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Executives

Connie Hamblin - Vice President of Investor Relations & Corporate Communications

Enoch Jen - Senior Vice President

Steve Dykman - Chief Financial Officer

Analysts

Richard Kwas - Wachovia

David Leiker - Robert Baird

Brett Hoselton - KeyBanc

Alexander Paris - Barrington Research

John Murphy - Merrill Lynch

Greg Halter - Great Lakes Review

Carrel Lawrence - BlackRock

Joe Hosler - OFI Institutional

Gentex Corporation (GNTX) Q3 2008 Earnings Call October 21, 2008 10:30 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Gentex Third Quarter 2008 Earnings Conference Call. Today’s call is being recorded.

I’d now like to turn the meeting over to Ms. Connie Hamblin, Vice President of Investor Relations and Corporate Communication. Please go ahead, Ms. Hamblin.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications

Thank you. Good morning everyone, thank you for joining Gentex Corporation for our third quarter conference call comments. On the call with me today is Enoch Jen our Senior Vice President as well as Steve Dykman, our Chief Financial Officer.

I’ll go through a few routine matters and then will turn the call over to Enoch, he will make the comments about the quarter and then we'll open it up to Q&A.

This call is being broadcast live on the internet on Gentex Corporation’s website at www.gentex.com. The auto playback of the conference call also is available on the website as well.

Before I proceed with discussing the Safe Harbor statement and other comments I think that we need to take the opportunity to remind everyone Gentex does have a quiet period every quarter that encompasses the last 10 business days of the quarter and last through the date of our quarterly earnings news release and conference call. And, every quarter we have a number of individuals who call during this period and going forward we would request that you respect our policy and understand that we are not going to be taking or returning phone calls during that period. If something does change materially obviously we would need to issue a news release as is required by Reg FD like we did this quarter to until that everyone gets the same information at the same time and we do appreciate your understanding and adherence to this policy.

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 alone holds such rights. While we understand that 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 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 or 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 of these terms.

This presentation may include forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about top line growth in the global automotive industry, the economy, the impact on stock option expenses on earnings, the ability to leverage fixed manufacturing overhead costs, unit shipment growth rates, and the company itself. Words like anticipate, believe, confident, estimate, expect, forecast, likely, plans, project, and should and variations of such words and similar expressions identify forward-looking statements.

These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, expense, likelihood and degree of occurrence, and actual result 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 I will turn the phone call over to Enoch Jen. And he’ll make his remarks regarding the quarter after Enoch makes his remark, we will open it up to Q&A. And as always we’ll request the queue ask single part questions and one at a time. Enoch.

Enoch Jen - Senior Vice President

Good morning. For the third quarter revenues were $153.1 million compared to $162.5 million, reported in the third quarter of 2007 and a 6% decrease. For the first nine months, revenues were $501.5 million a 4% increase over $483.2 million reported for the first nine months of 2007.

Operating income for the third quarter was $23.3 million compared to $34.6 million reported in the third quarter of 2007, a 33% decrease. For the first nine months, our operating income was $99 million compared to $105.1 million in the first nine months of 2007, a 6% decrease.

For the third quarter net income was $15.1 million compared to $29.8 million reported in the third quarter of 2007, a 49% decrease. For the first nine months net income was $72.5 million compared to $90.3 million in the first nine months of 2007, a 20% decrease.

Diluted earning per share for the third quarter was $0.11 compared to $0.21 reported in the third quarter of 2007. For the first nine months diluted earnings per share were $0.51 compared to $0.63 in the first nine months of 2007.

Looking next at automotive revenues and auto-dimming mirror unit shipments, total auto-dimming mirror unit shipments decreased by about 5% in the third quarter of 2008 compared with the third quarter of last year. Automotive revenues decreased by 6% from $156.5 million in the third quarter of 2007 to $147.3 million in the third quarter of 2008.

Total auto-dimming mirror unit shipments increased by 2% in the first nine months of 2008 compared with the first nine months of 2007. For the first nine months of 2008 automotive revenues increased by 4% to $484.2 million compared with $464.8 million for the first nine months of 2007.

