Gentex Corp (GNTX) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Gentex Corporation second-quarter results conference call. I would now like to turn the meeting over to Ms. Connie Hamblin, Vice President of Investor Relations and Corporate Communications. Please go ahead, Ms. Hamblin.

Good morning. Thank you, everyone, for joining our second-quarter conference call. This is Connie Hamblin. On the call with me are Enoch Jen, our Senior Vice President; and Steve Dykman, our Vice President of Finance and Chief Financial Officer. This call is being broadcast live on the Internet today on our website at www.Gentex.com. The icon is on the homepage. There is also an audio playback of the conference call available on the website as well.

I'm going to go through a brief routine comment and then I will turn this over to Enoch Jen, who will give us his comments on the quarter. And then we will open it up to Q&A. This call is being recorded by Gentex Corporation. All contents of Gentex Corporation's conference calls are the property of Gentex. No such content may be copied, published, reproduced, rebroadcast, retransmitted, or otherwise redistributed without the expressed written consent of Gentex Corporation. Gentex alone holds such rights. While we understand that there may be companies that transcribe and redistribute our conference calls notwithstanding this warning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of the content. We advise that you should not rely on the content of any unauthorized transcript as Gentex Corporation will not be held reliable for the content of any such transcript. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex with respect to any such unauthorized use. Your participation implies consent to our taping into the foregoing terms. Please drop off the line if you do not agree to these terms.

Our Safe Harbor statement -- this presentation may include forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections about top-line growth in the global automotive industry, the economy, the impact on stock option expenses, on earnings, the ability to leverage fixed manufacturing overhead costs, unit shipment growth rates, and the Company itself. Words like anticipates, believes, confident, estimates, expects, forecast, likely, plans, projects and should and variations of such words and similar expressions identify forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, expense, likelihood and degree of occurrence, and actual results may differ materially from those in the forward-looking statements. The Company undertakes the obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. We urge you to review the full Safe Harbor statement that is contained in the news release that is posted on our website.

At this time I will turn the call over to Enoch Jen, who will make his comments on the quarter. And then we will open it up to Q&A. Enoch?

Good morning, everyone. We are pleased to report record second-quarter revenues of $170.5 million. This compares to $163.5 million reported in the second quarter of 2007 and represents a 4% increase. For the first six months we reported revenues of $348.5 million, a 9% increase over the $320.7 million reported for the first six months of 2007. Our operating income for the second quarter was $35.8 million, a 2% decrease compared to the $36.5 million reported in the second quarter of 2007. For the first six months our operating income was $75.8 million, an 8% increase over the $70.5 million reported in the first six months of 2007.

Our second-quarter net income was $26.9 million, a 13% decrease compared to the $31 million reported in the second quarter of 2007. This decrease was primarily due to a decline in other income which we will discuss later. For the first six months we reported net income of $57.3 million, a 5% decrease compared to the $60.5 million reported in the first six months of 2007. Our earnings per share for the second quarter was $0.19. That compares to $0.22 reported in the second quarter of 2007. For the first six months we reported earnings per share of $0.40 compared to $0.42 reported in the first six months of 2007.

Looking next at automotive revenues and auto dimming mirror unit shipments, our total auto dimming mirror unit shipments were up by about 1% in the second quarter of 2008 compared with the second quarter last year. Automotive revenues increased by 5% from $157.2 million in the second quarter of 2007 to $164.8 million in the second quarter of 2008. The UAW strikes negatively impacted second-quarter automotive revenues by approximately $5.8 million.

Total auto dimming mirror unit shipments increased by 6% in the first six months of 2008 compared with the first six months of 2007. For the first six months of 2008 automotive revenues increased by 9% to $336.9 million compared with $308.3 million for the first six months of 2007. General Motors worldwide represented 19% of total company revenues for calendar year 2007. For 2008 year-to-date GM worldwide represented approximately 14% of total company revenues.

Auto dimming mirror unit shipments in North America decreased by 13% in the second quarter of 2008 compared with the same period in 2007, primarily as a result of the lower light vehicle production at the Detroit Three and the continuation of the UAW strikes that started in the first quarter of 2008. Unit shipments to Asia and the European transplants partially offset the impact of the strike and the production cuts at the Detroit Three.

