Gentex Corp (GNTX) 2011 Q3 法說會逐字稿

Welcome to the Gentex third-quarter financial results conference call. Today's conference is being recorded. I would now like to turn the meeting over to Ms. Connie Hamblin, Vice President of Investor Relations and Corporate Communication. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us for our conference call. On the call with me today are Enoch Jen, our Senior Vice President and Steve Dykman, our Chief Financial Officer. Just going through -- go through a few things and then I will turn the call over to Enoch. This call is being broadcast live on the Internet via our website at www.gentex.com. The auto playback of the conference call will also be available there. All contents of Gentex Corporation's conference calls are the property of Gentex and may not be copied, published, reproduced, rebroadcast, retransmitted or otherwise distributed without the express 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. Be advised that you should not rely on the content for any unauthorized transcript as Gentex Corporation will not be 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.

Before we begin, I'd like to remind you of our forward-looking statements. Gentex Corporation will make forward-looking statements in this presentation relating to its financial results for the fourth quarter and calendar year 2011 and beyond that are based on preliminary data and are subject to risks and uncertainties. These forward-looking statements are based on management's beliefs, assumptions, current expectations, estimates and projections about the global automotive industry, the economy, the ability to control and leverage fixed manufacturing overhead costs, unit shipment and net sales growth, product mix, the ability to control ER&D and SG&A expenses, gross margins and the Company itself.

All statements other than statements of historical fact are declarations that are or could be considered to be forward-looking statements and include terms such as anticipate, outlook, expectations, estimates, projects or forecast and variations of such words and similar expressions. 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 no 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, we will make some remarks with respect to the quarter. When our remarks conclude, we will open the call up for Q&A. We do respectfully request that you plan to ask one single-part question at a time so that everyone on the call who wants to ask a question has the opportunity to participate. We appreciate your cooperation and at this point, Enoch Jen will make some comments about the quarter.

Good morning. We are pleased to report an all-time record quarter in terms of revenues and earnings. Record third-quarter 2011 net sales were $269.5 million, a 30% increase compared with net sales of $206.8 million in the third quarter of 2010; record net sales of $763.4 million for the first nine months of 2011, a 28% increase compared with net sales of $594.2 million in the first nine months of 2010. We also reported record third-quarter 2011 operating income of $62.2 million, a 33% increase compared with operating income of $47 million in the third quarter of 2010; record operating income of $175.6 million for the first nine months of 2011, a 25% increase compared with operating income of $140.4 million in the first nine months of 2010.

We reported record third-quarter 2011 net income of $43.4 million, a 27% increase compared with net income of $34.3 million in the third quarter of 2010 and record net income of $124.2 million for the first nine months of 2011, a 23% increase compared with net income of $100.8 million in the first nine months of 2010. We reported record earnings per diluted share of $0.30 in the third quarter of 2011 compared with $0.24 per share in the third quarter of 2010 and earnings per diluted share were $0.86 for the first nine months of 2011 compared with $0.72 per share in the first nine months of 2010.

Next, we will look at automotive net sales and auto-dimming mirror unit shipments. For the third quarter ended September 30, 2011, total auto-dimming mirror unit shipments increased by 31% in the third quarter of 2011 compared with the third quarter last year. Automotive net sales also increased by 31% from $201.5 million in the third quarter of 2010 to $264 million in the third quarter of 2011. Auto-dimming mirror unit shipments increased by 19% to North America in the third quarter of 2011 primarily as a result of increased mirror unit shipments to certain domestic automakers. North American light vehicle production increased by 5% in the third quarter of 2011 compared with the same prior-year quarter.

Auto-dimming mirror unit shipments to offshore customers increased by 38% in the third quarter of 2011 compared with the same quarter last year. The increase in unit shipments was primarily due to increased mirror unit shipments to certain European and Asian automakers. Light vehicle production in Europe increased by 4% in the third quarter of 2011 and increased by 1% in Japan and Korea in the third quarter of 2011 compared with the same quarter last year.

Next we will look at the first nine months ended September 30, 2011. Total auto-dimming mirror unit shipments increased by 29% in the first nine months of 2011 compared with the first nine months last year. Automotive net sales also increased by 29% from $579.4 million in the first nine months of 2010 to $748.4 million in the first nine months of 2011. Auto-dimming mirror unit shipments increased by 27% in North America in the first nine months of 2011 compared with the first nine months of 2010 primarily as a result of increased mirror unit shipments to certain domestic automakers. North American light vehicle production increased by 7% in the first nine months of 2011 compared with the same prior year period.