The UAW strikes earlier in the year negatively impacted automotive revenues in the first two quarters of 2008 by approximately $8.3 million.

General Motors Worldwide represented 19% of total company revenues for calendar year 2007. For 2008 year-to-date GM Worldwide represented approximately 13% of total company revenues.

Auto-dimming mirror unit shipments in North America decreased by 27% in the third quarter of 2008 compared with the same period in 2007 primarily as a result of significantly lower light vehicle production. North American light vehicle production decreased by 16% in the third quarter of 2008 compared with the same prior year period.

GMT900 light vehicle production was down 45% in the third quarter of 2008 compared to the same period in 2007 and those vehicles utilized an interior and an exterior mirror on each vehicle. In addition other automakers announced extended pick up an SUV plant closings during the quarter resulting in total light truck/SUV production in North America being down by 32% in the third quarter of 2008.

Auto-dimming mirror unit shipments in North America decreased by 13% in the first nine months of 2008 compared with the same period in 2007. North American light vehicle production declined by 13% in the first nine months of 2008 compared with the same prior year period.

GMT900 light vehicle production was down 42% and total light truck/SUV production was down 21% for the first nine months of 2008 compared to the same period in 2007.

Auto-dimming mirror unit shipments to offshore customers increased by 13% in the third quarter of 2008 compared with the same period last year. The increase in unit shipments was primarily due to higher penetration of interior auto-dimming mirrors at certain European and Asian customers. Light vehicle production in Europe decreased by 1% in the third quarter and increased by 1% in Japan and Korea in the third quarter of 2008 compared with the same period last year. Auto-dimming mirror unit shipments to offshore customers increased by 14% in the first nine months of 2008 compared with the same period last year. Light vehicle production in Europe increased by 3% for the first nine months of 2008 compared with the same period last year. Light vehicle production in Japan and Korea, also increased by 3% for the first nine months of 2008 compared with the same prior year period.

Looking next at average selling price per auto-dimming mirror unit, the ASP was $41.23 for the third quarter of 2008. The ASP decreased from $41.60 in the second quarter of 2008 to $41.23 in the third quarter of 2008 primarily due to the mix of increased base featured mirrors. Based on our current forecast, we would expect the ASP in the fourth quarter to be approximately $41 depending upon the exact product mix.

The ASP decreased on a year-over-year basis from the third quarter of 2007 when it was $42.24 to $41.23 in the third quarter of 2008, primarily due to higher annual customer price reductions partially offset by the mix of more base featured mirrors. Third quarter 2008 and calendar year 2008 ASPs exclude non auto-dimming mirrors and microphone units and this is how we will be reporting ASPs going forward.

Fire protection revenues decreased by 7% to $5.6 million for the third quarter of 2008 compared with the same period last year. Fire Protection revenues decreased by 7% to $17.1 million for the first nine months of 2008 compared with the same period last year. The decreased revenues during both periods was due to the weak commercial construction markets.

Next looking at gross profit margin, the gross profit margin of 30.5% in the third quarter of 2008 declined sequentially from 34.7% in the second quarter of 2008 primarily due to the company’s inability to leverage its fixed manufacturing overhead costs because of negative top line growth and any production inefficiencies as a result of last minute customer order reductions the balance of the decline was due to the declining benefits of foreign exchange rates.

The gross margin declined on a year-over-year basis from 35.1% in the third quarter of 2007 to 30.5% in the current quarter primarily due to decreased top line revenues resulting in the company’s inability to leverage its fixed overhead cost, annual customer price reductions and production inefficiencies as a result of last minute customer order reductions which were partially offset by purchasing cost reductions. Each negative and positive factor is estimated to have impacted gross profit margin by approximately one to two percentage point.

We currently expect our gross margin in the fourth quarter to be approximately 29% depending upon top line growth, purchasing cost reductions and the debt of the global wide vehicle production cuts. Gross profit margin will continue to be impacted by annual customer price reductions, uncertain global automotive production levels, our ability to leverage our fixed overhead costs, purchasing cost reductions, VAVE initiatives and manufacturing yields.