North American light vehicle production decreased by 14% in the second quarter of 2008 compared with the same prior-year period. GMT900 light vehicle production was down 49% in the second order of 2008 compared to the same period in 2007. Auto dimming mirror unit shipments in North America decreased by 6% in the first six months of 2008 compared with the same period in 2007. North American light production declined by 11% in the first six months of 2008 compared with the same prior-year period. GMT900 light vehicle production was down 40% for the first six months of 2008 compared to the same period in 2007.

Auto dimming mirror unit shipments to offshore customers increased by 12% in the second quarter of 2008 compared with the same period last year. The increase in unit shipments was primarily due to higher penetration of interior and exterior auto dimming mirrors at certain European and Asian customers. Light vehicle production in Europe increased by 4% in the second quarter and increased by 2% in Japan and Korea in the second quarter of 2008 compared with the same period last year.

Auto dimming mirror shipments to offshore customers increased by 14% in the first six months of 2008 compared with the same period last year. Light vehicle production in Europe increased by 3% for the first six months of 2008 compared with the same period last year. Light vehicle production in Japan and Korea increased by 4% for the first six months of 2008 compared with the same prior-year period.

Looking next at average selling price per auto dimming mirror unit, the ASP for the second quarter of 2008 was $41.50. The ASP increased from $40.94 in the first quarter of 2008 two $41.50 in the second quarter of 2008, primarily due to increased sales of advanced featured mirrors. Based on our current forecast we would expect ASP in the third quarter and for the calendar year 2008 to be in the range of $41 to $42 depending upon product mix. The ASP increased on a year-over-year basis from the second quarter of 2007, when it was $40.32, to $41.50 in the second quarter of 2008, primarily due to higher content in interior mirrors partially offset by annual customer price reductions.

Second-quarter 2008 and calendar year 2008 ASPs exclude non-auto dimming mirrors and microphone units. This is how we will report ASPs going forward.

Fire protection revenues decreased by 10% to $5.6 million for the second quarter of 2008 compared with the same period last year. Fire protection revenues decreased by 7% to $11.6 million for the first six months of 2008 compared with the same period last year. The decreased revenues during both periods were due to the weak commercial and residential construction markets.

Gross profit margin of 34.7% in the second quarter of 2008 declined sequentially from 35.2% in the first quarter of the 2008, primarily due to the lower top-line growth limiting the Company's ability to leverage its fixed overhead cost. The gross margin also declined on a year-over-year basis from 35.3% in the second quarter of 2007, primarily due to annual customer price reductions and top-line growth below 10%, which caused negative leverage on fixed overhead costs. The impact of the annual customer price reductions was partially offset by purchasing cost reductions and foreign-exchange rates.

We currently expect our gross margin in the third quarter and calendar year 2008 to be in the range of the margin reported in second-quarter 2008, depending upon top-line growth, purchasing cost reductions and the depth of global light vehicle production cuts. The gross margin will continue to be impacted by annual customer price reductions, uncertain global automotive production levels, our ability to leverage our fixed overhead costs, purchasing cost reductions and VAVE initiatives, and manufacturing yields.

Turning to engineering research and development expense, ER&D expense increased by 8% in the second quarter of 2008 compared with the same 2007 period. The increased expense was primarily due to additional staffing and engineering for new product development and new vehicle programs such as rear camera display and SmartBeam, partially offset by decreased patent litigation expenses. Expense related to the Muth patent litigation was $1.4 million in the second quarter of 2007. That litigation was settled on February 15, 2008. Excluding the Muth litigation expense, ER&D expense would have increased by approximately 22% in the second quarter of 2008 compared with the same prior-year period. ER&D expense increased by 6% in the first six months of 2008 compared with the same 2007 period. Excluding Muth litigation expense in 2008 and 2007, ER&D expense would have increased by approximately 21% for the first six months of 2008 compared with the same period in 2007.

Selling, general, and administrative -- excuse me. ER&D expenses currently expected to increase by approximately 5% to 10% for the third quarter and calendar year 2008. Excluding the Muth litigation expense, ER&D expense is expected to increase by 15% to 20%.