Auto-dimming mirror unit shipments to offshore customers increased by 30% in the first nine months of 2011 compared with the same period last year. The increase in unit shipments was primarily due to increased mirror unit shipments to certain European and Asian automakers. Light vehicle production in Europe increased by 8% in the first nine months of 2011 and decreased by 12% in Japan and Korea in the first nine months of 2011 compared with the same period last year.

Other net sales increased by 3% to $5.5 million for the third quarter of 2011 compared with the same quarter last year primarily due to a 32% increase in dimmable aircraft window net sales partially offset by a 7% increase in fire protection net sales. Other net sales increased by 2% to $15 million for the first nine months of 2011 compared with the same period last year, primarily due to a 9% increase in dimmable aircraft window net sales partially offset by flat fire protection net sales. Fire protection net sales continue to be impacted by the relatively weak commercial construction market. The increase in dimmable aircraft window net sales for both the third quarter and the first nine months of 2011 was primarily due to increased shipments of dimmable windows for the Boeing 787 Dreamliner series of aircraft.

Next, we will talk about the impact of the economic downturn and natural disasters on net sales and supply chain constraints. Since the second half of 2008 when the global economic recession started, supply chain manufacturers in many industries, including automotive, have been negatively impacted. Certain tier 2 suppliers, including some that were purchased by private equity firms, sold off their equipment during the economic downturn for pennies on the dollar. When the economy began to recover, the demand for parts supplied by these companies far exceeded their new production capacity. This caused companies like Gentex to reevaluate their supply chain, including developing second sources and in some cases changing supply chain channels by moving from direct sourcing to distribution thereby incurring additional cost.

Revenues were also negatively impacted as automotive production schedules were reduced to match the new level of availability of certain components. The automotive industry has experienced a faster than expected rampup in light production volume -- light vehicle production that began in the second half of 2010 and has continued through the first nine months of 2011.

Gentex's business also has recovered and grown at a faster rate than expected. Both of these factors caused additional stress on the supply chain and the Company experienced increased costs associated with supply chain constraints on certain automotive-grade electronic components. This issue has gradually improved over the past 15 months. Although availability of certain automotive-grade components remained tight throughout this period of time, the Company did experience continued sequential improvement in this area during the third quarter of 2011.

The March 11, 2011 earthquake and tsunami in Japan added additional significant stresses on the automotive supply chain as many electronic components are supplied by Japanese manufacturers who were impacted by the natural disaster. The Company was successful in securing additional quantities of constrained parts to meet customer demand. The total impact on the Company's net sales as a result of the March 11, 2011 earthquake and tsunami in Japan was approximately $20 million for the first six months of 2011.

Based on IHS Automotive's September 2011 forecast for automotive light vehicle production and our customers' releases, we do not currently expect that there will be any continuing significant negative impact on the Company's net sales due to the March 11 earthquake and tsunami in Japan. Flooding in Thailand due to heavy rain and monsoons could result in additional supply chain disruptions. The Company has been in regular contact with its suppliers and we continue to work with them to secure adequate quantities of parts to meet customer demand for our products. Based on the September 2011 IHS forecast for light vehicle production levels and the Company's anticipated product mix, we currently believe that the Company has secured an adequate supply of parts for the balance of calendar year 2011.

Moreover, the Company continues to work to gain access to additional parts, which may be at a higher cost due to anticipated changes and purchasing channels. The additional costs associated with these more recent supply chain disruptions are estimated to negatively impact the Company's gross margin in the fourth quarter of 2011 by approximately one-quarter to one-half of a percentage point or 25 to 50 basis points. You should note that the current environment is constantly changing and it is not known what the ultimate effect will be on the supply chain, global light vehicle production, the automotive industry or the Company.

Next, we will look at the average selling price per auto-dimming mirror unit. It was $46.79 for the third quarter of 2011. The ASP of auto-dimming rearview mirrors was up sequentially to $46.79 in the third quarter of 2011 compared with $46.03 in the second quarter of 2011 primarily due to a higher mix of mirrors with advanced electronic features that more than offset annual customer price reductions. The ASP slightly decreased on a year-over-year basis to $46.79 compared with $46.90 in the third quarter of 2010 primarily due to a higher mix of base mirrors and annual customer price reductions.

