Gentex Corp (GNTX) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Gentex second-quarter 2012 financial results conference call. Today's call is being recorded. I would now like to turn the meeting over to Ms. Connie Hamblin, Vice President of Investor Relations. Please go ahead, Ms. Hamblin.

Thank you. Good morning, everyone. Thank you for joining us for the second-quarter conference call. On the call today with me are Steve Dykman, our Chief Financial Officer, and Mark Newton, our Senior Vice President. I will go through a few routine items and then I will turn the call over to Steve. This call is being broadcast live on the Internet, via an icon on our home page at www.Gentex.com. Or, a playback of the conference call is also available on the website.

All contents of Gentex Corporation's conference calls are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the express written consent of Gentex Corporation. Gentex Corporation alone holds such rights. While we understand that there may be companies that can 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 now if you do not agree with these terms.

Before we begin, I would like to remind you of our forward-looking statements. Gentex Corporation will make forward-looking statements in this presentation related to its financial results in the second quarter account and first six months and beyond that are based on preliminary data and are subject to risk 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 historic fact or declarations there, that are or could be considered to be forward-looking statements and include terms such as anticipate, outlook, expectations, estimates, projects, forecasts, 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 these 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 within the news release that is posted on our website.

At this time, I will turn the call over to Steve Dykman.

Good morning, and welcome to our second-quarter 2012 conference call. We are pleased to report another good quarter, with a 15% increase in net sales. As we will review below, you'll note that the Company's operating expenses are more in line with historic growth rates. However, our gross profit margin declined in the second quarter and we are working to stabilize the margin going forward.

We'll start with net sales. The Company reported record net sales in the second quarter 2012 of $280.3 million, a 15% increase compared with net sales of $243 million in the second quarter of 2011. Record net sales of $571 million for the first six months of 2012, a 16% increase compared with net sales of $493.9 million in the first six months of 2011. We reported operating income in the second quarter of $57.5 million, an 8% increase compared with operating income of $53.2 million in the second quarter of 2011. Operating income of $123 million for the first six months of 2012, a 9% increase compared with net sales of $113.3 million in the first six months of 2011.

We reported second quarter 2012 net income of $40.8 million, a 6% increase compared with net income of $38.5 million in the second quarter of 2011. Net income of $87.1 million for the first six months of 2012, an 8% increase compared with net income of $80.8 million in the first six months of 2011. We also reported second-quarter 2012 earnings per diluted share of $0.28 compared with $0.27 per share in the second quarter of 2011. Earnings per diluted share of $0.60 for the first six months of 2012 compared with earnings per diluted share of $0.56 for the first six months of 2011.

Next, we'll look at automotive net sales and auto-dimming mirror unit shipments for the second quarter ended June 30, 2012. The total auto-dimming mirror units increased by 19% in the second quarter of 2012 compared with the second quarter last year. Automotive net sales increased by 15% from $238.2 million in the second quarter of 2011 to $274.8 million in the second quarter of 2012. In addition, we are experiencing increased volatility with customer orders in the near term. Auto-dimming mirror unit shipments increased by 33% in North America in the second quarter of 2012, primarily as a result of increased mirror unit shipments to the Japanese transplant and the Detroit three auto makers.

North American light vehicle production increased by 25% in the second quarter of 2012 compared with the same prior-year quarter. However, there was a lot of variability in vehicle production levels within certain domestic auto makers ranging from flat to slightly up. Auto-dimming mirror unit shipments offshore customers increased by 10% in the second quarter 2012 compared with the same quarter last year. The increase in unit shipments was primarily due to increased mirror unit shipments to certain Japanese auto makers. Light vehicle production in Europe decreased by approximately 10% in the second quarter of 2012 and increased by 34% in Japan and Korea in the second quarter of 2012 compared with the same quarter last year.

For the first six months ended June 30, 2012, total auto-dimming mirror unit shipments increased by 17% compared with the same six-month period last year. Automotive net sales increased by 16%, from $484.5 million in the first six months of 2011 to $560.5 million in the first six months of 2012. Auto-dimming mirror unit shipments increased by 25% in North America for the first six months of 2012, primarily as a result of increased mirror unit shipments to the Detroit three, as well as certain Japanese and European transplant auto makers. North American light vehicle production increased by 21% in the first six months of 2012 compared with the same prior-year period. Again, there was a lot of variability in vehicle production levels within certain domestic auto makers, ranging from flat to slightly up.