Next, selling, general, and administrative expense -- SG&A expense increased by 13% in the second quarter of 2008 compared with the same prior-year period. The increase was primarily due to the continued expansion of the Company's overseas sales offices and foreign-exchange rates. SG&A expense increased by 16% for the first six months of 2008 compared with the same prior-year periods, primarily due to continued expansion of the Company's overseas sales offices and foreign-exchange rates. We currently believe that SG&A expense will increase in the third quarter and calendar year 2008 by approximately 15% to 20%. This increase is primarily due to continued expansion of our overseas offices and foreign-exchange rates.

Looking at other income, total other income decreased by 50% in the second quarter of 2008 compared with the same prior-year period, primarily due to lower realized gains on the sale of equity investments and lower interest income due to lower interest rates. For the second quarter of 2008 investment income was $3,240,000. Other net was $990,000 for a total other income of $4,230,000. For the first six months of 2008 investment income was $7,300,000. Other net was $2,406,000, for a total other income of $9,706,000. In light of the current stock market environment, we currently expect realized gains on the sale of equity investments for the balance of the year to be similar to the second quarter of 2008.

A few balance sheet items -- as of June 30, 2008, accounts receivable was $71.3 million. Inventories were $51.2 million. Patents and other assets were $8.8 million. Accounts payable was $34.3 million and accrued liabilities was $35.6 million. Our tax rate was 32.9% in the second quarter of 2008 as compared with the statutory rate of 35%, primarily due to the domestic manufacturing deduction. Tax benefits pertaining to stock option expense can significantly vary from quarter to quarter and year to year due to incentive stock options disqualifying disposition activity. The tax benefit pertaining to stock option expense was 40% in the second quarter of 2008 compared with 80% in the second quarter of 2007. Excluding stock option expensing we currently expect that the tax rate for 2008 will be approximately 33.25% based on current tax laws.

Our year-to-date cash flow from operations was $72.3 million. Our capital expenditures for the second quarter of 2008 was $14.5 million. Our depreciation expense in the second quarter of 2008 was $8.7 million. For calendar year 2008 our estimate for capital expenditures is now approximately $50 million to $55 million. Depreciation expense for 2008 is now estimated at $36 million to $38 million.

An update on our share repurchase plan -- during the second quarter 2008 the Company repurchased 1.2 million shares at a cost of approximately $19 million. The Company has a share repurchase plan in place with authorization to repurchase up to 28 million shares of the Company's stock. To date including the prior share repurchases, the Company has repurchased approximately 21.4 million shares, leaving approximately 6.6 million shares authorized to be repurchased under the plan.

Cash dividends -- on July 18, 2008, the Company paid a quarterly cash dividend of $0.105 per share to shareholders of record of the common stock at the close of business on July 8. The ex dividend date was July 3, 2008.

An update on SmartBeam -- we continue to be pleased with the progress we are making in the market acceptance for SmartBeam, the high beam headlamp assist product that we introduced in the 2005 model year. We are currently shipping SmartBeam for 18 2008/2009 vehicle programs including the Audi A4, A5 in Q7 that was announced in May. During 2008 we expect to announce and start shipping SmartBeam mirrors to the third European customer and our first Asian customer. There are a number of follow-on programs for existing and new customers scheduled for the 2009 calendar year. Based on our existing forecast, volumes and incremental sales dollars for SmartBeam will become more meaningful in the 2009 calendar year.

For the 2007 calendar year we shipped approximately 305,000 SmartBeam units. Option rates have remained strong at 25% to 30% on average. For the 2008 calendar year we currently expect to ship approximately 350,000 to 400,000 SmartBeam units.

Next, an update on rear camera display. In late 2006 we announced we had developed a new product that we called the rear camera display or RCD mirror. The product is currently offered as original equipment on the Ford F-150 and Expedition and the Lincoln Navigator and Mark LT as well as on the Kia Mohave and Hyundai Grandeur for the domestic Korean market. In addition, we set out a note to our mailing list on June 30 confirming that our RCD product will be offered as optional original equipment on the 2009 GMT900 and Lambda platforms. All mirror-based RCDs in these GM vehicles will be utilized in conjunction with auto dimming feature. Given the announcements for the Mohave and Hyundai Grandeur for the domestic Korean market you can see that there is interest in this feature in countries where there is no legislation pending nor passed.