Based on IHS's September 2011 light vehicle production forecast, we expect that the fourth-quarter 2011 ASP to slightly increase sequentially based on the anticipated product mix of base and featured mirrors in that forecast. As usual, there are uncertainties with the IHS production and sales forecast, customer orders and new product introductions. At this time, I am going to turn the call over to Steve who will review certain financial performance metrics for the quarter.

Okay, I will start with an update on gross margins. The gross profit margin increased on a sequential basis from 35.2% in the second quarter of 2011 to 35.4% in the third quarter of 2011. Primarily due to reduced supply chain-related costs partially offset by annual customer price reductions. The gross profit margin decreased on a year-over-year basis from 35.7% in the third quarter of 2010 to 35.4% in the third quarter of 2011 primarily due to annual customer price reductions partially offset by the Company's ability to leverage fixed overhead costs and purchasing cost reductions. The gross profit margin decreased to 35.5% for the first nine months of 2011 compared with 36.4% for the first nine months of 2010 primarily due to the impact of annual customer price reductions partially offset by the Company's ability to leverage fixed overhead costs.

The Company currently expects that its gross profit margin for the fourth quarter of 2011 will slightly decline sequentially primarily due to supply chain disruptions as a result of the flooding in Thailand. The gross profit margin will continue to be impacted by annual customer price reductions, uncertain global automotive production levels, our ability to leverage fixed overhead costs, purchasing and engineering cost reductions, supply chain constraints and manufacturing yields.

Engineering, research and development expense increased by 26% in the third quarter of 2011 compared with the same 2010 period primarily due to additional hiring of employee and outside contract engineering and development services to support new product development projects and new program awards. ER&D expenses increased by 30% for the first nine months of 2011 compared with the same 2010 period primarily due to additional hiring of employee and outside contract engineering and development services to support new product development projects and new program awards. ER&D expense is expected to increase by approximately 20% to 25% for the fourth quarter of 2011 compared with the fourth quarter of last year primarily due to additional hiring of employee and outside contract engineering and development services.

Selling, general and administrative expenses increased by 20% in the third quarter of 2011 compared with the same prior-year period primarily due to continued overseas office hiring to support our overseas growth. SG&A expense increased by 20% for the first nine months of 2011 compared with the same 2010 period primarily due to continued overseas office hiring to support our overseas growth. SG&A expense is currently expected to increase by approximately 15% to 20% for the fourth quarter of 2011 compared with the fourth quarter of last year primarily due to continued overseas office hiring to support our overseas growth.

Some additional details regarding other income for the third quarter of 2011. Investment income was $544,000. The Company did not have any investment impairment losses during the quarter and other net was $1.708 million for a total other income of $2.252 million. For the first nine months of 2011, investment income was $1.642 million. There were no investment impairment losses for the nine months ended September 30 and other net was $8.475 million for total other income of $10.117 million. Total other income decreased in the third quarter of 2011 compared with the third quarter of 2010 primarily due to changes in the foreign currency rate related to the Company's euro-denominated account, which were partially offset by increased realized gains on the sale of equity investments. Total other income increased in the first nine months of 2011 compared with the first nine months of 2010 primarily due to realized gains on the sale of equity investments.

Now I will provide an update regarding certain balance sheet items as of September 30. Accounts receivable was $130 million; inventories, $151.1 million; patents and other assets, $12.9 million; accounts payable, $70.2 million; and accrued liabilities $46.6 million. The effective tax rate of 33% during the third quarter of 2011 varied from the statutory rate of 35% primarily due to the domestic manufacturing deduction. We currently expect that the tax rate for 2011 will be approximately 33% based on current tax laws primarily due to the domestic manufacturing deduction.

Operating cash flow year to date was $125.4 million. An update regarding capital expenditures for the third quarter of 2011, capital expenditures were $36 million and depreciation expense was $12 million in the third quarter of 2011. The Company currently estimates that its plant capacity for automotive interior mirror manufacturing facilities is approximately 16 million to 18 million interior mirror units annually. The Company also currently estimates that its plant capacity for automotive exterior mirror manufacturing facility is approximately 6 million exterior mirror units annually. The revised plant capacity numbers are the result of increased complexity in our product mix and increased volatility in customer orders and production schedules.

The Company has historically expanded the plant capacity on a step function basis every five to six years. In light of the Company's current estimated plant capacity and continued strong demand for its auto-dimming mirrors, the Company recently announced the following expansion plans to increase its plant capacity in the electronic assembly, final assembly, rear camera display and exterior mirror manufacturing areas during the next year. These projects include an expansion of our electronic assembly manufacturing facility on James Street in Holland, Michigan, an expansion project connecting our State Street and Riley Street manufacturing facilities in Zeeland, an expansion of our exterior mirror manufacturing facility on State Street in Zeeland, as well as a chemistry lab expansion at our Zeeland, Michigan campus.