Auto-dimming mirror unit shipments to offshore customers increased by 12% in the first six months of 2012 compared with the same period last year. The increase in unit shipments was primarily due to increased mirror unit shipments to certain European and Japanese auto makers. Light vehicle production in Europe decreased by approximately 6% in the first six months of 2012, and increased by 34% in Japan and Korea in the first six months of 2012 compared with the same period last year.

Other net sales for the Company increased by 13% to $5.4 million for the second quarter of 2012 compared with the same quarter last year, primarily due to an increase in dimmable aircraft window net sales, partially offset by a decrease in fire protection net sales. Other net sales increased by 10% to $10.5 million for the first six months of 2012 compared with the same period last year, primarily due to an increase in dimmable aircraft window net sales, partially offset by a decrease in fire protection net sales. The increase in dimmable aircraft window net sales for the second quarter and six months of 2012 was primarily due to increased shipments of dimmable windows for the Boeing 787 Dreamliner series of aircraft. Fire protection net sales continued to be impacted by the relatively weak commercial construction market.

Next, we'll look at the average selling price per auto-dimming mirror unit, which was $44.73 for the second quarter of 2012. The ASP of auto-dimming rear view mirrors was down slightly on a sequential basis to $44.73 in the second quarter 2012 compared with $44.93 in the first quarter of 2012. The slight decline was primarily due to the impact of annual customer price reductions and a higher mix of base auto-dimming mirrors. The ASP decreased on a year-over-year basis to $44.73 in the second quarter of 2012 compared with $46.03 in the second quarter of 2011, primarily due to annual customer price reductions and a higher mix of base auto-dimming mirrors. Based on IHS's June 2012 light vehicle production forecast, we currently expect the third quarter 2012 ASP to be in approximately the same range as the second quarter of 2012 based on the anticipated product mix and base of featured mirrors in that forecast and annual customer price reductions. As usual, there are uncertainties with the HIS production and sales forecast, customer orders, and new product introduction.

Next, we'll look at the gross profit margin. The gross profit margin declined on a sequential basis to 33.1% in the second quarter of 2012 compared with 34.7% in the first quarter of 2012. The decline primarily was due to the impact of annual customer price reductions and product mix, partially offset by purchasing cost reductions. The gross profit margin decreased on a year-over-year basis from 35.2% in the second quarter of 2011 to 33.1% in the second quarter of 2012, primarily due to the impact of annual customer price reductions and product mix, partially offset by purchasing cost reductions.

We have been experiencing increased pricing pressures resulting in a trend towards the higher end of the 2% to 4% price reduction range that we have previously disclosed. The Company currently expects that its gross profit margin for the third quarter 2012 will increase sequentially by approximately 0.5 percentage point compared with a gross profit margin of 33.1% reported in the second quarter of 2012. This anticipated increase is primarily due to increased production efficiencies. The gross profit margin will continue to be impacted by annual customer price reductions on certain global automotive production levels, product mix, our ability to leverage our fixed overhead costs, purchasing and engineering cost reductions, supply chain constraints, and manufacturing yields.

Next, we will provide an overview of the Company's operating expenses. You will note that the rate of increase in expenses in both engineering research and development, as well as Selling, General, and Administrative expenses are now at levels more in line with historic rates of increases for those areas. This is due to a focused effort to bring those expenses in line with the Company's revenues. ER&D expense increased by 13% in the second quarter of 2012 compared with the same 2011 quarter. The primary reason for the increase in the second quarter of 2012, compared with the same prior-year period, was due to the increase hiring of employees to support new product development projects and new program awards.

ER&D expense increased by 17% in the first six months of 2012 compared with the same 2011 period. The primary reason for those increases in the first six months of 2012, compared with the first six months last year, was due to the increased hiring of employees and outside contract engineering development services to support new product development projects and new program awards. ER&D expense is expected to increase approximately 10% for the third quarter of 2012 compared with the third quarter of 2011.

Selling, General, and Administrative expenses increased by 3% in the second quarter of 2012 and by 5% for the first six months of 2012 compared with the same prior-year periods. The increase both for the second quarter and the six-month periods was primarily due to continued overseas office hiring to support our overseas growth, partially offset by the impact of favorable exchange rates of approximately 5 percentage points. SG&A expense is currently expected to increase approximately 5% for the third quarter of 2012 compared with the third quarter of 2011. This estimate is based on a stable foreign exchange rate.

