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Executives

Connie Hamblin - VP of IR and Corporate Communications

Enoch Jen - SVP

Steve Dykman - CFO

Analysts

Steve Dyer - Craig-Hallum

John Murphy - Bank of America\Merrill Lynch

Adam Brooks - Sidoti & Company

Himanshu Patel - JPMorgan

Peter Nesvold - Jefferies & Co.

David Lynn - Wells Fargo Securities

David Leiker - Robert W. Baird

Greg Halter - Great Lakes Review

Brett Hoselton - KeyBanc Capital Markets

Gentex Corporation (GNTX) Q2 2011 Earnings Call July 21, 2011 10:30 AM ET

Operator

Good morning ladies and gentlemen. Welcome to the Gentex Announces Second Quarter 2011 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 and Corporate Communications. Please go ahead Ms. Hamblin.

Connie Hamblin

Thank you. Good morning everyone. Thanks for joining us on our second quarter conference call. On the call with me today are Enoch Jen, Gentex’s Senior Vice President and Steve Dykman, our Chief Financial Officer.

This call is being broadcast live on the internet via Gentex Corporation’s website and the auto playback for the conference call is also available on the website and will remain there. I am going to go through our routine statement with respect to Safe Harbor and then I will turn the call over to Enoch who will go through the quarter and then open it up to Q&A.

This call is being recorded by Gentex Corporation. All contents of Gentex Corporation’s conference call are the property of Gentex. No such content maybe copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the express written consent of Gentex Corporation. Gentex alone holds such rights.

While we understand that there maybe companies that transcribe and redistribute our conference calls and 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 or liable any party for any damages incurred by Gentex with respect to any such unauthorized views. 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.

Safe Harbor statement; this presentation includes forward-looking statements that are based on management's belief, assumptions, current expectation, estimates and projections about the global automotive industry, the economy, the ability to control and leverage fixed manufacturing overhead costs, unit shipment and that sales growth, the ability to control ER&D and SG&A expense both margins and the company itself.

Words like anticipate, believe, confident, estimate, expect, forecast, hope, likely, plan, projects, optimistic, issuance and variations of such words and similar expressions identify forward-looking statements. These statements do not guarantee future performance and involve certain risks and uncertainties and assumptions that are difficult to predict with regard to timing, expense, likelihood and degree of occurrence and actual results may differ materially from those in the forward-looking statements.

The company undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. We urge you to review the full Safe Harbor statement that is contained in the news release that is posted on our website. At this point, I'll turn the call over to Enoch and he will go through his remarks with respect to the quarter, and we'll open up the Q&A.

Enoch Jen

Good morning everyone, thanks for taking the time to join at this quarterly conference calls. We’re please to report a record second quarter financial results. Our record second quarter, net sales were $243 million, a 21% increase compared to net sales of $201.6 million in the second quarter of 2010. We reported record net sales of $493.9 million from the first six months of 2011, a 28% increase compared to net sales of $387.3 million in the first six months of 2010.

Record second quarter operating income was $53.2 million, a 9% increase compared with operating income of $48.8 million in the second quarter or 2010. Record operating income of $113.3 million for the first six month of 2011, a 21% increase compared with operating income of $93.4 million in the first six month of 2010. Record second quarter net income of $38.5 million, 30% increase compared with net income of $34.1 million in the second quarter of 2010. Record net income of $80.8 million for the first six months of 2011 a 21% increase, compared with net income of $66.5 million in the first six months of 2010.

Earning per diluted share were $0.27 in the second quarter of 2011 compared to $0.24 per share in the second quarter of 2010. Earnings per diluted share were $0.56 for the first six month of 2011 compared with $0.47 per share in the first six month of 2010.

Next, we’ll look at automotive net sales and automatic dimming mirror unit shipment. For the second quarter and the June 30, 2011 total auto-dimming mirror unit’s shipments increased by 22% in the second quarter of 2011 compared with the second quarter last year. Automotive net sales increased by 21% from $196.4 million in the second quarter of 2010 to $238.2 million in the second quarter of 2011.

Auto-dimming mirror unit shipments increased by 21% in North America in the second quarter of 2011, primary as a result of increased mirror unit shipments to domestic automakers.

North American light vehicle production increased by 1% in the second quarter of 2011 compared with the same prior year quarter. Auto-dimming mirror unit shipments to offshore customers increased by 22% in the second quarter of 2011 compared with the same quarter last year. The increase in unit shipments was primarily due to increased mirror unit shipments to certain European and Korean automakers. Light vehicle production in Europe increased by 4% in the Second Quarter of 2011 and decreased by 22% in Jan and Korea in the second quarter of 2011 compared with the same quarter last year.