The Company estimates that after the expansion projects are completed, plant capacity for its automotive mirror manufacturing facilities in Zeeland and Holland will be approximately 21 million to 23 million interior mirror units annually and approximately 10 million exterior mirror units annually. The Company has also been increasing its production line capacity in light of continued strong customer demand for its auto-dimming mirrors and more complex product mix.

The Company currently estimates that 2011 capital expenditures will be approximately $100 million to $115 million primarily due to the increased production equipment purchases of approximately $70 million to $80 million and new facility costs of approximately $30 million to $35 million to increase production plant capacity. 2011 capital expenditures will be financed from current cash and cash equivalents on hand. Depreciation expense for the 2011 calendar year is currently estimated at approximately $41 million to $44 million.

An update regarding cash dividends. Tomorrow, the Company will pay a quarterly cash dividend of $0.12 per share to shareholders of record of the common stock at the close of business on October 7. The Company's cash dividend policy was established based on a number of criteria, including current US income tax laws that will be meaningful and sustainable and that the dividend rate would increase generally in line with the Company's earnings and operating cash flow over time. Now I will turn the call over to Connie who will make some comments regarding a product update, as well as some vehicle production numbers.

Okay. First, I will provide an update on our SmartBeam product. We continue to make progress with automakers as they more broadly offer SmartBeam across their productline. SmartBeam is the intelligent high beam headlamp assist product that we introduced in the 2005 model year and it is currently offered on 62 vehicle models at 13 OEM customers, including Audi, BMW, Chrysler, General Motors, Honda, Opel Vauxhall, Peugeot Citroen, Saab, Fiat, Tata Motors Land Rover, Toyota Lexus, Rolls-Royce and Volkswagen. For the 2010 calendar year, we shipped approximately 630,000 SmartBeam units. Based on the IHS September 2011 forecast, we currently expect the SmartBeam units will increase by approximately 60% to 70% in calendar year 2011.

I will now provide an update on our rear camera display product. Our RCD mirrors are currently offered on 63 vehicle models with nine automakers as original equipment, including Daihatsu, Ford, General Motors, Honda, Acura, Hyundai Kia, Mitsubishi, Nissan, Subaru and Toyota Lexus. RCD mirrors are also currently offered as a dealer-installed option or an aftermarket product on over 20 additional models. The Company shipped approximately 1.25 million RCD mirrors in calendar year 2010.

Now an update on the legislation related to RCD mirrors. In early September 2011, the US Department of Transportation posted an update on its website related to the timing of certain events associated with the Kids Transportation Safety Act and the pending requirement that all vehicles in the United States will be required to be equipped with cameras and rear camera displays by September 2014 and that is based on the notice of proposed rulemaking that was issued by NHTSA in December 2010.

The Department of Transportation stated that the final rule related to the KTSA is scheduled to go to the Office of the Secretary of Transportation by October 3, 2011 to the Office of Management and Budget by November 3, 2011 and then it further stated that the rule will receive clearance from the Office of Management and Budget by December 23, 2011 and that the publication date for the final rule will be by December 30, 2011.

We continue to believe that RCD mirrors will likely be implemented in three overlapping phases. The first, a market-driven phase, which is the time period prior to ending legislation through NHTSA's notice of proposed rulemaking in December of 2010. Secondly, there is a wait-and-see phase, which is the period of time from when the legislation was signed into law on February 28, 2008 until the final rule is issued, which currently is expected by December 30, 2011. And then thirdly, an implementation phase, which would be the time the final rule is issued until full implementation when 100% of all vehicles in the US under 10,000 pounds will be required to be equipped with rear cameras and displays.

We still believe that the market for camera displays and vehicles will be divided into two primary market segments. The top 15% to 20% of the vehicle market will primarily offer the display for a rear camera in the navigation system with the option of purchasing an RCD mirror. The rest of the market is the most likely market area to offer the camera display in the mirror or in other multipurpose displays in the vehicle in a number of different locations, including the radio, instrument panel, console, etc. This is the segment of the market with the greatest volume potential, but also has the greatest and increasing competition. We continue to be in the wait-and-see phase as most automakers are waiting to find out where the final rule regulations will be. Based on IHS Automotive's September 2011 forecast, we currently expect that RCD mirror unit shipments will increase by approximately 40% for calendar year 2011 compared with calendar year 2010.

