Gentex Corporation (NASDAQ:GNTX) Q2 2023 Earnings Call Transcript

Gentex Corporation (NASDAQ:GNTX) Q2 2023 Earnings Call Transcript July 28, 2023

Gentex Corporation misses on earnings expectations. Reported EPS is $0.31 EPS, expectations were $0.41.

Operator: Good day, and thank you for standing by. Welcome to the Gentex’s Second Quarter 2023 Financial Results Conference Call. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host today, Josh O’Berski, Director of Investor Relations. Please go ahead.

Josh O’Berski: Thank you. Good morning, and welcome to the Gentex Corporation Second Quarter 2023 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. This call is live on the Internet and can be reached by going through the Gentex website at ir.gentex.com. All contents of this conference call are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcasted, retransmitted, transcribed or otherwise redistributed. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any unauthorized use of the contents of this conference call.

This conference call contains forward-looking information within the meaning of the Gentex safe harbor statement included in the Gentex reports second quarter 2023 financial results press release from earlier this morning, and as always, shown on the Gentex website. Your participation in this conference call implies consent to these terms. Now I’ll turn the call over to Steve Downing, who will get us started today.

Steven Downing: Thanks, Josh. For the second quarter of 2023, the company reported net sales of $583.5 million compared to net sales of $463.4 million in the second quarter of last year, a 26% quarter-over-quarter increase and a new quarterly sales record for the company. For the second quarter of 2023, global light vehicle production in North America, Europe, Japan, Korea and China, increased approximately 18% when compared to the second quarter of last year. So far, 2023 has proven to be the opposite of the last few years with year-to-date sales levels coming in higher than our beginning of the year forecast. As a result of the improvement in light vehicle production, fewer supply chain challenges and the continued strong demand for our products, this quarter resulted in an outperformance of 9% compared to our primary markets, which include North America, Europe, Japan and Korea.

The company’s growth is being driven by penetration rates of our core electrochromic technology, continued growth in our Full Display Mirror product line and adoption of other value-add features in the market. For the second quarter of 2023, the gross margin was 33.1% compared to a gross margin of 32% for the second quarter of last year. The second quarter of 2023 gross margin increased on a quarter-over-quarter basis as a result of the significantly higher sales levels, manufacturing improvements, cost recoveries from OEMs and improvements in freight-related costs and product mix. Some of these improvements were partially offset by increased raw material and labor costs as compared to the second quarter of last year, but still resulted in a 110 basis point increase in gross margin on a year-over-year basis.

When compared to the first quarter of 2023, the gross margin in the second quarter increased from 31.7% to 33.1% as a result of better overhead leverage from the higher sales levels, customer cost recoveries realized in the second quarter and improvements in overtime costs, which helped to offset certain incremental raw material cost increases that took effect in the first half of 2023. Late last year, we formulated our plan for margin recovery that we estimated would take until the end of 2024 to complete. So far, I’m very pleased with our progress and believe we are well on our way to accomplishing the goal of achieving a gross margin of 35% to 36% by the end of next year. Operating expenses during the second quarter of 2023 increased by 5% to $65.8 million compared to operating expenses of $62.6 million in the second quarter of last year.

Operating expenses increased quarter-over-quarter, primarily due to staffing and engineering-related professional fees, which were partially offset by lower outbound freight expenses. Our operating expenses started to ramp as expected during the second quarter and will continue to build throughout the rest of the calendar year as we add resources focused on new product research and development, new business awards and VAVE initiatives for cost optimization of our bill of materials. Income from operations for the second quarter of 2023 was $127.3 million, a 48% increase when compared to income from operations of $85.8 million for the second quarter of last year. During the second quarter of 2023, 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 2023 was $109.2 million compared to net income of $72.4 million for the second quarter of last year, which represents a 51% increase. The increase in net income was primarily the result of the quarter-over-quarter increases in net sales and operating profits. Earnings per diluted share for the second quarter of 2023 were $0.47, a 52% increase when compared to earnings per diluted share of $0.31 for the second quarter of 2022. I will now hand the call over to Kevin for some financial details.