Next looking at engineering research and development expense, ER&D expense decreased by 1% in the third quarter of 2008 compared with the same 2007 period. Expense related to the Muth litigation which was settled on February 15, 2008 was $1.6 million in the third quarter of 2007. Excluding the Muth litigation expense, ER&D expense would have increased by approximately 12% in the third quarter of 2008 compared with the same prior-year period. The increased expense was primarily due to additional staffing and engineering for new product development and new vehicle programs such as RCV and smart beam.

ER&D expense increased by 3% in the first nine months of 2008 compared with the same 2007 period excluding Muth patent litigation expense of approximately $104,000 and the litigation judgment expense accrual reversal of $335,000 for the first nine months of 2008 compared with patent litigation expense of $4.4 million for the same period in 2007. ER&D expense would have increased by approximately 18% for the first nine months of 2008 compared with the same period in 2007. Excluding the impact of the Muth litigation expense, ER&D expense is currently expected to increase by approximately 10% for the fourth quarter of 2008.

Selling, general and administrative expense increased by 13% in the third quarter of 2008 compared with the same prior-year period. The increase was primarily due to the continued expansion of the company’s overseas sales offices and foreign exchange rates. SG&A expense increased by 15% for the first nine months of 2008 compared with the same prior-year periods primarily due to the continued expansion of the company’s overseas sales offices and foreign exchange rates. We currently believe that SG&A expense will increase in the fourth quarter by approximately 10% to 15%. This increase is also primarily due to the continued expansion of our overseas offices and foreign exchange rate.

Next, looking at other income, total other income decreased by 106% in the third quarter of 2008 and declined by 66% for the first nine months of 2008 compared with the same prior-year periods primarily due to lower realized gains on the sale of equity investments due to current market conditions and lower interest income due to lower interest rate.

Looking at the detail of Total Other Income for the third quarter of 2008, Investment Income was $2,949,000. Other was a -$3,515,000 for a Total Other Expense of $566,000. For the first nine months of 2008, investment income was $10,250,000. Other Net was a negative $1,110,000 for a Total Other Income of $9,140,000.

In light of the current stock market environment, we currently expect other income to be minimal for the fourth quarter of 2008. This estimate assumes that realized losses on the sale of the equity investments are likely offset, investment income and the year-end mutual fund distribution for the minimal given the current market condition.

A few balance sheet item at September 30, 2008, accounts receivable was $70.9 million, inventories were $55.9 million, patents and other assets were $9 million, accounts payable were $30.5 million and accrued liabilities were $31.4 million.

Our tax rate was 33.3% in the third quarter of 2008 as compared with the statutory rate of 35%, primarily due to the domestic manufacturing deduction. Excluding stock option expensing we currently expect that the tax rate for 2008 will be approximately 33.25% based on current tax loss.

Our year-to-date cash flow from operations was $91 million, our capital expenditures for the third quarter of 2008 were $9.6 million, our depreciation expense for the third quarter in 2008 was $9.8 million. For calendar year 2008, our estimate for capital expenditures is now approximately $50 million. Depreciation expense for 2008 is now estimated at $36 million to $38 million.

An update on our share repurchase plan, during the third quarter of 2008, the company repurchased 2.5 million shares at a cost of approximately $39.7 million. The company has a share repurchase plan in place of authorization to repurchase up to 28 million shares of the company stock. To-date, including the prior share repurchases, the company has repurchased approximately 23.9 million shares leaving approximately 4.1 million shares authorized to repurchase under the plan.

On October 17, 2008, the company paid a quarterly cash dividend of $0.11 per share to shareholders of record of the common stock at the close of business on October 7. The ex-dividend date was October 3.

Next an update on SmartBeam, we continue to be pleased with the progress we’re making and the market acceptance for SmartBeam. The high-beam headlamp assist product that we introduced in the 2005 model year. We’re currently shipping SmartBeam for 18, 2008/2009 vehicle programs. Current customers include [Cavalac], BMW, Audi, and Opel/Vauxhall. During 2008, we expect to announce and start shipping SmartBeam mirrors to our first Asian customers. There are number of follow on programs for existing new customers scheduled for the 2009 calendar year. Based on our existing forecast, volumes and incremental sales dollars for SmartBeam will become more meaningful in the 2009 model year.