Now I will give you an update on our dimmable aircraft windows business. We currently are shipping dimmable windows for the 787 Dreamliner and we are very happy about that and each passenger aircraft has approximately 100 windows. Boeing has also expressed interest in utilizing dimmable windows for other aircraft. In late 2011, Boeing shipped the first 787 to All Nippon Airways. That aircraft has received significant media attention and the Gentex dimmable window has been a focal point of many national and regional news stories.

Gentex is also shipping dimmable aircraft windows for use on the passenger cabin windows of the 2010 Beechcraft King Air 350i, which is the first aircraft in the general and business aviation market with dimmable windows. Each King Air has 15 windows. Other aircraft manufacturers continue to have interest in this technology and we are working on potential programs with BPG Aerospace.

Next, I will provide our estimates for the fourth quarter in terms of net sales. The following projection for net sales in the fourth quarter of 2011 is based on IHS' September 2011 light vehicle production forecast. Our estimate for net sales for the fourth quarter of 2011 is an increase of approximately 20% to 25% compared with the same quarter in 2010 based on IHS' September 2011 forecast for light vehicle production levels. That forecast is based on the following light vehicle production levels in the three major market areas that we serve.

North America is 3.3 million vehicle units and that is up 11% compared with 3 million units in the fourth quarter of 2010; Europe, 4.8 million vehicle units, down 2% compared with 4.9 million units in the fourth quarter of 2010; and then Japan and Korea, 3.7 million vehicle units, which is up 14% compared with 3.3 million units in the fourth quarter last year. And then for calendar year 2011, the light vehicle production numbers are North America at 12.9 million vehicles, which is an 8% increase compared with 11.9 million in calendar year 2010; Europe, 19.8 million vehicles, which is up 5% compared with 18.8 million last year; and then Japan and Korea, 12.4 million vehicles, which is down 5% compared with 13.1 million vehicles last year.

As a 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 express written consent of Gentex. 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 transcripts as Gentex Corporation will not be held liable for the content of any such transcripts. 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 of this call and to the foregoing terms. Please drop off the line if you do not agree to these terms. At this point, we are going to open the call up to Q&A and we do request that you ask one single-part question to allow time for everybody to get their questions in. Operator, if you could open up to Q&A.

(Operator Instructions). Peter Nesvold, Jefferies & Company.

Good morning. [SKS] was out yesterday talking cautiously about European production schedules for fourth quarter. At least based on the guidance you have provided here this morning, it doesn't really seem like you share that caution, but I think I just wanted to confirm that.

Well, I think we are still, as we've talked about before, facing a favorable mix in the European market and so the luxury car segment where the bulk of our shipments and sales go into continues to grow faster than the overall market. Certainly there are some cautionary signs both with the European sovereign debt issue, as well as some slowing demand in China. But, overall, we still feel like our business into Europe is strong.

And IHS' forecast for the fourth quarter is still strong.

Okay. And at the risk of being rude, I am going to slip in a really quick follow-up. Sorry. I couldn't help it. You outlined what the capacity is going to be at the end of the year with these expansions. Just historically how long has it historically taken you to fill out the capacity when you have added it? Thank you.

Well, I think when you look at the expansion projects, the various projects that I mentioned will be completed at various stages between the end of this year and the middle of next year. And because they are expansion projects and we are adding equipment as needed, it would be within a year or so that the facilities would be utilized to the extent it wouldn't be a drag on margins. And because they are expansions, we do not feel the degree of negative impact on margins will be as great as when we added a complete new facility like we did back in 2006.

Thanks a lot.

David Lim, Wells Fargo Securities.

Hi, good morning. I just wanted to ask a little bit more detail about the headwinds that you are seeing in China. Not China -- Thailand. If you could just give us some detail related to the kind of products that you guys are shipping in from Thailand and give us an idea of the overall time period you think is going to be required to overcome the natural disasters there?

I think there has been increasing press coverage about the flooding in Thailand and as you probably have read in the news, there is a half dozen electronic suppliers that have facilities in Thailand that have been affected by the flooding. And as a consequence, as we mentioned in our remarks, we are working with each of our suppliers to ensure that we continue to have a supply of parts. In some cases, some of these suppliers are moving some of their production to other facilities outside of Thailand. There is also the potential secondary impact whereas some of these suppliers move production to some of their other facilities, they have had to put production of certain electronic parts on allocation.

