Gentex Corporation (NASDAQ:GNTX) Q1 2024 Earnings Call Transcript

Gentex Corporation (NASDAQ:GNTX) Q1 2024 Earnings Call Transcript April 26, 2024

Gentex Corporation reports earnings inline with expectations. Reported EPS is $0.47 EPS, expectations were $0.47. GNTX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to Gentex’ report’s First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there’ll be a question-and-answer session. [Operator Instructions]. Please be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Josh O’Berski. Please go ahead.

Josh O’Berski: Thank you. Good morning, and welcome to the Gentex Corporation first quarter 2024 earnings release conference call. I’m Josh O’Berski, Gentex’ Director of Investor Relations. And I’m joined by Steve Downing, President and CEO; Neil Boehm, CTO; and Kevin Nash, Vice President of Finance and CFO. This call is live on the Internet and can be reached by going through the Gentex website and to ir.gentex.com. All contents of this conference call are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcast, retransmitted, transcribed or otherwise redistributed. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any unauthorized use of the contents of this conference call.

This conference call contains forward-looking information within the meaning of the Gentex safe harbor statement included in the Gentex Reports first quarter 2024 financial results press release from earlier this morning and, as always, shown on the Gentex website. Your participation in this conference call implies consent to these terms. Before we jump into our prepared remarks, I wanted to take a moment to address our upcoming annual shareholder meeting and the proxy vote. Glass Lewis has recently released their proxy voting recommendations for Gentex’s. Their analysis lacked factual and logical accuracy on multiple fronts. I would like to briefly address a few of these items. Regarding board oversight of cybersecurity and human capital, both of these items are detailed in our proxy.

Oversight for these functions are part of the audit committee’s listed duties. They are included on page 12 for cybersecurity and page 18 for human resources. Regarding our company reported percentages of racial and ethnic minorities on the board, we follow NASDAQ’s guidelines for disclosure. This information is included on our website in the board of directors section at ir.gentex’s.com and also included each year in the back of our annual reports. Regarding the recommendation to vote against our nominating and corporate governance committee chair, Ms. Leslie Brown, due to a lack of female representation on the Board, we encourage shareholders to ignore Glass Lewis. Since 2016, when Ms. Leslie Brown joined our Board as our first female board member in the company’s history, Gentex’s has continued to identify and nominate qualified, capable, intelligent thought leaders to our board.

In this process, we have added seven new board members to our board, and the new director nominee, Dr. Bill Pink, will be our eighth new board member if elected in this year’s vote. Each of these new members and our current new director nominee have exemplary backgrounds, capabilities, and experience. Of these new members, two have improved the board’s gender diversity, and three, including Dr. Pink if elected, have improved the board’s racial diversity. If we assume that all of our director nominees will be elected as identified in the proxy, this means that five of our last eight member additions will have improved diversity. We believe the work Ms. Brown is doing, as evidenced by the sustained growth in diversity on our board, is indicative of her performance and the company’s progress.

Glass Lewis’s recommendation to vote against a female board member because there are not enough female board members is as illogical as it sounds. We hope that Glass Lewis updates their policies to consider the Chair’s gender in this process, as well as the progress we’ve made as a company towards increasing diversity on our Board. I would welcome any calls with investors who use Glass Lewis for their proxy voting recommendations and am happy to clarify Gentex’s position on items contained within these reports. I will now hand the call over to Steve Downing for our prepared remarks. Steve?

Steve Downing: Thanks, Josh. We got that out of the way. For the first quarter of 2024, net sales increased 7% versus last year to $590.2 million, despite the fact that actual light vehicle production declined by 3% in our primary markets. It’s also important to note that light vehicle production declined from the beginning of quarter forecast, which resulted in revenue levels being approximately $20 million lower than our original expectations. Despite the lower than expected light vehicle production, revenue for the quarter was not only a company record, but also represented a 10% outperformance versus the underlying market. The revenue growth in the first quarter was driven by strong content growth because of higher launch rates and increased take rates of our full display mirrors and other advanced features and strong growth in our outside auto-dimming mirror business, which has been the case for the last several quarters.