For the 2007 calendar year, we shipped approximately 305,000 SmartBeams. For the 2008 calendar year, we now expect to ship approximately 300,000 SmartBeam units. The reduction in our unit shipment guidance estimate for 2008 is due to lower vehicle production volumes and slower than expected ramp up on certain programs as automakers make adjustments and right size their production for lower sales volume.

Next an update on our Rear Camera Display. We currently have announced 18 OEM Rear Camera Display programs with Ford, Lincoln, Kia, GMC, Hyundai, Toyota, Chevrolet, Cadillac, Buick, and Saturn and four after market or accessory programs with Mazda, Gulf States Toyota, and Suzuki. There continues to be significant interest in Gentex’s RCD Mirrors, and we are working with a number of additional customers on original equipment programs that will be announced in 2008 and 2009. The company shipped approximately 65,000 RCD Mirrors in calendar year 2007, and we now estimate that we will ship approximately 250,000 RCD mirror units in calendar year 2008.

The reduction in our unit shipments estimate for 2008 is primarily due to lower vehicle production volumes and slower than expected ramp up on certain programs. Based on the current forecast, the company continues to believe that RCD Mirror unit shipments were more than doubled in calendar year 2009 compared with calendar year 2008.

The automakers currently offering a Rear Camera Display Product are doing this absent any legislation. And made their decision before any legislation was pending. The legislation that was signed into law on February 28, 2008, called the Kids Transportation Safety Act of 2007. Orders of Secretary of Transportation at the National Highway Traffic Safety Administration to revise the federal standard to expand the field of view so that the drivers can detect objects directly behind vehicles. The facing period, during which automakers will need to meet the requirement set for by NHTSA, is expected to be between now and 2016.

Next an update on dimmable windows, Boeing, currently expects that the first 787 Dreamliner planes will go into service in late 2009, due to the ongoing Boeing machine strikes we now anticipate that we will now, that we will began to deliver our windows to the aircraft production line in 2009.

On October 5, Gentex and PPG Aerospace announced that we also be shipping dimmable aircraft windows, for use on the passenger cabin windows of the 2010, each craft King Air 350i Aircraft. This is the first aircraft in general business aviation with dimmable windows, each King Air of 350i will have 15 windows and we expect to begin shipments sometime in calendar year of 2009. Other aircraft manufactures continue their interest in this technology, when we are working on those potential programs with PPG Aerospace.

Next some top line growth estimates, the following projections for top line growth are based on CSM’s and mid-October light vehicle production forecast. For the fourth quarter of 2008, our estimate for top line revenues is a decline of approximately 15% compared with the same period in 2007, based on the current forecast for light vehicle production levels, including customer plans for significant extended holiday plant shut down. However, due to the many uncertainties in the marketplace, we believe that there is potentially more downside than upside to global light vehicle production levels.

For the fourth quarter of 2008, light vehicle production per CSM for North America is 3 million vehicle units, a 19% decline compared to the fourth quarter of 2007. The forecast for Europe is 5 million vehicle units, and a 11% declined compared to the prior year fourth quarter. And the forecast is 3.8 million vehicle units for Japan and Korea, a 7% decrease compared to fourth quarter of 2007.

From the calendar year of 2008 light vehicle production, per CSM will be 12.9 million vehicle units for North America a 15% decline compared to the prior year. The forecast is 21.5 million vehicle units for Europe a 1% decrease compared to the prior year. And the forecast is 14.8 million units for Japan and Korea, which is flat compared to the prior year.

At this point this is the end of our prepare remarks. And I will turn the conference call back over to Connie.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications

Just as a quick reminder, all listeners should note that this call is being recorded by Gentex. All contents of Gentex Corporation’s conference calls is a property of Gentex. No such context may 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 maybe companies that transcribe and redistribute our conference calls not withstanding this warning, Gentex 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 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 point, we’ll open the call up for questions-and-answers. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Rich Kwas with Wachovia.