We have previously announced that the RCD mirror is available as a port or dealer-installed option on the Mazda CX-9. The Company also previously announced that the RCD mirror is available as a dealer or port-installed option on the Toyota Camry through Gulf States Toyota. We continue to work with a number of other customers on original equipment development programs for this product. This is not a long leadtime product, so upon receiving a production order from a customer we could be in volume production for other programs within nine to 12 months.

The Company shipped approximately 55,000 RCD mirrors in calendar year 2007 and we currently estimate that we will shift between 350,000 to 400,000 RCD mirrors in calendar year 2008. Based on the current forecast the Company continues to believe that RCD mirror shipments will more than double in calendar year 2009 compared with calendar year 2008. The automakers currently offer a rear camera display product -- currently offering a rear camera display product are doing this absent any legislation and made the decision before any legislation was pending. As most of you have heard by now, the legislation, now called the Kids Transportation Safety Act of 2007, was signed into law by President Bush on February 28, 2008. The bill orders the secretary of transportation at the National Highway Traffic Safety Administration or NHTSA to initiate rulemaking to revise the federal standard to expand the field of view so that drivers can detect objects directly behind vehicles. The requirements may be met by the use of additional mirrors, sensors, cameras, or other technology to increase the driver's field of view, which is the decision that NHTSA needs to make. NHTSA has done some independent studies already and appears to be leaning towards camera-based systems.

With respect to timing, our understanding is that NHTSA has until February 28, 2009, to initiate rulemaking and then has 36 months to publish final standards, and then automakers will need to become fully compliant with the final standards within 48 months. So in general automakers will have approximately seven years to comply with the rules that NHTSA initiates. However, we expect early adoption by many automakers and we are already seeing that with Ford, General Motors, and Hyundai/Kia for the US and Korean markets.

An update on the Boeing 787 Dreamliner dimmable window program -- we began shipping parts for the first test planes for the Boeing 787 Dreamliner series of aircraft at midyear 2007. Boeing has now announced three delays for the final deliveries of aircraft to their customers. Boeing remains resolute that they will achieve the first flight of the 787 before the end of calendar year 2008 and that the first planes will go into service in late 2009. We now anticipate that we will begin to ship our windows to the aircraft production line in late 2008 to early 2009. We do not expect revenues from this program to be significant in calendar year 2008. Other aircraft manufacturers have expressed interest in this technology, and we continue to work on these potential programs with PPG Aerospace.

Turning next to top-line growth estimates, the following projections for top-line growth are based on CSM's mid-July light vehicle production forecast. For the third quarter and balance of calendar year 2008 our estimate for top-line growth is approximately 10% compared with the same period in 2007, based on our current forecast for product mix, light vehicle production levels, and take rates. However, due to uncertainties in the marketplace we believe there is potentially more downside than upside to current global light vehicle production levels.

For the third quarter of 2008 light vehicle production per CSM for North America is currently 3.1 million vehicle units, which is a 12% decrease compared to the third quarter of 2007. For Europe the CSM forecast is 4.9 million vehicle units, a 2% increase over the third quarter of 2007. And for Japan and Korea, the CSM forecast is 3.6 million vehicle units, a 7% increase compared to the third quarter of 2007.

For calendar year 2008 light vehicle production, the current CSM forecast for North America is 13.4 million vehicles, an 11% decrease compared to calendar year 2007. For Europe the current CSM forecast is 22 million vehicles, a 2% increase compared to calendar year 2007. And for Japan and Korea the CSM forecast is 15 million vehicles, a 2% increase compared to calendar year 2007.

At this time I will turn the call back over to Connie, and then we'll go into Q&A.

Just as a quick reminder, all listeners should note that this call is being recorded by Gentex Corporation. All contents of Gentex Corporation's conference calls are the property of Gentex. No such content may be copied, published, reproduced, rebroadcast, retransmitted, or otherwise redistributed without the expressed written consent of Gentex Corporation. Gentex Corporation alone holds such rights. While we understand that there may be companies that transcribe and redistribute our conference calls notwithstanding this warning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of the content. We advise that you should not rely on the content of any unauthorized transcript as Gentex Corporation will not be held liable for the content of any such transcript. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex with respect to any such unauthorized use. Your participation implies consent to our taping and to the foregoing terms. Please drop off the line if you do not agree to these terms.