The work we have been executing to increase our total number of features, including investments in additional electronic technologies, is beginning to provide additional revenue growth opportunities while de-risking the business by reducing our dependence on light vehicle production. For the first quarter of this year, the gross margin was 34.3%, which was an increase of 260 basis points versus the first quarter of last year. The increase was the result of raw material cost reductions, higher sales levels, customer price changes made after the first quarter of 2023, and manufacturing-related efficiencies. We continue to make very good progress on our margin recovery plan that we estimated would take until the end of 2024 to complete. When compared to the fourth quarter of 2023, the gross margin declined by 20 basis points.

However, it is important to note that during the fourth quarter of last year, there was approximately 50 basis points of gross margin benefit stemming from one-time customer cost recoveries. Additionally, the gross margin was in line with our expectations despite revenue levels that came in below the beginning of quarter forecast. Further improvements in gross margin that we have targeted for the rest of this year are dependent on sales levels, product mix, raw material cost reductions, and further efficiencies in manufacturing. We remain focused and confident in the gross margin recovery plan that we established last year and will continue to execute throughout the remainder of this year. Operating expenses during the first quarter were $72.9 million compared to operating expenses of $61.5 million in the first quarter of last year.

The increase in operating expenses are primarily due to engineering staffing and related professional fees, as well as the addition of the e-site engineering and sales teams after the acquisition. Our operating expenses are trending in line with our expectations for the full year, with increases primarily focused on R&D. Operating expenses are expected to continue at the current pace with some additional growth forecasted in the second half of this year. As we continue to invest in new products and technologies, new business awards, VA/VE initiatives for cost optimization of our bill of materials. As a result of the higher sales levels and increased gross profit, income from operations for the first quarter of 2024 increased 14% to $129.3 million.

Net income increased 11% to $108.2 million, and earnings per diluted share increased 12% to $0.47 per share. I will now hand the call over to Kevin for some further financial details.

Kevin Nash: Thanks, Steve. Automotive net sales in the first quarter increased by 7% to $577.6 million, despite a reduction in auto dimming mirror unit shipments of 2% for the quarter, and light vehicle production in our primary markets declining by 3% compared to the first quarter of 2023. Other net sales in the first quarter were $12.6 million compared to $13.3 million in the first quarter of 2023. This was driven by a $2.5 million decrease in fire protection sales, which was partially offset by a $1.8 million increase in dimmable aircraft window sales compared to the first quarter of last year. Share repurchases. During the first quarter, we repurchased 1.2 million shares of common stock at an average price of $35.84. And as of March 31 of ’24, the company has approximately 14.7 million shares remaining available for repurchase from the previously announced plan.

We remain committed to repurchase additional shares in support of our capital allocation strategy, but share repurchases will vary from time to time and will take into account macroeconomic issues, market trends, and other factors we deem appropriate. Looking at the balance sheet, the balance sheet comparisons mentioned today are as of March 31 of ’24 and compared to December 31 of ’23. Cash and cash equivalents were $249 million compared to $226.4 million. Short-term and long-term investments combined were $311 million, up from $299.1 million, which includes fixed income investments as well as the company’s equity and cost method investments. Accounts receivable was $341.6 million, up from $321.8 million due to the higher level of sales during the first quarter.

The inventories were $436.6 million, up from $402.5 million, and the accounts payable increased to $191.8 million from $184.4 million. Looking at the preliminary cash flow items, first quarter of 2024 cash flow from operations was $129.9 million compared to $120.9 million in the first quarter of last year. CapEx for the first quarter was $31.9 million compared to $42.8 million in the first quarter of 2023, and depreciation and amortization was $24 million for the first quarter compared with $24.7 million for the first quarter of last year. I’ll now hand the call over to Neil for a product update.

Neil Boehm: Thank you, Kevin. In the first quarter of 2024, there were 31 net new nameplate launches of our interior and exterior auto dimming mirrors and electronic features. This is the highest first quarter launch rate for the company since 2015, and over 60% of these net launches were advanced features. For the advanced features in the quarter, full display mirror, HomeLink, and outside auto dimming mirrors led the way. Now for a full display mirror update. We’re excited to announce our 16th OEM customer for full display mirror, Polestar. Our full display mirror shipments to Polestar are for the Polestar 4 vehicle, which will be available in all of our major markets globally. The addition of this OEM customer helps to further demonstrate the global appeal of this technology as well as its acceptance on different vehicle architectures.