Kevin Nash: Thank you, Steve. Automotive net sales in the second quarter of ’23 were $574.1 million, a 27% increase when compared to $452.9 million in the second quarter of ’22. Auto-dimming mirror unit shipments increased by 21% during the second quarter compared to the second quarter of last year. Other net sales in the second quarter of ’23, which includes dimmable aircraft windows and fire protection products, were $9.4 million compared to other net sales of $10.5 million in the second quarter of ’22. Fire protection sales decreased by $3.6 million for the second quarter of ’23 compared to the second quarter of ’22. And dimmable aircraft window sales increased by $2.5 million for the second quarter of ’23 compared to the second quarter of last year.

Share repurchases. During the second quarter of ’23, the company repurchased 0.9 million shares of its common stock at an average price of $27.28 per share. As of June 30, 23, the company has approximately 18.8 million shares remaining available for repurchase pursuant to its previously announced share repurchase 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. Looking at the balance sheet. Balance sheet comparisons mentioned today are as of June 30, ’23 as compared to December 31, ’22.

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Cash and cash equivalents were $237.7 million compared to $214.8 million. Short-term and long-term investments combined were $259.8 million, up from $225.3 million, which includes fixed income investments as well as the company’s equity and cost method investments. Accounts receivable was $350.4 million, up from $276.5 million due to the increase in sales levels. Inventories were $390 million, down from $404.4 million and accounts payable increased to $168.5 million, up from $151.7 million. Looking at preliminary cash flow items for the quarter and year-to-date. Second quarter ’23 cash flow from operations was $120.9 million, which was an increase from $73.3 million in the second quarter of last year. The increase was due to increases in net income and shifts in working capital.

And year-to-date cash flow from operations was $241.8 million, an increase from $189.3 million in ’22, also due to increased net income and changes in working capital. Capital expenditures for the second quarter were $47.5 million compared with $34.1 million for the second quarter of ’22. And year-to-date capital expenditures were $90.3 million compared with $58 million for year-to-date ’22. Depreciation and amortization for the second quarter was $24.8 million compared with $25.3 million for the second quarter of ’22. And year-to-date depreciation and amortization was $48.9 million compared with $50 million for year-to-date ’22. I’ll now hand the call over to Neil for a product update.

Neil Boehm: Thank you, Kevin. For today’s product update, we’re going to focus on 3 key areas: first, our launch rate for the quarter; second, Full Display Mirror volumes for the quarter and full year; and third, our focus on bond reduction now that supply constraints have improved. In regards to launch rates, in the second quarter of 2023, there were 35 net new nameplate launches of our interior and exterior auto-dimming mirrors and electronic features net of previously disclosed feature headwinds. The second quarter was an extremely heavy launch quarter and was very strong in advanced features. In the quarter, 60% of the net launches contained advanced features with Full Display Mirror and HomeLink leading the way. Now for an update on Full Display Mirror.

Full Display Mirror continues to maintain momentum with our customers through increased launches and with consumers that have helped to drive increased take rates and volumes. In the first quarter of 2023, we stated that we are expecting our 2023 unit volume to be at least 300,000 units higher than our 2022 volume. Based on the results of the first half of the year and our current forecast for the remainder of 2023, we now believe our Full Display Mirror unit growth will be approximately 500,000 units higher than our 2022 volume. We’re excited to see this product continue to grow across so many different vehicle platforms globally. Throughout the second quarter of 2023, we’ve continued to see improvements in supply constraints that have been forcing us to execute a significant number of redesigns.

With the majority of these challenges behind us, we can begin to evaluate our designs and component strategies from a cost perspective. Over the last 2 years, we’ve incurred significant cost increases due to the reactionary mode we needed to be in, but we’re now turning our focus on the designs, the components and the suppliers of the components in an effort to drive down our bill of material costs. Our strategy is very straightforward, work with our key supplier partners to find win-win situations that allow us both to have sustainable, profitable growth. Finally, I want to say thank you to the Gentex team. This team continues to do an incredible job working through issues and challenges, all while launching new products at the highest rate in company history.

It has been truly impressive. I’ll now hand the call back over to Steve for guidance and closing remarks.

Steven Downing: Thanks, Neil. The company’s current forecast for light vehicle production for the third quarter of 2023 and full years 2023 and 2024 are based on the mid-July 2023 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 3% for the third quarter of 2023 as compared to light vehicle production for the third quarter of last year. For calendar year 2023, light vehicle production in these markets is forecasted to increase approximately 6% when compared to last year. It is important to note that these estimates do not include any estimated impact stemming from potential labor issues in the second half of this year.