So I think as you listen to other automotive suppliers, as well as other companies that use electronic components in their products, you will see that there will be some additional stresses on the supply chain and preliminary estimates are that it could take anywhere from three months to up to a year to restore normal production for some of the facilities in Thailand.

Got it. Thank you very much.

David Leiker, Robert W. Baird.

Good morning, all. How are you doing? So instead of asking a question, I want to have a discussion. How's that? As we look at penetration rates, two things. One, are you seeing accelerating -- what are you seeing in terms of just normal penetration rates around the world -- North America, Europe, Asia. And then secondly, are you seeing evidence that RCD and SmartBeam are driving penetration rates faster than what they would have been had you not had those features?

Penetration rates in general continue to increase the vehicle models for which we are shipping and I think that SmartBeam is potentially increasing some penetration rates just because if you look at some of the vehicle models that were offered on with SmartBeam, I mean VW has very broadly offered SmartBeam across almost the entire vehicle line. We are probably on some vehicles that we otherwise may not have been offered on at least this soon.

So I think we are beginning to see some signs that RCD and SmartBeam are driving penetration. I think we will probably see more of it over the next few years once the final rules on the legislation are finalized and as the SmartBeam mirrors continue to ship in increasing volumes.

And then as a piece of that, there is some vehicles out there today that offer your mirror at certain trim levels and offer, for RCD, and offer to display in other places in the vehicle with options for your mirror to use that. In those specific (multiple speakers), are you seeing penetration rates rise or fall or hold steady where you would expect them to be if you were the only option?

I don't think that we are seeing anything out of the ordinary there.

Great, thank you.

Steve Dyer, Craig-Hallum.

Thank you, good morning. Just a quick question on your guidance versus sort of IHS production data. It looks like Q4 over Q3 will be up pretty nicely in terms of units, but yet your guidance is generally flat with Q3. Is that a function of mix or how should we think about that?

Well, what we do with our forecast is it is a bottoms-up forecast. So whereas IHS numbers are gross numbers, we do a vehicle by vehicle, in some cases by trim level, buildup and so it inevitably comes down to really vehicle mix and production of certain vehicle models and trim levels by each customer.

Okay, makes sense. And then as far as OpEx, it has been growing I guess at a rate pretty close to revenue growth here this year for a few different reasons. Would you expect the rate of acceleration there or the rate of growth to slow as you go forward here such that kind of a little bit more of the incremental revenue drops to the bottom line or as you look out into next year, how should we think about that?

I think we have said with respect to ER&D expenses that really over the next year or so, we do feel that will run at a faster pace as far as year-over-year increases than the historical 10% to 15%. And that is really driven by increased activity with program project development. So that is likely going to continue into next year. When you look sequentially, the increase of ER&D expenses is slowing a little bit and the year-over-year expense growth is slowing as you have the comps on a higher base.

With respect to selling, general and administrative expenses, that is really driven by our overseas offices and we do expect that to continue into next year. The one factor that is driving a portion of the expense increase over the last few quarters is the impact of foreign exchange rates and when we look at the third quarter's 20% increase on a year-over-year basis, about 4 percentage points of that increase is due to foreign exchange rates. To the degree that that piece goes away, the expense may come down a bit.

All right. I will hop back into the queue. Thanks.

Brett Hoselton, KeyBanc.

Good morning, Enoch, Steve, Connie. Let's see, a suggestion. You ought to suggest people ask half a question and then you will only get one.

I will have to start figuring out how to do that. We will start with you, Brett.

Okay, thank you very much. The Thailand supply chain constraint, 25 to 50 bps in the fourth quarter, 3 to 12 months possibly before they get up to speed. My question is do you think that 25 to 50 bps continues for three to 12 months or is it possible that you could see an improvement sooner than that due to resourcing or other things that you can do?

Well, it's a constantly changing situation, but we do feel that that impact will go into definitely the first quarter of next year and then we would be hopeful that there might be some sequential improvement after that.

And then my second question is on the share repurchase what are your thoughts on the share repurchase these days?

Well, we have 2 million shares remaining on the existing plan. It is an item that is discussed on each Board meeting agenda. The criteria that we have had to date with the plan is that we want the repurchases to be significantly anti-dilutive and one thing we do use in that computation is a more normalized interest rate. So that does change the formula a little bit.

Thank you very much, sir.

John Murphy, Bank of America Merrill Lynch.