In addition to the new OEM customer launch, we have seen great growth and expansion of the technology at our existing customers. We are currently shipping full display mirror on over 110 nameplates globally, and we are confident in our 2024 FDM shipment guidance of shipping an incremental 500,000 FDM units above the 2023 unit shipments. Also in 2024, we expect to announce shipping full display mirror to at least one additional new OEM customer. Calendar year 2024 started off as an extremely busy launch year. The Gentex project and program teams are working hard to prepare the automotive and non-automotive products for production, while the operation team prepares to build and ship these exciting technologies. We’re excited about the continued growth we’re seeing with our technologies and appreciate all the hard work and dedication that the team at Gentex is putting in to ensure we execute flawlessly.

Also, while we’re launching a lot of products and technologies, we are continuing to evaluate opportunities to reduce the bill of material of existing programs, as well as execute on the VA/VE launches we currently have in process. These changes are critical for our margin recovery and stabilization plan, especially as we move into 2025. I’ll now hand the call back over to Steve for guidance and closing remarks.

Steve Downing: Thanks, Neil. The current forecast for light vehicle production for the second quarter of 2024 and full years 2024 and 2025 are based on the mid-April 2024 S&P Global Mobility forecast for light vehicle production in our primary markets of North America, Europe, Japan, and Korea, plus China. Light vehicle production in these markets is expected to increase 3% for the second quarter of 2024 versus the same quarter last year. But when looking further at our primary markets, those regions are forecasted to decline by 2% compared to the second quarter of 2023. For calendar year 2024, light vehicle production in our primary markets plus China is forecasted to be flat when compared with light vehicle production for the prior year but is expected to be down 1% when comparing only our primary markets.

Light vehicle production for calendar year 2025 in our primary markets plus China is forecasted to increase by 2% versus calendar year 2024 but is expected to be flat when comparing only our primary markets. Given these production volume estimates, we are making no changes to our previously provided guidance for 2024. Revenue for the year is expected to be between $2.45 billion and $2.55 billion. Gross margins for the year are expected to be between 34% and 35%. Operating expenses are expected to be between $295 million and $305 million. Our estimated annual tax rate is forecasted to be between 16% and 18%. Capital expenditures are expected to be between $225 million and $250 million. And depreciation and amortization is forecasted to be between $95 million and $105 million.

Additionally, based on the company’s current forecast for light vehicle production for calendar year 2025, the company still expects calendar year 2025 revenue of approximately $2.65 billion to $2.75 billion. We are on pace for record-setting revenue in 2024 and 2025 with much of that growth being driven by expansion of our product content including advanced feature growth and new electronic technologies. The outgrowth versus the market demonstrates that our product strategy is succeeding with our customers and consumers, and we are excited to see several of the new technologies that we have invested in over the last several years begin to generate revenue and profitability for the company. Revenue outperformance has been exciting to see, but I’m also very pleased with our progress toward improved profitability.

While a tremendous amount of work remains to be done this year as we execute additional cost improvement initiatives, we remain confident in our ability to accomplish our plan of reaching a 35%-36% gross margin range by the end of 2024. That completes our prepared comments for today. We can now proceed to questions.

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Q&A Session

Operator: Thank you, ladies and gentlemen. [Operator instructions]. Our first question comes from Luke Junk with Baird. Your line is open.

Luke Junk: Good morning. Thanks for taking the questions. Maybe if we could start with just any updated indicators for full-year FDM volumes. I appreciate that you’re reiterating the guidance that you provided previously, but just hoping we can maybe talk in finer detail on any changes you’re seeing. Take rates at customers, which it seems like you hinted at, and then back of the envelope first quarter numbers seemed very strong. Just trying to reconcile that with what it might mean to the full year and any potential upside. Thank you.