Next, I'll provide some additional details regarding Other Income for the second quarter of 2012. Investment income for the second quarter was $634,000. Other was $2.533 million, for total Other Income of $3.167 million. Total Other Income decreased in the second quarter of 2012 compared with the second quarter of 2011, primarily due to changes in foreign currency rate related to the Company's euro-denominated account. Other Income details for the first six months of 2012 were investment income at $1.230 million, and other of $5.224 million for total Other Income of $6.454 million. Total Other Income decreased for the first six months of 2012 compared with the same period last year, primarily due to changes in foreign currency rate related to the Company's euro-denominated account, and reduced realized gains on the sale of equity investments.

Now, I'll provide an update regarding certain balance sheet items. As of June 30, 2012, accounts receivable, $129.9 million; inventories, $192.3 million; patents and other assets, $12.9 million; accounts payable, $53.5 million; and accrued liabilities, $52.5 million.

Next, I will provide an update regarding the effective tax rate. The second quarter 2012 effective tax rate of 33% varied from the statutory rate of 35%, primarily due to the domestic manufacturing deduction. We currently expect that the tax rate for the 2012 calendar year will be approximately 33% based on current tax laws, primarily due to the domestic manufacturing deduction. The Company's year-to-date cash flow from operations was $101.5 million.

Now I'll provide an update on capital expenditures and depreciation expense. Capital expenditures for the second quarter of 2012 were $29.6 million and depreciation expense for the second quarter was $12.4 million. The Company continues to estimate that the 2012 capital expenditures will be approximately $130 million to $140 million, primarily due to increased production equipment purchases of approximately $60 million to $65 million, and new facility-related costs of approximately $70 million to $75 million to increase production plant capacity. 2012 capital expenditures will be financed from current cash and cash equivalents on hand, and depreciation and amortization expense for 2012 is currently estimated at approximately $48 million to $52 million.

Update on cash dividends, on July 20, 2012, the Company paid a quarterly cash dividend of $0.13 per share to shareholders of record of the common stock at the close of business on July 5. The Company's cash dividend policy was established based on a number of criteria, including current US income tax laws, that it 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. The Company's Board of Directors has authorized the repurchase of a total of 28 million shares of the Company stock. The criteria for repurchases is based on a number of different factors, including market, economic, and industry conditions, market price of the Company's common stock, the anti-dilutive effect on earnings using a normalized interest rate, available cash, and other factors that the Company deems appropriate.

The Company did not repurchase any shares during the first six months of 2012. Approximately 2 million shares remain authorized to be repurchased under the existing plan. The Board of Directors continues to evaluate this plan and it is an agenda item at every regular Board meeting. And now I'll turn the call over to Mark Newton, who is going to provide an update on our products.

Update on Gentex SmartBeam and driver-assist camera products. Currently Gentex SmartBeam products are predominantly sold in Europe. Given the fact and based on the HIS June 2012 forecast for light vehicle production, we now expect that SmartBeam unit shipments will increase by approximately 20% to 25% in the calendar year 2012 compared with the calendar year 2011. This downward revision to our previous 2012 SmartBeam guidance is primarily due to lower take rates and packaging changes at certain European customers, and declines in European light vehicle production on vehicle models that offer SmartBeam. We do not believe that this is a long-term trend and there continues to be significant interest in our SmartBeam product globally.

We also recently began shipping auto-dimming mirrors with a new camera-based driver-assist system for the 2013 Ford Explorer. This new Gentex driver-assist system uses a multi-function camera combined with algorithmic decision-making to perform automatic high beam control, lane keeping and driver alert functions. The system was developed in conjunction with Mobileye, the global pioneer in the development of vision-based driver assistance systems. This program was the first of a number of driver-assist awards that the Company expects to announce this year.

On June 25, 2012, American Vehicular Sciences filed four patent infringement complaints in the eastern district of Texas, each of which named Gentex and at least one or two of its customers as co-defendants. The Company has not yet been served with the complaint, but we are currently evaluating the allegations of infringement. In two of the four complaints, AVS alleges that Gentex's SmartBeam product infringes one patent owned by AVS. In the other two complaints, AVS alleges that Gentex monitoring system of products infringe two other patents owned by AVS. The Company is uncertain of what impact, if any, the above claims may potentially have on our business.

Updating now rear-camera display, Gentex rear-camera display mirrors have always been sold to auto makers who use multiple options for where they install the display for the rear camera. We have recently confirmed that four of our customers are changing the RCD display locations from the mirror to a radio display in the center console, with two of those customer changes to materially impact rear-camera display mirror unit shipments negatively in the 2013 calendar year. The rear-camera display changes at the other two customers will materially impact RCD unit shipments negatively beginning in the 2014 calendar year. These location change decisions were primarily driven to reduce costs with the automaker. The radio location is expected to be the primary rear-camera display location for each of these four auto makers.