For the first six months ended June 30, 2011, total auto-dimming mirror unit shipments increased by 28% compared with the first six months last year. Automotive net sales increased by 28% from $377.9 million in the first six months of 2010 to 484.5 million in the first six months of 2011.

Auto-dimming mirror unit shipments increased by 31% in North America in the first six months of 2011 compared with the first six months of 2010, primarily as a result of increased mirror unit shipments to the domestic automakers. North American light vehicle production increased by 8% in the first six months of 2011 compared with the same prior year period. Auto dimming mirror unit shipments to offshore customers increased by 26% in the first six months of 2011 compared with the same period last year.

The increase in unit shipments was primarily due to increased mirror unit shipments to certain European automakers. Light vehicle production in Europe increased by 8% in the first six months of 2011 and decreased by 19% in Japan and Korea in the first six months of 2011 compared with the same period last year.

Other net sales decreased by 7% to $4.8 million for the second quarter of 2011 compared with the same quarter last due to a 37% decrease in the dimmable aircraft window net sales, partially offset by a 2% increase in fire protection as sales. Other net sales increased by 1% to $9.5 million for the first six months of 2011 compared with the same period due to 3% increase in fire protection net sales mostly offset by a 9% decrease in dimmable aircraft window net sales.

The increase in fire protection of sales for both the second quarter and the first six months of 2011 was primarily due to the continued slight improvement in the commercial construction market. The decrease in dimmable aircraft window net sales for both the second quarter and first six months of 2011 was primarily due to continued delays affecting the production and delivery of the Boeing 787, Dreamliner series of aircraft.

Next, we will review the impact of the Japan earthquake and tsunami on net sales and the supply chain constraints. The total impact on net sales of the March 11, 2011 earthquake and tsunami in Japan on the first six months of 2011 was approximately $20 million including $17 million in the second quarter of 2011. Based on IHS Automotive’s July 2011 forecast for automotive light vehicle production and our customers releases we do not currently expect that there will be any continuing negative impact on the company’s net sales due to the March 11th earthquake and tsunami in Japan.

Due in part to the fast ramp up in automotive light vehicle production in the second half of 2010, and the continuation into the first half of 2011, the company continue to experience increased costs associated with supply chain constraints on certain automotive grade electronic components. Although availability of certain automotive grade components remain tight the company did experienced continued sequential improvement in this area during both the first and second quarters of 2011.

Unfortunately, the March 11, 2011 earthquake and tsunami in Japan resulted in the company experiencing additional increased cost associated with supply chain constraints on certain automotive grade electronic components during the second quarter of 2011.

While the company was successful in securing additional quantities of constrained parts during the second quarter to meet anticipated customer demand, the additional secured parts purchased during the second quarter did come at a higher cost due to changes in purchasing channel.

The company currently believes that it will experience some sequential reduction in the supply chain related cost during the third quarter of 2011. However, the current environment is constantly changing and it is not known what the ultimate effect will be on the supply chain, global-wide vehicle production, the automotive industry or the company in the second half of the 2011 calendar year.

Based on the IHS 2011 forecast for light vehicle production levels and the company’s anticipated product mix, we currently believe that the company has secured an adequate supply of parts for the third quarter of 2011.

All projections made on this call are based upon the following IHS assumptions regarding Japan. First, virtually all OEMs are now back to running full production volumes with certain Japanese automakers still lagging in some regions.

Second, total lost industry production volume was approximately 2.7 million vehicle units through the end of June. Third, the build back of lost production volume will begin early summer 2011 and extend into 2012 with varying levels of replacement depending on the OEM.

The current assumption is that 20% of the lost volume will be recovered in 2011, but the remainder of the lost volume that will be recovered to occur in 2012. It is also assumed that 23% of the Japanese automakers lost volume will not be recovered. The average selling price per auto dimming mirror unit was $46.03 during the second quarter of 2011. The ASP of auto dimming rearview mirrors was up sequentially to $46.03 in the second quarter of 2011 compared with $44.83 in the fiscal quarter of 2011, primarily due to a higher product mix in mirrors with advanced electronic features that more than offset annual customer price reductions.

The ASP slightly decreased on a year-over-year basis to $46.03 compared to $46.40 in the second quarter of 2010 primarily due to a higher product mix of base mirrors and annual customer price reductions.

Based on HIS’ July 2011 light vehicle production forecast, we expect the third quarter 2011 ASP to slightly increase based on the anticipated product mix of base and 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 decreased on a sequential basis from 36% in the first quarter of 2011 to 35.2% in the second quarter of 2011 primarily due to supply chain related cost as a result of earthquake and tsunami in Japan on March 11, 2011.