Richard Kwas

Hi good morning everyone.

Enoch Jen

Good morning Rich.

Connie Hamblin

Good morning.

Richard Kwas

Enoch, in terms of the guidance for the fourth quarter, it looks like in the third quarter you underperformed the market in North America, outperformed the market in Europe, should we assume that for the fourth quarter as well meaning that you are looking at 19% decline in overall production in North America shipment performance be worse than that in North America and then better in Europe and Asia?

Enoch Jen

I think we would expect that trend to continue, Rich. As we pointed out in our comments, as you and the other analysts are aware we have a lot of volumes tied to the pickup and SUV segment of the North American market. So, you are correct in that we’re underperforming the overall North American market, but our results are somewhere in between the overall market and the pickup in SUV segment and then we also expect to continue to outperform the production levels overseas.

Richard Kwas

And could you remind us on the mix between Europe and North America in terms of average selling price if there is a meaningful deviation from the overall average?

Enoch Jen

There is not a meaningful difference, the one-time when we first started selling into Europe virtually all the mirrors we were selling were base mirror sub assembly, but today we have featured mirrors in Europe and Japan, and Korea, as well as in North America.

Richard Kwas

Okay, great. Thanks so much.

Enoch Jen

Welcome.

Operator

And our next question comes from David Leiker with Robert Baird.

David Leiker

Good morning.

Enoch Jen

Good morning, David.

Connie Hamblin

Good morning.

David Leiker

Trying to figure out which question to ask. If you look at the expense side of the equation, the ER&D and SG&A, both of those you are talking about 15% to 20% growth in the second half of the year and historically you’ve made comments that you don’t move that revenue that you continue to invest for future business, yet you pulled that guidance down to roughly around 11% or 12% here in the second half of the year. Just talk through that a little bit that had change in philosophy of what you have done in the past?

Steve Dykman

No, if you look at the SG&A expenses one thing that has been impacting the growth is the foreign exchange rates and as the dollar strengthened the impact of that is somewhat diminished and we expect that to continue going forward. And within the SG&A expense line the growth continues to be with the overseas offices, and when you look at ER&D expenses for the third quarter if you exclude Muth that came in at 12%, we had a little slowing and higher entering the third quarter within the ER&D group but, we are not changing any of our strategies or approaches with respect to expense.

David Leiker

No, just talking about fourth quarter being 10% range?

Steve Dykman

Yes.

David Leiker

So, the second half of the year is up 11 in your guidance last quarter was 15 to 20%?

Steve Dykman

Correct.

David Leiker

And it’s a pretty meaningful drop. If that’s timing issue, or if that’s the conscious effort to pull back investment there?

Enoch Jen

Well, I think the other thing David in ER&D as I think announced earlier in the quarter Mark Newton assumed responsibilities for the electrical, engineering group and as part of that, there has been some reorganization of that department to align the department with our product development processes. So, I think like Steve mentioned the hiring did slowdown little bit due to some of that reorganization and determining you know, where everybody is fit in the new structure.

David Leiker

But on a longer term basis, what should we look for those two line items to grow by?

Steve Dykman

We would expect longer term that those expense lines would grow in the 10 to 15% range on a year-over-year basis.

David Leiker

Okay. Thank you.

Steve Dykman

Welcome.

Operator

And our next call comes from Brett Hoselton with KeyBanc.

Brett Hoselton

Good morning.

Enoch Jen

Good morning Brad.

Brett Hoselton

Now let’s see here. Okay this is a two part question but it’s really the same question. Can you give us a sense of what is your mix of investments at this point in time and has there been any material shift in that mix recently?

Enoch Jen

There has been no material shift in our investments. And if you just look at the breakdown on our balance sheet as of the end of September, long term investments were just under $107 million that continues to primarily be equity investments. Short term investments were just under $55 million and those are invested primarily in government securities as well as the few CDs and then cash and cash equivalents were just over $283 million and those are invested primarily in money market funds.