The Kids Transportation Safety Act and the pending requirement of all new vehicles in the United States will be required to be equipped with cameras and rear-camera displays by September 2014 has now been delayed three times. There is no change in our understanding that the rule currently resides at the Office of Management and Budget, and that the Secretary of Transportation currently forecasts that the final rule will now be ready by December 31, 2012. With these KTSA delays and the uncertainties that they will have created in the automotive market, we continue to believe that RCD mirror unit shipments will be approximately flat for calendar year 2012 versus 2011.

Lastly, an update on dimmable aircraft window programs, we are currently shipping dimmable windows for the Boeing 787 Dreamliner and each passenger aircraft has approximately 100 windows. The first Boeing 787 was purchased by All Nippon Airways and Boeing has also expressed interest in utilizing dimmable windows for their aircraft. Gentex is also shipping dimmable aircraft windows for use on the passenger cabin windows of the 2010 Beechcraft King Air 350i, the first aircraft in general in business aviation with dimmable windows. Each King Air 350i has 15 windows. Other aircraft manufacturers continue to have interest in this technology and we are working on those potential programs with PPG Aerospace.

There recently was a news report that All Nippon Airways was not satisfied with the darkness level of the aircraft windows that we supply with PPG Aerospace; that story was refuted the next day in a blog posted by airlinereporter.com. Now I'll turn this back over to Steve Dykman.

Actually it's coming back to me.

Oh, sorry about that.

I'll give you our net sales estimates for the third quarter of 2012. We currently estimate that net sales for the third quarter of 2012 is an increase of approximately 0% to 5% compared with the same quarter in 2011 based on IHS's June 2012 forecast for light vehicle production. We continue to experience increasing volatility with customer orders within the 12-week customer release window, with some of our customers, including the Tier 1 mirror suppliers revising orders at the last minute.

I'll give you some production numbers and forecasts from HIS. These are based on IHS's June light vehicle production forecast. For the third quarter of 2012 in North America, HIS forecast that light vehicle production will be 3.4 million vehicles, which is an increase of 8% compared with the 3.2 million vehicles shipped in third quarter of 2011. European light vehicle production of 4.2 million vehicles, which is down 8% compared with 4.5 million in the same quarter last year. Japan and Korea, 3.5 million vehicles, which is up 4% compared with 3.3 million vehicles last year's third quarter. For calendar year 2012, HIS forecast that North American light vehicle production will be 14.9 units, which is up 13% compared with 13.1 million units last year. European light vehicle production,18.9 million vehicles, which is down 6% compared with 20.2 million vehicles. And Japan and Korea, 14.1 million vehicles, which is up 12% compared with 12.5 million vehicles.

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 content of Gentex Corporation. Gentex Corporation alone holds such rights.

While we understand there may be companies that transcribe and redistribute our conference calls, not withstanding this warning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of 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 transcript. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation 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 time, we're going to open the call up for Q&A. And we respectfully request that you ask one single-part question at a time so that everybody has a chance to participate. We do appreciate your cooperation with this. Operator, Jessica, we're ready to open this up to Q&A.

Thank you. (Operator Instructions)

We'll first go to David Leiker from Robert W. Baird.

Good morning. I want to focus on the comment here that the disclosure on the RCD contracts 2013 and 2014 and put it in the context of we're seeing in particularly across Toyota where your mirrors, RCD mirrors in the vehicle updated infotainment in the center console and there's still an option to put it in the mirror. Can you put any color on whether that potential opportunity exists for these four customers in 2014, '13 and '14?

Yes, there certainly is that potential as most of the auto makers are utilizing a multi-pronged approach, but more recently, we have been notified by some of these customers of their intent to move to the radio display at a future date.

I guess I'm asking specifically on those that you've announced today are moving the radio display, do you also have a contract to provide an upsell option to put the display in the mirror?

Our products for rear camera display has generally always been sold as an option and that practice continues. As we've always stated that we've always competed with this product against other display options in the instrument panel and the console. That continues here and the rear camera display mirror does continue as an option in many cases.

David, the radio display is the primary location that they have chosen, but they could upgrade to a mirror.

I understand that. What I'm trying to understand is on those four that you announced today, do you have a contract where your product will be available as an option as an upsell to the primary display being in the radio?

On some of them. We can't say across the board with these, but there are situations where you can get it in the mirror.

And then is there any indication on what the expected take rate is going to be on those vehicles when that primary display becomes console as opposed to the mirror?