Based on this light vehicle production forecast, the company is updating certain guidance estimates for calendar year 2023. We are increasing our revenue estimates for the year, which is now expected to be between $2.2 billion and $2.3 billion. We are also raising the bottom end of the range for gross margins for the year as we are now expecting gross margins to be between 32.5% and 33% for the year. Operating expenses are still expected to be between $260 million and $270 million. We are lowering the high end of our estimated annual tax rate for the year, which is now forecasted to be between 15% and 16%. Capital expenditures are still expected to be between $200 million and $225 million. And our depreciation and amortization forecast remains unchanged and is expected to be between $100 million and $110 million for 2023.

Additionally, based on the company’s current forecast for light vehicle production for calendar year 2024, the company expects calendar year 2024 revenue to be between $2.45 billion and $2.55 billion. The second quarter of 2023 produced revenue levels that were both record-setting and better than our initial expectations. Additionally, the company continued to make progress on our path towards improved profitability, and we are now executing our next wave of cost improvement initiatives that are necessary for us to accomplish our goal of reaching the 35% to 36% gross margin range by the end of 2024. While the remainder of 2023 and 2024 had the potential to be impacted by industry challenges and macroeconomic issues, we continue to remain optimistic about our product portfolio, our growth estimates and our ability to control costs.

These factors should come together over the next 18 months to produce record revenue and profitability for the company. That completes our prepared comments for today, and we can now proceed to questions.

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Q&A Session

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

Luke Junk: Steve, hoping to start with gross margin. Based on both the result this quarter and guidance moving higher, it appears that some elements of the gross margin improvement plan that you’ve laid out are maybe progressing faster than expected. Can you just talk about where you’re seeing upside leverage to gross margin sooner or all it’s equal and the sustainability of those factors? And then with respect to the next wave of gross margin initiatives that you’re moving to right now, are some of these coming sooner than you may have initially thought?

Steven Downing: Yes. No, thanks for that question. You’re right on with the underlying principle. The — really, what’s driving margins higher and faster than really we had even anticipated was this really strong growth in revenue. What happens with this higher level of sales allows us to leverage the manufacturing overhead portion of the business quite well. And then as we mentioned before, we’ve had a lot of new hires over the last 6 months. And so the folks getting onboarded, trained starting to see the improvements in labor. Obviously, labor costs themselves have gone up significantly, but the team has been able to show increased throughput, which has helped to offset some of those higher labor costs. Beyond that, the cost recoveries from OEMs have actually come in a little quicker than anticipated and, quite honestly, more meaningful than what our initial estimates were.

Obviously, with some of the slowdown in what’s happening in the industry, there’s been some significant improvements in freight costs. And so that’s helped us on the — both on the incoming side for bill of material costs with raw materials, but then also on the SG&A side as we’ve had lower expedited freight cost getting components to our customers. And so when you look at the next wave of those cost improvement initiatives, really what we’re focused on right now is continuing to get pricing adjust, obviously, trying to slow down the cost increases from the supply base. And then as we move through the second half of this year and into next year, we’re going to be focused, as Neil mentioned, on bill of material focus, a lot of components we had to go to based on availability were at higher BOM prices, not just the increases from the suppliers, but also changing components to the ones that were available.

We believe over the next couple of years, there will be a lot of opportunity for us to focus on that bill of material on the supply base to make sure we have cost optimized designs.

Luke Junk: For my follow-up, I just wanted to look at the updated 2024 view that you gave. It implies the company is going to be driving outgrowth above the ranges that you’ve historically targeted for a second consecutive year in quite a meaningful way. Just wondering, what’s driving that? Are we seeing higher FDM executions reflected in that? I appreciate the update on 2023 that Neil gave. Should we think about that into 2024 as well? Or is there something else that’s reflected in the expected outgrowth?

Steven Downing: Yes, there are several things. One of them is definitely continued growth in the FDM product portfolio expansion with more OEMs and new vehicles and take rates. The other one is we’ve actually been on a couple of year run of significantly higher OEC volumes. We believe that will obviously continue to show some strength in terms of outside mirror volume growth. And then we’re expecting by the end of next year to start seeing some of the other new features starting to come online, things like DVR, some ITM volumes coming back, now that we can finally have components that we need to produce those. But there’s other advanced features towards the end of next year that we believe we’ll be launching as well that will start to show some meaningful growth for the business.

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