At this point we will open the call up for questions and answers. And again, we would appreciate it if you would try to limit your questions to single-part questions and ask one at a time to allow everyone to get in the queue. Thank you.

Operator?

(Operator Instructions) Himanshu Patel from JPMorgan.

Can you guys remind us what is your Chrysler exposure exactly?

Well, for calendar year 2007 DaimlerChrysler represented approximately 15% of our Company revenues and Mercedes represented approximately two-thirds of that total, and Chrysler represented the other third.

Enoch, I'm sorry if you had mentioned this already. But assuming industry volumes are consistent with CSM for 2009, what is your initial sense on the direction for gross margins?

We haven't given any guidance for gross margins for 2009.

I guess I'm more kind of --

We did, for 2008. But think in general our guidance for gross margins is that there's going to be upside for gross margins if we can achieve double-digit top-line growth and upward pressure on them. But at this point we haven't given any guidance whatsoever for calendar year 2009.

I think, first off, the CSM forecast in our estimation probably has a little more downside than upside. But our expected growth rate for 2009 is really going to be dependent on the vehicles that our auto dimming mirrors are offered on and the new vehicles that we haven't announced. So until we announce our top-line revenue at the end of January, probably we are not in a position to make any comments about gross margins for 2009.

And you would still feel comfortable with the statement that if your top-line is north of 10% you can expand margins south of 10%, you would see margin pressure?

That is correct.

And then one last question -- just in the current quarter, in Europe did you see any last-minute production cuts or whatever happened in the quarter in Europe, was it fairly in line with what you had expected at the start of the quarter.

Pretty much in line.

I think CSM in their June forecast took down their European forecast for the balance of the year significantly. But we didn't see any unusual activity during the second quarter.

Himanshu Patel

When you said you think there's risks to CSM's global production forecast, in any particular geography you are thinking about?

Well, I think North America continues to be weak. And then I think there's some feeling that some of that weakness is starting to spread over into Europe.

Thank you.

David Leiker from RW Baird.

Two really quick numbers questions, and then I want to come back to something. What was your share count of the quarter, actual share count?

141,942,000.

Okay. And then your CapEx and D&A numbers have moved higher. What's behind that?

Well, we are -- the increase in our guidance for calendar year 2008 is just primarily due to additional anticipated production equipment purchases.

That's SmartBeam RCD related? Or (multiple speakers)?

Most of it is the exterior mirror side of the business.

Okay. And then just a last thing here. If you look at the efforts you guys have done on your manufacturing floor, how flexible do you think your manufacturing is today between different products, different customers, those types of things that would be either better or worse than we've seen in the past with big volume swings?

I think the flexibility of our manufacturing line today is probably the most flexible it has ever been. We continue to reduce change over time. We are able to convert production lines over to a wide variety of different mirrors very quickly. So it's pretty flexible.

Okay, thank you.

John Murphy from Merrill Lynch.

As you think about the pressure on gross margin and really the lid here, is there anything going on with yield doubles that have improved or potentially gotten worse in the short run? Or is there anything other than really just the operating leverage that we should be thinking about here in the near term?

Yes, with respect to yields they are pretty stable. We haven't had any significant shift whatsoever. So within the second quarter on a sequential basis is just the drop in the margin was primarily due to our inability to leverage our fixed overhead cost.

Okay, and then just two quick clarifications. What is the definition for the window in which you can buy stock or really what are the blackout periods as you have them defined?

Our blackout periods are from the end of the quarter through 48 hours after we release our earnings.

Okay. And then you mentioned something about the ASP being $41.50. And you said there was parts that were being excluded from that. What is going on there? Because that is slightly different than you have been talking about ASPs or the revenue per mirror in the past.

Well, for the past couple of quarters we have talked about that we are beginning to ship some non-auto dimming mirrors that offer some electronic content. And we are also beginning to sell a growing amount of microphone units that are not tied to our mirrors. And so to give everyone a accurate apples-to-apples comparison on auto dimming's mirror ASPs, we are excluding those revenues and units from the calculation.