We have not made that estimate.

Not at this time, no.

Okay. I'll circle back. Thanks.

Thank you.

Our next question comes from Ryan Brinkman from JPMorgan.

Hi, good morning. Thanks for taking my question. On the margin compression front, are the higher customer pricedowns focused predominantly in one region, such as Europe, or are they more widespread? Is the margin compression more a function of a pricedowns on existing products, or the less quickly increasing mix of value-add additional products like SmartBeam or RCDs?

Okay. So if you think of the two negative factors that I discussed, it was the annual customer price reductions, as well as product mix. Generally, overall within all regions, we're seeing a trend of increased pricing pressure, albeit it's still within the 2% to 4% range that we've discussed, so it is trending towards the higher end of that. So it's not really isolated to a specific region or a specific customer overall.

With respect to the product mix impact, in those two negative factors equally contributed in the quarter on a sequential basis and we've talked before that our gross profit margins don't differ that significantly within interior mirrors. However, there is generally some variation within there with respect to interior mirrors. We've also talked about with respect to exterior mirror auto dimming mirrors, that their margins are a little bit higher than interior mirrors because the electronics are in the interior mirror.

Okay, and do you want to update us on how you think about share repurchases, given the stock reaction today?

I think that it certainly is something that our board and the company continues to evaluate. Part of the board's evaluation they are looking at overall business and economic conditions as well as volatility in the market and obviously we mentioned in the last several months, the board has spent more time evaluating the repurchase program, and with the more recent pullback in our share price today, they will continue to evaluate that.

Okay, thanks. I'll hop back in the queue.

Our next question comes from Steve Dyer from Craig-Hallum.

Thank you. I'm wondering if you could break out in terms of the gross margin and couple hundred basis points lower than your historical average, so the pricedowns seem to be on the high end. How much of a factor is the excess capacity you guys have added in the lower gross margin?

There's a lot of moving parts within the margin line, as we've talked, and some of the other factors are significant in and of itself on a single item. But other negative factors that did impact the margin on a sequential basis were, you know, with a little bit lower revenues. We did not leverage our fixed overhead costs. There were some production line moves that created some production inefficiencies. Those were not significant in and of themselves.

Specific to your question on plant capacity, we've talked about the four expansion projects, two of which are pretty much complete as of the second quarter, or the end of the second quarter, but on the plant capacity side of things, it was right around 0.1 to 0.2 effect on margin.

Okay, and then going back to the lost RCD business, are you able to quantify that? I'm assuming you know the customers and what they represent this year. What do you estimate the dollar loss to be next year?

We'll provide the updated guidance on our fourth-quarter call with respect to 2013. We haven't provided any details with respect to next calendar year yet.

Okay, and then updated thoughts on adding capacity in light of losing some of this additional business.

As we previously discussed, facility or plant capacity is added on a step function basis. And so the four existing expansion projects have not reflected any anticipated volumes with respect to KTSA, so they are based on program awards and work that we are conducting at this point in time.

So the four expansion projects are moving along, as I mentioned. Two of them are completed as of the end of the second quarter. One of them is expected to be completed by the end of the third quarter, with a final one by the end of calendar year 2012. We've talked about some land infrastructure work that's being performed on some property that we have, but we have not made any decision to proceed with any facility on that property at this point in time.

Thank you.

And we'll now go to John Murphy from Bank of America.

Good morning, guys. Just wanted to catch up on these four EMs. Is there any way you could tell us who these companies are? Just trying to understand whether they are mass market guys or luxury companies. I'm not sure they would really be too concerned with you announcing that they are making this kind of a switch. So I'm not sure why you couldn't name them.

Yes, two of the four are North American auto makers. We're not allowed to specifically name names. So two are North American auto makers and two are overseas customers and you can probably look at the listing and make some assumptions.

Okay. So if we were to think about these four, forget about prospective 2013, but to think about the base year of 2012, as these four auto makers move out of the base and are usually -- are almost largely not using any RCDs from you, would that create a very significant or material decline from your shipments for RCDs for calendar year 2012?

There would be declines on a year-over-year basis, but you have to also keep in mind that we are picking up some other business, albeit it may not be to the same degree to some of these vehicle models are rolling off. And some of it's going to be somewhat dependent on the KTSA final ruling and mix of vehicle production on the vehicle models that we do have.