Brett Hoselton

Okay. Well actually that was the first part of the question so the second part is I am thinking about your share repurchase. It seems like a somewhat mechanical program, you talked about that in the past. If you go back to the second quarter of 2006, you repurchased about 7 million shares in one quarter at an average price of about $14.5. Obviously your share price is much lower than that, given the mechanical nature of your program, it looks like you have probably repurchased or I don’t see any reason why you wouldn’t repurchase a significant number of shares in the fourth quarter. However your authorization is currently at 4.1 million remaining. Is there any reason to believe that you won’t or Gentex won’t be increasing its authorization? Is there any reason to believe that at the current share price, you won’t be very gratified in repurchasing your shares?

Enoch Jen

Well I think, we do have established criteria for the plan but some of the factors we also take into account are the overall stock market conditions and the volatility. So given our criteria that we are more aggressive in repurchasing at lower prices, certainly I think it would be reasonable to expect that we would be continuing to look at that. I mean one of the other factors that affected our share repurchases in specific quarters has been the blackout periods and the share prices inside and outside of those blackout periods. The share repurchase plan is reviewed at every quarterly board meeting. Our next board meeting is scheduled for around the middle of November, so I am sure we will discuss that issue again.

Brett Hoselton

Great, thank you very much.

Enoch Jen

Yes, you are welcome.

Operator

And our next question comes from Alexander Paris with Barrington Research.

Alexander Paris

Good morning.

Enoch Jen

Good morning Alex.

Alexander Paris

Just to finishing upon the last question regarding your portfolio, could you give an idea the average return that you are getting under fixed income part of your business?

Steve Dykman

Well if you look at our money market funds which accounts for the bulk of that, I would say currently it’s an average around 3%.

Alexander Paris

Right and you didn’t get caught in any of the – there was one big refund the reserve fund that broke the buck. You were involved in that one at all?

Steve Dykman

We were not involved with that. We have been monitoring those accounts and funds very closely with respect to the underlying holdings in those funds.

Alexander Paris

My actual question was just a kind of a bigger picture. It seems to me on the economy and the market and the auto industry that there is - the really big drop happened very late in the quarter. Was that your experience in the last month of the quarter that was surprisingly weak relative to your expectations?

Steve Dykman

Well, I think there is a difference between sales and production and of course we see it from the production side in our 12 week customer order releases and what we saw on the second half of the quarter was every week customers were dropping orders out for the following week. So, there was very short notice of a lot of these order reductions or cancellations as the OEMs try to catch up with the declining sale.

Alexander Paris

I asked that because it just seems like an overall production numbers, it was such a sharp decline relative to July and August that there was a lot of talk that that was really the impact of the credit freeze up hitting auto financing and I was wondering is that a part of CSMs much sharper decline – forecasted decline in the fourth quarter?

Steve Dykman

Yeah, I think that’s only part of it. I don’t know, Alex if you saw an automotive news article that came out this week where GM was estimating that tighter credit lending conditions were costing them unit sales of 10 to 12,000 vehicles per month and that is just GM. So, definitely the credit crisis or environment has significantly impacted automotive sales as well.

Alexander Paris

And again the reason I asked that is, if there are increasing shines that the bailouts are starting to ease credit and if that continues could you see some positive surprises in the fourth quarter from – how much are you relying upon the CSM estimate more than usual, same as usual?

Steve Dykman

Same as usual. Again we try not to second guess GSM because then start confusing ourselves.

Alexander Paris

Okay. All right, thank you very much.

Steve Dykman

You’re welcome.

Operator

Our next question comes from John Murphy with Merrill Lynch.

John Murphy

Good morning.

Steve Dykman

Good morning John.

Enoch Jen

Good morning.

John Murphy

I am just wondering – when will we get these production cut to follow up on this and think about your ability to respond to the lower production schedules that we are probably going to see likely into next year and may be even further out. When you get the production cuts, what can you respond to or how can respond in a short run for us controlling and cutting costs in short-term and then may be we think the long-term how you might be able to restructure or change your strategy as we go forward, so short-term or long-term, how can you cut costs and may be restructure?