Okay. Is there a way that we could get that disclosed going forward, just in the financial so we can model that? Or is that already in the Q?

It is not in the Q. And at this point in time we do not plan to disclose it.

We don't expect it in the near-term to be that significant. But again, just for accuracy's sake, we began doing that, I think, in the end of 2007.

Okay. All right, thank you very much.

Brandon Ferro from KeyBanc.

I think in the Q it said that gross margin third and fourth quarter was going to be roughly in line with the second quarter?

That's correct.

Can you give me a sense of why we are going to see those fail to expand, given acceleration in growth rates relative to the second quarter and the back half?

Well, if you think of the third quarter's margin, we do have a number of annual customer price reductions that take place during the quarter. So that would have some downward pressure on our margins that is expected to offset any improved leverage on fixed overhead costs.

Okay. Is that the same in the fourth quarter, then?

I think, when you look to the fourth quarter, that would be the same. And there also is some additional risks within the production, like vehicle production levels.

Okay. And I wanted to touch on your RCD guidance in 2009. When you guys say more than double, what do you mean by that? And I guess in the context of a lot of that growth in 2008 and 2009 coming from the GMT900, on RCD I know we've seen some pretty significant cuts to production forecast. I would think, given those cuts, we would potentially need to see a reduction in that guidance. Does that mean that guidance is just extremely conservative? What do you mean by more than doubling?

Well, I think mathematically we are talking about that if we expect to ship to between 350,000 and 400,000 units in calendar year 2008, that we currently believe that we will ship more than 700,000 to 800,000 units in calendar year 2009. And it's really from a combination of two factors. The one is most of the new programs that we are announcing for 2008 calendar year are midyear programs. So you are going to get the benefit of the full year next year. And then secondly, we have a number of 2009 calendar year programs that we will be announcing in due course. So the reduction in the GMT900 platform that CSM has already incorporated in their mid July forecast has been taken into account.

Okay. So just one clarification question before I jump off here -- there is upside to the 700,000 to 800,000, to the extent that you haven't announced additional 2009 RCD programs?

Yes. There's upside because 700,000 to 800,000 is exactly double and we are currently expecting that we will more than double those shipments in 2009.

Okay, thank you guys. I appreciate it.

Alexander Paris from Barrington Research.

I just have some questions in your geographic breakdown. I think maybe I've got it confused. I don't know if I'm talking that units or revenues. You said North America is about 25% of units, unit shipments? In 2007?

Well, that's shipments to customers headquartered in North America.

Okay. And then you said General Motors was 19%?

Of revenues, globally.

Okay. I'm mixing revenues with the units?

Yes, yes.

And then Chrysler is -- DaimlerChrysler is 15%. Is that revenues?

Yes.

And 5% of that is Chrysler, of the 15%?

For 2007, yes.

And you are doing business with --?

For Ford, I think for 2007 they were less 10%. So their percentage was not disclosed.

So that doesn't leave much for Japanese companies producing here, does it, transplants?

That's included in the 75%.

You include that in the international?

The unit shipments -- when we say that more than 75% of our unit shipments are to customers headquartered outside North America, that includes the transplants.

Okay. So it's where they are headquartered. Understand. And just one other thing related to that is -- are you shipping anything at all into China that's maybe included in your Japan-Korea numbers?

Yes, we are shipping some mirrors into China, primarily through joint ventures between global OEMs and Chinese companies. Those units are included in our Asia-Pacific total units.

The way that we count our units is the destination to where they are shipped. And some of those units actually might be included, very small part, in some of the European because some of the European manufacturers -- we would ship it to them and then they would turn around and ship it to China. But for the most part it would be in Asia.

There's something I hear of like 100 Chinese auto companies producing small amounts, but most of those shipments are to major companies outside of China that are manufacturing in China?

Yes. If you look at the Chinese market today there's really three segments. The very top end segment is dominated by these joint ventures between Mercedes, Audi, BMW, General Motors, Toyota and their local Chinese partners. The next segment -- there's a few fairly large national Chinese automakers like Geely, Cherry that have international aspirations. And then below that there's a large number of relatively small and inefficient Chinese automakers that are producing vehicles for the domestic market.