Got ya. And then just on SmartBeam, it sounds like you guys had a big change in your view there. And it sounded like the bulk of the change from up 40% to 45% to up 20% to 25% was more a function of mix and take rates as opposed to any changes in volume, because I don't think IHS has changed their outlook for volume expectations this year all that much in Europe, where this is predominant. I'm just curious what was going on there? Are there other competitors or competitive products that are being put in place? Or is it just a change literally in model level mixes?

What we've seen to date in this is the contributors as we stated since the majority of our customers are in Europe is due to European production down. The changes in mix are not necessarily a loss to other technologies and we don't see this as a trend, because as we stated earlier in the call, with our ER & D expense increase primarily due to development of new products and program awards, we continue to see strong development with this product.

But if we look at the IHS schedules from the May release to the June release, I mean, they are still down about 6% give or take. There wasn't a real material shift. That must have been something with model level mixes or just take rates. Is that -- I mean, I'm just trying to understand what exactly what you think is going on there.

That is what we had stated earlier on the call, is yes, within models and product mix, we do see changes. That's been common for us particularly in our history in SmartBeam product launches, primarily because it's with our European customer base and if you go and try to purchase a BMW in Germany, the way options are applied, it's more ala carte than in the United States. You buy different features and package them together.

And whenever we launch new product awards as we are with the SmartBeam product, we have always found that there's a settling phase between what was originally forecasted with the launch of the program and actual take rates in this. We are seeing adjustments like that as part of this issue here.

Got ya. And then just lastly, on the ABS case, you guys are great at patent litigation and protecting your patents, and you know the stuff inside and out. Is this really just more of a nuisance and noise around the edges? Seems like that's the way things have been in the past with patent litigation, because you're so good at it. I'm just curious what your thoughts generally are on this.

Right now, we're still very early because we haven't been served in the evaluation process. So we're going through the diligence right now. We take all of these obviously seriously, but this is not a company that manufactures product. And so we're still evaluating at this point.

Okay, great. Thank you very much.

We'll now go to Rich Kwas from Wells Fargo.

Hi, good morning. Just following up on John's question with the patent, is your understanding that on the second generation SmartBeam, because I would think that being with SmartBeam being out for a number of years at this point, the first gen, you would have heard about this earlier. But is this related to second gen, or what do you know, if you know anything right now?

No, not at this point. We don't have specific knowledge and we're still early, as I said, in confirming what all this applies to and the diligence and research. So we don't have information that indicates that at this point.

Okay, and then, Steve, just following up on earlier question about capacity, so hit the volume on RCD, it's not going to affect your capacity expansion plans and you have business on the books or contracts on the books to fill this added capacity, is that correct?

Yes, that is correct.

Okay, and then on the margin, for gross margin, the thing that I'm struggling with is back in April, you guided to flat sequentially and you said price, customer pricedowns are worse than the higher end of what you originally thought. But what else was causing the miss on the market because you had production, you got some lift from the Japanese, while you noted that there's been some volatility within overall production scheduled. It just seems like the miss on the margin front has something -- there's something else going on there. So I don't know if you can provide any additional color.

Sure. The new item obviously touched on the annual customer price reduction with the increased press and pressures. So that's an additional head wind that contributed to the sequential decline. The product mix variability also negatively impacted the margins.

Some other less significant factors, as I mentioned, related to some production efficiencies within the quarter when we had some production line moves and so there was less efficiency within the production area within the quarter. And so when we're discussing the forward-looking guidance with respect to Q3, part of that margin improvement is the anticipated production efficiencies we're expecting.

Okay, so you're assuming pricedowns are going to be pretty consistent at the high end of the range going forward?

Yes.

And then product mix is going to be uneven at best?

That's the variability we have a forecast at the beginning of a quarter, but that obviously can change as we progress through any given reporting period.

Right, and then just lastly, on the product mix front with the -- I know I'm going overboard here with these questions, but just on the German OEMs, you know the auto lead a few days ago saying they are really not seeing much change with the German OEMs and they are seeing good visibility, or at least decent visibility right now. So on the product mix, this sounds like it's relative, rather than it's just platform changes, there have been substantial changes within the platform production, that this is more take rate associated or take rate issue with some of your products?

Well, and mix of products that are being built by any given customer within a vehicle model.

Right. So the trim levels are varying versus--

Right.

Okay. All righty. Thanks so much.

And we'll now move to Jason Rogers from Great Lakes Review.

Just looking at RCD, as far as the customers that use the console as a primary display location versus the mirror, is it generally cheaper for those customers to have the camera inside the console versus the mirror?