Enoch Jen

Okay, when the company looks at how quickly the production cuts have been announced and with this very short-term reductions we are looking at our manufacturing lines and making adjustments to them and match these production cuts. And a few things that we are looking at started is we have eliminated a third shift on certain production lines. We have historically used temporary contract workers that have filled and helped out in the production area in the lines that have had increased demands. We have eliminated the use of temporary contract employees near the end of the third quarter. And with many of our customers announcing extended plant shutdowns, we are planning for extended plant, holiday plan shutdown as well. So these are few things we are doing in the short-term on a variable cost standpoint. Obviously from a fixed overhead standpoint, it takes a little longer to adjust and react to these current environments.

Steve Dykman

I think longer term John, I mean we are still confident that we will resume growing both with the penetration of EC Mirrors as well as the features like RCD and SmartBeam. So, we may be deferring some further automation until such time as we see our growth resuming, we continue to look for ways to improve our manufacturing processes, improve the quality, and to improve the yield. And so, we are trying to take advantage of the slower time, to take a closer look at our manufacturing production lines and processes and make sure that when the growths are picking up again that we are well positioned.

John Murphy

So, structurally you think sort of two, three, four years out when hopefully the world settles downs and (inaudible) recover. That you pretty much look the same way you expected to look anyway, it’s just really the short term period where there might be sort of some delays and short term cut. Is that kind of the way to think about this?

Steve Dykman

Yes, I think we’re hoping that your two, three, four year estimate is overly pessimistic, but we wouldn’t care to bet against you.

John Murphy

I sure hope so.

Steve Dykman

Yes, you’re welcome.

Operator

[Operator Instructions]. Our next question comes from Greg Halter with Great Lakes Review.

Greg Halter

Good morning.

Enoch Jen

Good morning Greg.

Greg Halter

I noticed that your inventory levels I think are up about 17, 18% year-over-year. I just wanted to see if you could comment on that increase relative to the drop in the top line.

Steve Dykman

Okay. If you look at the inventory levels, the increase is primarily due to longer lead times and certain electronic components in conjunction with these last minute order released reductions we’re experiencing with our customers. So, the bulk of our inventory increase has been in the raw materials area.

Enoch Jen

So, I think the expectation is that over the next few months that will be brought back in line with production levels.

Greg Halter

Okay. And a similar question on the receivable side, I know they’re down about 6%. But just wonder if you could comment on the quality of your receivables at this point?

Steve Dykman

Well, we continue to monitor a number of our customers’ financial situation as well as the Tier-1s. We are looking at payments’ history and their behavior. And currently there is nothing of any significance as far as past due accounts. We are monitoring that in this trade environment.

Enoch Jen

And think it’s our DSO, our day sales outstanding is still around the mid 40 days. But like Steve mentioned it’s certainly our financial stresses in the system and there is certainly bankruptcy and other negative financial news about some of the OEMs and some of the Tier 1 mirror companies to which we ship our exterior mirror subassembly. So, we are well aware that there is a risk there. And this group is spending a lot of time in that area monitoring the situation.

Greg Halter

Have you increased your reserves at this point?

Steve Dykman

We historically had a year-over-year basis increase in our reserves but nothing material as far as increase in adjustments.

Greg Halter

Okay, thank you.

Operator

And our next question comes from Carrel Lawrence with BlackRock.

Carrel Lawrence

Hi. I’ve got a question, I just find to see if you could help me understand the -- I got the confidence that you have behind an assumption of long term top line growth of greater than 10%, I use that because I know that you guys have said in the past. You guys have had a negative leverage when it’s below 10%. And four of the last five years, you’ve been below 10%. And if I look at it even on a 10 year basis, kind of on a compounded annual growth of probably somewhere just over 11%. So, looking out five years or so, why is there confidence that we stay more times than not above 10%?

Enoch Jen

Okay, I think that’s a very good question. I think what we said is that we feel fairly confident that our organic top line growth rate can exceed 10% based on continued penetration of EC Mirrors and the introduction of new features like SmartBeam and RCD. We have also said that the net top line growth will clearly also be affected by overall global production levels and specific vehicle platforms that where we offer our EC Mirror. So you’re completely factually correct. I think if you look at our history whether it’s the last five years or a little longer. If you break out the impact of global production levels and the GMT900, 800/900 declines, those have partially offset our organic growth and then netting to this mid single digit top line growth over the past say four, five years. So I think we’ve always said that this greater than 10% is predicated on a neutral global production environment and specifically on the vehicle platforms that we are on.