And those are mostly smaller cars and maybe not a market for mirrors?

Well, they are smaller, less expensive cars. We also expect that there will be some significant industry consolidation over the next few years in that lower segment.

Okay. Thank you very much.

Mark Warnsman from Calyon.

Good morning. Reference was made to the negative leverage on fixed cost as well as the downside risk to top-line growth. Interested to understand whether there are any initiatives in place to either reduce fixed cost or to at least slow the rate of fixed cost growth as a means to limit the potential downside to negative leverage on margins going forward.

There certainly are a number of cost reduction programs on the manufacturing side of the business. And we are trying to manage our fixed costs. One of the issues we have is that we do have to continue to ramp up production to meet some of the newer products that are continuing to sell very well and grow rapidly, such as our chrome ring exterior mirrors, our rear camera display, and SmartBeam products. And in the short term we can't immediately take some of the production capacity off line in terms of production line equipment for some of the decreases in domestic production levels. So, we definitely are focused on that, but it is somewhat of a balancing act for us.

Is there a timing difference between -- obviously, the revenues dropped off very quickly. And your fixed costs aren't as quickly managed. Is there a timeframe? Are we talking two, three quarters where you could in fact make that transition in terms of your manufacturing capacity?

Yes. I think if you look, we have talked about plant capacity being a step function over a five- to six-year period and manufacturing production equipment being added on an annual basis. So I would say, like you pointed out, with the suddenness of some of the production decreases, we had a lot of equipment on order for this year. And so it probably will take a few quarters to work that out.

And if I could, on a slightly different subject, market mix and its impact on your overall margins, you noted a significant shift in your shipments overseas versus what you are selling domestically. Does that have a meaningful impact on your margins? Or is it roughly the same, given that the vast majority of what you are selling is in US dollars?

Generally speaking, our gross margins across the board are pretty similar. And a lot of that is due to the fact that many of our customers have global purchasing departments. So we have to be consistent with our pricing in different regions.

Great, thank you very much.

Rich Kwas from Wachovia.

This is actually David Lim. Just had a couple questions. On the commentary about the 10% revenue growth in Q3, when you mentioned -- first, is that correct? And then when you mentioned the downside to CSM's production, are you -- can I tie those in together, saying that there could be downside to that 10%?

You are correct that we are estimating approximately 10% top-line growth for the third quarter and the balance of this year. There certainly have been a significant amount of changes, as you are aware, in the CSM and other forecasting services' forecasts globally. And the vast majority of those changes recently have been down rather than up. So, we certainly recognize that there is some risk for the balance of this year as well as for next year. I think, in terms of volatility the potential volatility is probably a little greater for next year compared to the balance of this year.

Got you. So I could conclude that there's some downside risk to that 10% revenue growth?

Yes.

Finally, could you give us some color as to the kind of mirror, the contenting of the mirrors that were lost because of the UAW strike over at American Axle, understanding that it is the higher-end content SUVs as well as the trucks?

Well, it was across most of the GM plants for and as we have said in the past, the majority of our business with GM is on the full size SUV and pickup vehicle models. And we've talked about also in the past that historically we have had a contented inside mirror as well as a driver side exterior mirror on many of those models.

The content on those vehicles is slightly higher than our average.

Okay. Slightly higher? That's what you said?

Yes. It's not -- a lot of people have made some pretty large estimates in terms of what the content per vehicle is. And I would say it's slightly higher. They are certainly not our highest contented vehicles by any stretch.

Got it, got it. Great, thank you very much. That's all I have.

Jason Rodgers from Great Lakes Review.

I noticed the inventory levels were up about 22% year over year and sequentially. Just wondering what the reason for that was.

On a sequential basis inventory levels were up a little bit, primarily in a few different areas. We had some additional leadtimes on some of our material components. We had some finished goods inventory builds in anticipation of some line moves and some new product launches. So those were the main contributing factors on a sequential basis.

Okay, thank you.

David Leiker from RW Baird.