Good morning, guys. I have a little bit of a longer-term question, really sort of a year-to-date question, I should say. When we look at the total mirror shipments divided into the total auto revenue, you get $46.58, which is basically flat year over year yet you are talking about shipping a lot more SmartBeam and a lot more RCD, up 60% to 70% on SmartBeam, up 40% on RCD. It almost seems like there is something going on with mix underneath the surface where there is either some real pricing pressure on mirrors or there is some real mix deterioration. I'm just trying to understand what is going on there, why that revenue per unit is not going up significantly as you are adding all these great new products.

Well, I think certainly as the growth in RCD and SmartBeam mirrors is increasing faster than the overall Company average, that does pull the average selling price up. As we have talked about before, we do have annual price reductions, which have not worsened, but just the normal rate of 2% to 4% per year will take our average selling price down. And then third, like you pointed out, John, I mean it is mix. We have talked about that in any particular quarter, it does come down to the mix between base and mirrors with one to multiple features. And as we have talked about before, our base mirror business is good business for us and so we are not -- we don't pay as much attention to ASP except as a historical after-the-fact computation.

Okay, great. Thank you very much.

Adam Brooks, Sidoti & Company, LLC.

Yes, good morning. I just wanted to see is there anything of particular note with the international shipments up about 38% well ahead of Japan, Korea and Europe. Was there anything that you want to point out, maybe any customer? I know the premium mix obviously helps in Europe, but anything else that really stands out to you in the quarter?

Well, really the two major things within the overseas growth, one, we have talked about, our shipments into the German luxury automakers and certainly a meaningful proportion of that has been driven by the demand in China. We have also talked about that, within the mass-market European automakers, the majority of our volume is the VW, which is doing better than the average European automaker. And I think in Asia, Japan has been recovering, but Korea has been very strong for us both in the domestic Korean market, as well as exports into the United States and globally.

All right, thank you.

Greg Halter, Great Lakes Review.

Yes, good morning. I wondered if you could provide any assessment on your efforts in the driver assist and/or crash avoidance areas.

We are expecting to announce a product and customer within the next six months or so and I haven't discussed exactly what that product will look like or what it will be, but we have talked very openly about the fact that we have been working on things like lane departure warning, forward collision warning, optical detection and those types of things. And we just continue to work with customers way beyond that first program because these types of features are very deeply integrated into the vehicle's electrical system and it does require a lot of upfront engineering time on both our part and the customers'.

Okay, thank you very much and one rhetorical question, what is a more normal interest rate?

Well, 4% to 5%.

All right. Thank you.

Himanshu Patel, JPMorgan.

Hi, good afternoon. A couple of follow-up questions. Can you guys -- I don't know if you disclosed this, but maybe just directionally, of the roughly 14 million units or so of foreign shipments you are going to do this year, how much of that is actually Europe?

I don't think we break that down specifically. Europe is the majority of the shipments and if you look at our annual footnote disclosure, you will see that Germany is I think our largest overseas market.

But I mean just ballpark would we guess like two-thirds or so?

We actually haven't calculated it.

Okay. No worries. And then, Enoch, you mentioned platform mix diverges from IHS' sort of headline forecast sequentially for you guys in Q4. Can you just put some color around that? What are the key platforms that you are on that are not behaving the same as the overall market sequentially or which regions are you seeing that in?

Well, it is really by specific program, Himanshu. What we are doing is we are selling our suite of products, so it ranges from base interior mirrors to all our various electronic features, as well as exterior mirrors and exterior mirrors with features. And so we are looking to gain new business at all the global automakers on both new vehicle models, as well as increased option take rates. So it is not any one customer or program in particular.

But I mean were there any -- I mean historically you have had a couple of platforms that may have sent your revenue trends to diverge from the overall market, whether it was GM trucks or whatever. Is there anything specific like that that is explaining that divergence in Q4 or it's just a handful of several things coming together?

No, it's probably a combination. We really no longer have a single dominant platform like we did 10 years ago with the GMT 800/900. Today, we probably have half a dozen high-volume vehicle platforms, each of which account for 5% or more of our business. This is just one example, so this is not the answer to your question. But certainly we have been gaining business with the French automakers and they tend to at least initially take base mirrors.

Okay, very good. Thank you.

David Leiker, Robert W. Baird.

Yes, just a follow-up on that. If I am doing my math right and I look at what you have put out for European revenue and what you do for customer mix, it looks like BMW and Mercedes, Volkswagen, Audi are 90% of your European volume. Does that sound right?