As we stated earlier in the call, the potential for the radio now to include a display that will show the camera image and the instrument panel particularly due to the volume potential of a radio in a vehicle versus our option of a rear camera display in the mirror. It is, as we stated, a lower cost option for the automaker, if the feature is going to be mandated particularly as KTSA indicates.

And are you seeing more, as you did with your customers, seeing more entry-level trends using the console as the primary display location?

I don't believe we can state that we're seeing that as a trend. With the potential indication of what Kids Transportation Safety Act provided originally, where this would be a mandated feature, any time those types of things occur, it invites greater evaluation and increased competition in this.

We succeeded with the rear camera display mirror product based on quality and technology as an option product and we've had good success in growing it. With it becoming a mandated feature, auto makers have asked to be on every vehicle, we'll evaluate as many options as possible. And you do face cost pressures in technologies like this.

Okay, and finally, just so I understand the SmartBeam guidance, is it more a function of the lower take rates versus the option package changes? This isn't a case where SmartBeam is being removed from different option packages at the auto makers in Europe, correct?

This is more, from what we're seeing right now, difference in option packages as they are being applied. No, we're not seeing a trend to remove SmartBeam from these vehicles on any of our European customers.

Okay, thanks.

And we'll now go to Adam Brooks from Sidoti.

Good morning. Just a few quick things. One, on SmartBeam guidance, can you give us a sense first half of the year versus second half, I'm guessing second half of the year growth slows down.

Well, the first quarter was strong. We started seeing some of these trend changes, as Mark mentioned, with respect to take rates and packaging aren't here as we progress through the second quarter and as reflected in the balance of the year as well.

Okay, and can we talk a little bit about driver assist, maybe any traction you're gaining with new OEMs or even with Ford, or just maybe any update there as far as new announcements coming out over the next few months?

We do anticipate, as we stated earlier, more announcements coming yet this year on that product. It has been, in the engineering area where I work, a significant area of development for us and we have strong activity. We look forward to those announcements later this year and in the future.

All right. Thank you.

Adam, we can't, we can't talk about them until the customer approves us talking about them.

Okay. Thank you.

Our next question comes from Brett Hoselton from KeyBanc.

RCD, I want to make sure I understand what's taking place here. Sounds like 4 out of your 10 customers are making a wholesale shift of all of their platforms towards using some sort of a radio-based display and may offer the RCD in the mirror as an option. Is that a correct assessment? Or is this just a matter of one or two platforms for each of those different customers?

Not wholesale, from what we know at this point. As we indicated earlier in the call and we're doing so a large part at your request for us to provide more information on this. We talked about radio display, I believe in the last quarter, and increasing as another option for auto makers to consider in this. The rear camera display mirrors do continue and they continue to be marketed and sold honestly, as we always have. They have always been an option versus other displays in the vehicle.

With the indication that it was going to be mandated by KTSA, even though that has not come to pass, it has increased automaker evaluation and how they would apply standard feature. So we still remain suppliers in this mix. We're working now just to be more informative to you on where we have been affected, based on comments that you've been making to us recently.

So not necessarily the wholesale shift, but am I correct in my understanding that this is not necessarily just one platform for each of these four customers, that it's at least one, maybe more platforms for each customer?

That's correct.

That's correct, yes.

And then do you have any incremental RCD contracts, which are going to be kicking in that 2013-2014 timeframe? My impression was during our last, your last earnings call, is that everything was on hold, that you did not really have any incremental business that was coming online kind of out in that timeframe. Am I correct in that? Is that still the case, or is there some additional business which is likely to offset some of this lost business as you move into 2013, 2014? I'm asking about contracts that you have in hand at this point.

Rear camera display, new awards do continue and the product does continue at other auto makers to have new contracts awarded. As far as how that impacts materially in 2013, I think we would stay consistent with what Steve has said, and say that we're not providing any forecasted guidance yet at this point is that correct, Steve?

Yes.

Okay. Thank you very much.

We'll now go to Elaine Quay from Jefferies.

Hi, thanks so much for taking my question. I want to go back to a comment about the order cancellation. Is that something you're seeing more on the base auto dimming mirrors or with the higher content, the RCD and the SmartBeam? And what is the operational response strategy in reaction to those lower orders? Is the plan to realign ERG, SG&A, manufacturing? Just any color there would be helpful. Thank you.

Elaine, we could barely hear what you said for the first half of that. So you'll have to repeat it and speak louder, if you can.

I'm sorry. Is this better?

Yes. Much better.

I'm sorry. It was a phone issue here. Just -- so going back to the increased volatility and last-minute order cancellations, is that something that's more on the base auto dimming mirrors or with the RCD and SmartBeam? And then what's the operational response or strategy in -- you have in plan for the lower orders? Is it to adjust ER & D, SG&A and work force?