Steve Downing: Yes, I would say on FDM volumes for the year, we’re right in line with that initial beginning of the year forecast. If you look at take rates, we kind of had a pretty good indication at the end of last year what take rates for this year were going to be. If anything, we feel like we were probably a hair conservative as we tend to be when we estimate launch, especially launch take rates are a little more difficult to predict than mid-cycle take rates. If you look at how long we’ve been in production now with FDM and which OEMs we’ve been on there with, we feel pretty comfortable what’s happening this year. Obviously, the back half of the year always has a little bit of risk as it relates to interest rates and what’s going on economically, but we’re off to such a strong start to the year. We feel really confident in our ability to hit those numbers for the year.

Luke Junk: And then switching gears to margins and just the gross margin walk from here, just trying to unpack how much lift, if you will, was in the first quarter margin from things that you’re working on this year versus remaining areas of opportunity. I guess, especially thinking of already negotiated supplier concessions based on my understanding, somewhat more mechanically rolling going forward. So I’m just trying to square the one key margin versus the full year as well. Thank you.

Kevin Nash: Yes. So as a lot of the work in 2024 is going to be about customer price or supplier price reduction. So that’s probably one of the bigger beneficiaries in the quarter. So if you look at, compared to the first quarter last year, raw material price reduction is about 150 basis points of improvement versus last year. Our manufacturing efficiencies, so overhead and the like is about 100bps to 125 basis points of improvement. You look at labor scrap and yield. That was probably 75 basis points of improvement. Frame duty was 25 basis points to 30 basis points. And then that was offset by about 100 basis points of pricing reductions to the customer. And so that gets you in the ballpark of kind of where we ended the quarter from a margin from 31.7% to 34.3%.

Steve Downing: Yes. And then Luke from Q1 now through Q4, how we expect to get to the 35% to 36% is really driven by a couple key areas. Number one is the growth in the business should provide some overhead leverage. Really the next biggest one is going to be focused on PPV. So when we refer to PPV, we talk about what is the purchase price variance from beginning of the year to end of the year that we’re getting from our supply base. First quarter is always a little thin. We have inventory leftover from prior year, so you don’t get the full read through in Q1. So we would expect some margin tailwinds from price reductions from the supply base. And then on the manufacturing side, you’re really looking at efficiencies in scrap over time and yield loss that we expect to achieve throughout the year.

Luke Junk: That is all very helpful. Thank you. And then just a smaller item non-operating but just other income swung to expense this quarter, just what was going on there and what we should expect the rest of this year in that line?

Kevin Nash: Yes, that’s really a combination of fair value adjustments of some of our tech investments and then mark to market adjustments of some of our more public investments. So that will be volatile a little bit as you go through new rounds of investments or again some of that stuff is subject to mark to market conditions.

Operator: Thank you. [Operator instructions]. Our next question comes from Ron Jewsikow of Guggenheim Securities. Your line is open.

Ronald Jewsikow: Yes, good morning team. Thanks for taking my question. Hey, looking at North American mirror shipments specifically down 7% versus the same period last year, is there some kind of timing comparison issue we should be aware of or anything else? I guess it’s quite a big delta versus light vehicle production, so just trying to get a sense of kind of what drove the unit shipment declines?

Steve Downing: Yes, there’s always a timing issue that exists anytime you’re talking about market trends and what’s happening when you’re shipping versus when they’re getting deployed and inventory. And then the other timing issue I always caution everyone to think about, too, is imagine back 18 months ago, it started supply shortages happened. There was some stockpiling happening at OEM levels so that we know there was definitely some pull ahead from certain OEMs who were trying to make sure they had inventory in-house. And then obviously that shakes out later once they realize they may have overbought slightly. But I think the real big issue and probably the primary reason why you saw that change is certain OEMs in particular in the market were more impacted and had been more impacted given what’s going on and so some of those OEMs were struggling more than others. So I’d say it’s really more of a mix issue even more so than the timing issue.

Ronald Jewsikow: Okay, Yes, that makes perfect sense. And on the 35% to 36% gross margin exit rate, I guess in light of pretty strong first quarter gross margins, and they were in line with your expectations despite lower revenue based on your commentary. So I guess could you help us characterize the exit rate? Do you expect to touch 36% by the end of this year reported on a quarterly basis and any color on PPV that you expect to get from here as well would be helpful.