to the focus on profitability among OEMs, recognizing that light vehicle production is unlikely to meet expectations. This shift is leading to an increase in the upper half of our production volume mix, which is positive for us. However, we're also experiencing some declines in OEC, which negatively affect our margin profile. While there are positive aspects, such as the trend towards FDM and higher take rates for advanced features, there are also challenges related to cost-cutting and decontenting from OEMs that have impacted our OEC volumes. Thus, the financial performance, despite these challenges, has been quite strong. Losing OEC volume compared to last year presents operational and margin challenges. The struggle in the external portion of our business indicates that it’s not all positive momentum.

Michael Joshua Nichols, Analyst

And then just to touch on VOXX real quick. I think at a high level, you mentioned it, it's running around breakeven today. But when you look at the opportunity for margin expansion, I think the guidance for VOXX is like 27% to 29%. This year, you guys, your core business is running at best-in-class numbers, 34-plus percent this year. Like how much do you think that those margins for VOXX could improve over the next 12 to 24 months? As you mentioned, probably not to the level that you guys are operating at, at the core business given the nature of it. But I'm just curious how much of that synergies and operating leverage is going to be coming through the gross margin line for VOXX?

Steven R. Downing, President and CEO

Yes. I don't have a specific figure for you, but on the Klipsch side, improvements can happen more rapidly due to the faster redesign cycles, which helps reset the margin profile for consumer electronics quickly. Each redesign offers a chance to enhance profitability. The automotive sector, however, takes longer. Looking ahead two years, I believe an improvement of 200 to 300 basis points in gross margin is definitely possible.

Michael Joshua Nichols, Analyst

And then last question for me. You touched on the dimmable glass, a very big opportunity there. Good to see the progress the company has been making on that front. On driver monitoring, a little bit more near-term revenue opportunity. Any updates on that? I know you expect to do a little bit of revenue this year, but that could ramp to be more material over the '27, '28 type time frame?

Neil Boehm, COO and CTO

Yes, exactly. Our second customer is set to begin production in late Q3 or early Q4. Customer 3 will follow in late Q4 or early Q1 of next year, and the fourth customer is expected in the early part of 2026. As mentioned, we anticipate that volumes will increase over the coming years, particularly becoming more significant around 2027 and into 2028.

Operator, Operator

Our next question comes from the line of Ron Jewsikow with Guggenheim Securities.

Ronald John Jewsikow, Analyst

Maybe starting on just the FDM growth, the increase in the guide. Any color on kind of what's driving the roughly 5% upside versus prior shipment expectations? I guess I want to unpack like I don't think it's probably light vehicle production volumes? Or is it take rates? Is it launches coming quicker than expected? Just kind of what you're seeing?

Steven R. Downing, President and CEO

It's really a combination of factors. I would say we have a clear view of the launch cadence and take rates. We were initially more pessimistic about light vehicle production in the first half of the year than what actually transpired. At the start of the year, we believed there were more risk factors involved. However, given the strong performance in the first half and the upcoming launches mentioned by Neil for the second half, we are becoming more confident in meeting our goals, especially considering what has already occurred this year. Even with lower production volumes, when we look at the distribution across those OEMs and the potential take rates, we see less risk now compared to earlier in the year. Therefore, we expect take rates to continue to improve, and the pace of launches has not diminished. This is a significant positive development for the second half of the year, with OEMs remaining committed to their product launch schedules.

Ronald John Jewsikow, Analyst

Okay. That's super helpful color. And I want to maybe double tap or it might be triple or quadruple at this point on the China guide. I guess just what is the reason in your estimation that the China market is not bouncing back, I think, post-tariff relief to kind of pre-tariff levels? Is local competition filling the void? Was there kind of enough inventory in the channel already that OEMs were able to use that? Or is there kind of just decontenting at certain OEMs as a result of tariffs?

Steven R. Downing, President and CEO

Yes. All three factors are indeed at play, but the most significant one is decontenting. This situation is primarily influenced by the tight profitability pressures that OEMs in that market are currently facing. Many OEMs have announced negative margin profiles, and some are struggling just to break even. A significant portion of this is due to decontenting efforts aimed at reducing the cost per vehicle. While there has been some impact from local competition, I would say that it represents a much smaller fraction of the business loss in China; decontenting is the main driver.

Ronald John Jewsikow, Analyst

Okay. That's helpful color. And if I could just squeeze one more in. On the tariffs or the net tariff costs that weren't reimbursed this quarter, it seems like it was maybe $4 million to $5 million of net cost...

Steven R. Downing, President and CEO

It was about $2.7 million.

Ronald John Jewsikow, Analyst

Okay. Do you expect those to be reimbursed in the second half? Or is that just kind of assumed as kind of leakage in the guide?

Steven R. Downing, President and CEO

No. The team is very clear that our expectation is that we're going to get at least most, if not all, of that reimbursed.

Operator, Operator

Our next question comes from the line of David Whiston with Morningstar.

David Whiston, Analyst

In terms of the core company, getting that gross margin target of 35% to 36%, what major activities still need to be done to get to that level?

Steven R. Downing, President and CEO

If things remain the same, I believe we're on track. However, there are additional initiatives we have initiated that are still in progress. This includes some product redesigns. The efforts began when the cost increases in the electronics sector occurred, prompting several projects that we continue to develop. Some of these redesigns are still underway and not yet fully implemented. We're also consistently improving manufacturing aspects like throughput, yields, and scrap costs. Another area of focus is on replacement products, which can vary. For instance, some of our incoming bill materials are affected by tariffs from various regions, leading us to explore alternative suppliers. We are continually assessing ways to minimize risks in our business to achieve and maintain this margin profile over the long term.

David Whiston, Analyst

Okay. And then on your supply chain, how much exposure do you guys have to rare earths and magnet materials from China upstream?

Steven R. Downing, President and CEO

I would say there's significant exposure on the coating side for core Gentex, particularly with precious metals and our coatings. Following the Klipsch acquisition, magnets have become a much larger concern. Previously, magnets were not an issue for us, but the Klipsch team and the Premium Audio team have been working diligently to ensure that this does not become a problem for them and their ability to serve their customers. They have done a commendable job of minimizing supply risks as much as possible in this environment. While it's not completely risk-free, we currently have a strong plan in place to maintain a steady supply of magnets for their speaker products.

Operator, Operator

And I'm currently showing no further questions at this time. I'd like to hand the call back over to Josh O'Berski for closing remarks.

Josh O'Berski, Director of Investor Relations

Thank you, everyone, for your time today. As a reminder, we will be at SEMA in November; if any investors are interested in joining us, please reach out. But this concludes our conference call. Have a great weekend.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.