Hey, I'm back. Just a couple of quick things here. If you look at the other income, the gains and losses that -- I think you made a comment you expect Q3 and Q4 to be comparable to the second quarter of $990,000?

Yes.

Then in your interest and dividend income for the last several fourth quarters, you have had a pretty large distribution. Is there any way to gauge what the size of that is this year versus what we've seen in the past? I know it's out of your control.

That's very difficult to predict. And we are anticipating it's going to be quite a bit less than the previous year because a large portion of that are the year-end mutual fund distributions that occur.

If you could tell us what the market is going to do, we could give you a better estimate.

I'll work on that. All right? Can you talk a little bit about your purchasing initiatives and where you are on those starting to bear some fruit for you?

Well, as we have talked about, we initiated more aggressive purchasing cost reduction program back in the middle of 2006. And I think in the tail end of the 2007 calendar year and into the first quarter of 2008 you are seeing the compounding effect of some of those purchasing cost reduction benefits as well as some of the VAVE initiatives. So that is continuing. Our forecast still expects some good benefits going forward that are assisting in offsetting the annual customer price reductions.

And where do you think you are in terms of realizing that? You are a year into this or something, year and a half into it. And you are still --

A year and a half into it.

Pardon?

We are a year and a half into it.

So if you looked at what you thought your opportunity would have been from A to B and realizing that you have some ongoing initiatives, do you think you have closed some of that gap, most of that gap there? Is there still quite a bit left?

There's a still additional opportunities, I think. Going forward it is going to be a combination of true purchasing cost reductions and continued future VAVE initiative benefits.

And then just one last thing. I know when we were out last month we talked about this a little bit. I just wanted to see if there are any incremental opportunities you are seeing in this premium compact market that has always existed in Europe but is likely to emerge here in the US and whether you're seeing any increased movement in that direction.

Yes. I think we are beginning to see some increased interest from automakers. The consumers that are switching to more fuel-efficient vehicles are doing it because of gas prices, but they still expect many of the features that they currently have in their vehicles.

The customers definitely seem to be realizing that they need to offer featured-up smaller vehicles like they do in Europe.

Do you think that's something that can happen relatively quickly, or is that something out in that two-to-three-year planning cycle?

I think it's really primarily dependent on the automaker's ability to change. I think a week or so ago Ford announced plans to convert some of their assembly plants from larger vehicles to the production of smaller vehicles. So, I think it's primarily going to be dictated by their timing.

And from my perspective it's --

To the extent that you are already on a car and they make the move of making more high-end Focuses, if there is such a thing?

Right. And then also, if we already offer that particular auto dimming mirror product, it can also go across other vehicle lines.

Thank you very much.

I think we have time for one more question.

Brandon Ferro from KeyBanc.

Just one follow-up -- as far as the kids in cars safety act goes, Enoch can you just generally talk about when the earliest date might be at which we see an automaker potentially make 100% of its fleet compliant with the kids in cars safety act rather than waiting for the 2015 cutoff date?

Well, I think it's going to be potentially a couple of situations. The first is we expect one or more automakers to decide that they want to be early adopters and position themselves as leaders in this safety feature. I think the second factor that will affect how early the across-the-board adoption will take place will be dependent on the timing of new vehicles, new vehicle platforms at a specific automaker.

For example, if you've got an automaker and they are going to introduce a new vehicle two years before the deadline, they may decide that they are not going to try to add the feature two years into the vehicle life but they prefer to do it at the beginning.

And the two automakers right now that are the forefront of that, in the US at least, are Ford and General Motors. Because Ford obviously was the first one to offer it as an OEM option and now General Motors is offering it as an OEM option, and they also have come out and published a study that they did with, I believe, Virginia Tech saying that they believe that the best place and the safest place to put a display, a rear camera display, is in a rearview mirror and to use a 3 1/2 inch display. They have -- they even showed in the study that it decreases the number of back over incidents by putting the display in the mirror as opposed to in a nav screen or in a radio.

Okay, thank you.

Thank you very much for joining our conference call. And if you have any further follow-up questions, Connie will be available to handle those.

Connie and her friend Steve. Thank you, everyone. We appreciate you participating in the call.

Thank you. This concludes today's conference call. Please disconnect your lines and thank you for your participation.