Yes, I would say if you take the three German luxury automakers plus VW, that would be the vast majority of our European business.

So where there is weakness in Europe with the French automakers with Ford and GM, you have relatively low exposure, in some cases virtually no exposure?

Yes, we have much less exposure to Opel. Ford of Europe is probably the largest of the other ones and then like you said, most of the others, Fiat, [Ciat], they are all fairly minor.

Okay. And so just to close a loop there. So your divergence and what you are seeing in Europe versus what third-party sources are seeing is really the weakness in the non-German market?

Yes, and in the lower-end market.

In the lower end, okay. And then one other item. If we look at the RCD adoption, and you have been talking about the three-phase period here for a while, and you are seeing shipments this year up 40% versus last year and we know three years out or four years out, the number is going to be larger. Is there any way you can characterize how these volumes are going to move between now and then? Do we go down to 10% type RCD shipments or is it not as big of a -- is there any qualitative discussion you can give in that regard of what that interim period might look like?

We really don't have very good visibility just because the majority of our customers have not made their final decisions. So it is really going to be customer by customer as they make their decision how they are going to meet the legislation and then they are going to have to review the timing of their new vehicle introductions and cycles. So it is very much up in the air both in terms of the rampup and what the ultimate adoption rate will be for RCD mirrors.

And they are supposed to basically publish the final rule by December 30. If they don't make major changes to that rule, the OEMs are going to have to move very quickly to determine how they are going to meet the schedule and meet the phase-in period.

So I mean from the outside looking in, I am just trying to get my arms around what the prudent level of expectations for 2012 and 2013 going in (multiple speakers).

So are we. I mean it is an unknown. We would like to know too. It would be much easier for us to plan.

Let me ask it this way. You have got 63 program launches that you have done so far over the last, what, four years roughly?

Yes.

So let's say it's 20 or 25 a year. I would expect that number in 2012 to probably be a lot less than that before we start ramping up again. Is that fair?

I would think that could be a reasonable expectation. I mean I think you are going to have two factors. One is how many new vehicles are going to add RCD, including RCD mirrors and then secondly, what the take rates will be.

Right, okay. Thank you much.

David Lim, Wells Fargo Securities.

Enoch, Steve and Connie, just a follow-up, of the three production forecasts by IHS, it appears that Japan and Korea could be a little light just given the potential recovery post the tsunami disaster. Any thoughts on that given production schedules that you are privy to from your Asian-based customers? And also wanted to get your opinion which region has the most upside production potential after viewing the IHS numbers?

Well, we don't show Japan and Korea as being light in the fourth quarter. We show it up 14%.

Right. But I am saying that, relative to what I guess we were thinking, we thought 14%, there could have been a little bit more upside to that and --.

I think one of the things, David, that we are hearing with a couple of the Japanese automakers that are rebounding from the sharply decreased production is that they are running some overtime, but they are not necessarily going full out and that they expect to reach what they feel is their normal inventory objectives a little earlier than what some of the industry forecasts were expecting.

Got it. Got it.

And our schedule remains very high, but we are just not seeing as many last-minute drop in orders.

Got you. Okay. Thank you.

I think we have time for one more question.

Steve Dyer, Craig-Hallum.

Thanks. I guess I will try to ask David's a little bit differently. I guess assuming the ruling goes into effect or is ruled as we all are sort of anticipating at December 30, do you expect the OEMs to sort of -- I mean do you expect a flurry of activity Q1, Q2 right after that design-ins or do you think they are going to roll them in sort of as their models get reskinned, redesigned, etc.?

Well, I think, one, there is a question with the legislation allowing four years for full implementation with the final rule being delayed from the end of February to the end of December, there is a question of whether that full implementation date will change from September 2014. I think our customers will make a lot of decisions in the first half of 2012, but, like you said, it is going to depend largely on the timing of their vehicle lifecycles and new vehicle model introductions in terms of the actual implementation.

It is also going to depend on where each particular automaker is in relation to the phase-in schedule. Do they already have 10% of their vehicles that offer a rear camera display or are they going to really have to hustle to meet that 10% deadline or the 40% one the following year, which seems to be probably the biggest hurdle for most companies.

And I think there is an expectation that the automakers in their own interest in maximizing profitability will want to offer the RCD feature as an option for as long as possible.

Yes, okay. Thank you very much.

Thank you. At this point in time, we would thank everybody for participating in the phone call. If you have additional questions, we will be around this afternoon. Thank you.

And that concludes today's conference. You may now disconnect.