It is not isolated to any specific product. It's an overall trend that we're seeing, so that certainly increases and provides some challenges for us as we schedule and try and run the manufacturing area in an efficient manner. In and of itself, it is not really changing our resources within the ER & D area, as those resources are on future product developments and orders that are dropping out at the last minute are really just more volume related on existing programs and platforms.

Great. Thanks so much.

We'll now go to David Leiker from Robert W. Baird.

A couple of things that have rolled up that I want to follow up on. On your first-quarter call, I believe you made the comment that you had spent a year since you had received a new contract for RCD mirrors. I think I just heard since that time you've been awarded some new contracts. Is that correct?

We talked about that we haven't been awarded any new business, but we have new business to announce. We have a number of RCD contracts that we'll be announcing that had been awarded prior to that.

Okay. So since the first-quarter conference call, you've been awarded new contracts?

Yes.

Okay. On the pricedowns, what we're seeing here with pricedowns going to the high end of what the range has been. Is that more what you had characterized returning to normal type of events after the last three years, where things were obviously in disarray, or is that something where there's higher demand, straighter demand for larger pricedowns from your customers?

I think it's a trend back towards the normal historical range. Obviously the pricing pressure is pretty consistent over a long period of time. We are just seeing an overall trend of some increases and so I think your first point is a little more accurate.

And those are contracts that you negotiated that kicked in here in the second quarter?

Yes, the increased trend started in the second quarter and we expect that to continue.

Okay, and is it across all other customers, or is it just a little here and there?

I would say more recently than in the recent quarters, it was hit or miss, but it's becoming more of a consistent trend today, which is why it's become more meaningful.

Okay, and then in the past, you've done a great job, obviously you've struggled the last six quarters with all the external things, but you historically have done a great job at taking your costs down more than the pricedowns and that's been a challenge here of late. I recall in the first quarter that the redesign you went through a take swap out components and things like that, that those efforts were done and that you could refocus your efforts on cost reduction programs. Has that happened? Or is there something there that's not kicking in?

There's a couple of things. One, I think the comment in the first quarter on engineering redesigns being on the tail end was based on the ER & D expense growth and that we're starting to see some efficiencies that are gained within that line item as resources can be redirected now that a lot of that activity is completed. With respect to the margin line, we still have a very aggressive purchasing cost reduction program that continues to be successful. However, more recently, it is being challenged to keep up with the pace of annual customer price reductions.

So we are still very positive about the future purchasing cost reduction program and our purchasing group continues to work with the objective of offsetting the annual customer price reductions, but with the recent trend of that increasing, it currently is not.

And bringing new capacity online should help you with productivity gains that help offset some of those as well?

That is our objective, yes.

Okay, and one last item. You break out your revenue mix as geographically, but how much of your revenue going over to Europe is priced in euro versus dollars today?

For calendar year 2012, it's about 8%. So it's not that significant.

Would it be fair to assume that's the portion of your revenue that's sold into Europe that stays in Europe and the rest is exported?

Yes, generally speaking, yes.

And then how much of your SG&A do you think is in euro today?

A good portion of it, I would say, maybe half.

So do you think you're at the point that a weak euro, that your costs come down more than the profits on the revenue that a weak euro might actually be positive for profits?

Potentially, yes.

Okay. Thank you.

We have time for one more question.

And our final question will come from Ryan Brinkman from JPMorgan.

I was just wondering if you could elaborate a little bit more on what you mean by volatility in near-term orders. Does this primarily relate to Europe? And is it an indication that near-term production schedules of European auto makers are maybe tracking significantly worse than expected? Thanks.

It's not specifically isolated to Europe. We're seeing it in other regions with other customers as well, but I think it is due to a lot of the uncertainty and overall economic conditions, as well as some customers are using it as a safeguard. We believe that some of our customers are over-ordering parts at the beginning of each quarter to ensure they're protected in the event there's another issue that causes some form of a part shortage since we've been in that environment for a couple of years.

And so then they drop these orders out just prior to when they are expecting to ship the product and that's created some additional volatility and we're anticipating that this trend might continue here in the near term.

I see. Thank you.

Thank you. At this point, we're going to wrap the call up. Thank you, everyone, for participating. We remain positive about the business that Gentex has. We have a good company. And we will work to make it a better company. We will be here if you have additional follow-up questions. Thank you.

This concludes today's presentation. Thank you for your participation.