Carrel Lawrence

Okay.

Operator

We will take a follow-up question from the David Leiker with Robert Baird.

David Leiker

Hi. Just one other item here to follow up on. When you look at -- you made a comment in the release that you have seen strong customer penetration, strong penetration of particular customers. Can you give us some perspective where you are seeing that strength in particular, I mean obviously one is going be forward at the margin but…?

Enoch Jen

Okay, we’re trying to find our comment.

Connie Hamblin

I am trying to figure out what you’re talking about David?

David Leiker

There was a comment in there.

Enoch Jen

It has to do with our overseas customers, David, right and we’re talking about our certain European and Asian customers.

David Leiker

Yeah, increased penetration and so you admire that certain that are coming European and Asian customer are primary factor. I mean can you give us some other color on that in terms of where you have seen that happen, were they more traditional Asian and European and those newer customers?

Enoch Jen

No, they are traditional European and Asian customers.

David Leiker

Okay. So to look at it in a different way, are you seeing any changes in penetration, I know it’s kind of hard to do, but at trim levels that was in the mix issue that you are seeing some changes, what customers aren’t ordering the mirror, they are ordering lower packages, near mirror on those vehicles. Do you have any way to have some insight into that?

Steve Dykman

Well, I think we have some insight, it’s pretty limited. I mean I think we would say primarily we are being impacted by vehicle production level. We are not seeing any significant impact from changes in take rates from customers ordering lower term level. And I think the other thing we have said overseas and especially in Europe is that our –for the same size vehicle, the vehicles in Europe tend a have offer more features then they historically have in North America.

David Leiker

Great. And then just one other item, you have given some insight, I know that this is something that is disclosed in your SEC filings. But how big are the losses running in the prior products business here that you are running the Boeing window program through there, right?

Enoch Jen

Yeah.

David Leiker

Is there any meaningful change there from what we have seen in the last breakeven, $100,000 loss or something like that in the last couple of quarters, was there any meaningful difference there?

Enoch Jen

No, there isn’t and actually in the segment disclosure within the 10-Q that other category the losses are lower than previous quarters.

Steve Dykman

And really the fire protection division is this profitable as it historically has been, it’s the direct and allocated losses to the dimmable window segment that’s basically offsetting the fire protection divisions profitability.

David Leiker

Right, okay. Perfect, thank you very much

Enoch Jen

You are welcome.

Connie Hamblin

We have time for one more question.

Operator

Okay. And our last question will come from Joe Hosler of OFI Institutional.

Joe Hosler

Hello.

Enoch Jen

Hi Joe.

Joe Hosler

I wanted to get an idea of how much revenue is dependent upon the large SUV segment?

Enoch Jen

Well, I think we have said historically that a significant portion of our North American revenue, which would include the Detroit 3 as well as the transplants was tied to the SUV and pickup segment. And we have said further that the majority of our business with GM is tied to the GMT900 platform.

Joe Hosler

Okay. So right now it’s running 13% as of to-date. What was it in the third quarter would you suspect?

Enoch Jen

It’s about the same. You are talking about GM global as a percentage of our total revenues.

Joe Hosler

Great.

Enoch Jen

Yeah.

Joe Hosler

So, we are getting closer to the end of SUVs driving your top line?

Enoch Jen

Yeah, I mean you can look out at that fortunately or unfortunately, the impact of the SUVs and pickup continues to decline as their volumes decline in North America and also as we increase our growth overseas.

Joe Hosler

Okay, thank you.

Enoch Jen

You’re welcome.

Connie Hamblin

At this time I would like to thank you everybody for listening to our call. If you have additional questions we will be here to answer your questions. Thank you. Have a good day, good bye.

Operator

And that does conclude our presentation. You may now disconnect.

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Source: Gentex Corporation Q3 2008 Earnings Call Transcript
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