The gross profit margin decreased on a year-over-year basis from 36.7% in the second quarter of 2010 to 35.2% in the second quarter of 2011 primarily due to annual customer price reductions and cost associated with supply chain constraints on certain automotive grade electronic components.

The gross profit margin decreased to 35.6% for the first six months of 2011 compared with 36.8% for the first six months of 2010 primarily due to the impact of the annual automotive customer price reductions and cost associated with supply chain constraints on certain automotive grade electronic components partially offset by the company’s ability to leverage fixed overhead costs.

The company currently expects that its gross margins in the third quarter of 2011 will slightly increase sequentially due to some anticipated reductions in the supply chain related costs, partially offset by annual customer price reductions. The 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 and VAVE cost reductions, supply chain constraints and manufacturing yields.

Next we’ll look at engineering, research and development expense. ER&D expense increased by 33% in the second quarter of 2011 compared with the same 2010 period primarily due to additional hiring of employee and outside contract engineering and development services to support new product development projects and new program awards.

ER&D expense increased by 32% for the first six months of 2011 compared with the same 2010 period again primarily due to additionally hiring of employee and outside contract, engineer and development services to support new product development projects and new program awards. ER&D expense is expected to increase by approximately 25% to 30% for the third quarter of 2011 compared with the third quarter of 2010 primarily due to additional hiring of employee and outside contract, engineering and developments services.

Next we’ll look at selling, general and administrative expense. SG&A expense increased by 23% in the second quarter of 2011 compared with the same prior year period primarily due to continued overseas office hiring to support our overseas growth as well as foreign exchange rates.

SG&A expense increased by 20% for the first six months of 2011 compared with the same 2010 period again primarily due to the company’s overseas office expenses and foreign exchange rates. SG&A expense is currently expected to increase by approximately 15% to 20% from the third quarter of 2011 compared with the third quarter of 2010 primarily due to overseas office expenses.

A few numbers from our total other income; for the second quarter 2011 investment income of $598,000 and other net was $3,903,000 for a total of $4,501,000. For the first six months of 2011 investment income was $1,98,000, other net was $6,768,000 for a total of $7,866,000.

Total other income increased in the second quarter of 2011 compared with the second quarter of 2010 primarily due to realized gains on the sale of equity investments and changes in the foreign currency rate related to the company’s Euro denominated account.

Total other income increased in the first six months of 2011 compared with the first six months of 2010 primarily due to changes in the foreign currency rate related to the company’s Euro denominated account.

Next we will look at few balance sheet accounts at June 30, 2011. Accounts receivable were $111.9 million, inventories were $119.5 million, patents and other assets were $13 million, accounts payable were $63.3 million and accrued liabilities were $40.5 million.

The effective tax rate of 33% during the second quarter of 2011 varied from the statutory rate of 35% primarily due to the domestic manufacturing deductions. We currently expect that the tax rate for 2011 will be approximately 33% based on current tax laws primarily due to the domestic manufacturing deduction.

Our year-to-date cash flow from operations was $104.6 million, our capital expenditures for the second quarter of 2011 was $29.6 million and our depreciation expense for the second quarter of 2011 was $10.7 million. The company has historically expanded its plan capacity on a step-function basis every five to six years and light or strong customer demands for our auto-dimming mirror and the more complex product mix. We have been increasing our production line and facility capacity. Production lines for auto dimming mirrors with advanced electronic features such as rear camera display and smart beam are more complex and require additional equipment.

For calendar 2011, we now estimate that our 2011 capital expenditures will be approximately $100 million to $115 million, primarily due to increased production line equipment purchases of approximately $70 million to $80 million and new facility costs of approximately $30 million to $35 million to increased production plant capacity.

The appreciation expense for 2011 is now estimated at $41 million to $44 million. The new facility costs are intended to increase plant capacity and the electronic assembly, final assembly, rear camera display and exterior mirror manufacturing areas.

Next, looking at our cash dividends. Tomorrow on July 22nd , the company will pay a quarterly cash dividend of $0.12 per share to shareholders of record of the common stock at the close of business on July 8th. The company’s cash dividend policy was established based on a number of criteria including current US income tax laws, that the dividend rate 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.

Next, an update on SmartBeam. We continue to make progress with automakers as a more broadly offer SmartBeam across the product line. SmartBeam is the intelligent, high beam headlamp-assist product that we introduced in the 2005 model year and it is currently offered on 60 vehicle models, have 13 OEM customers including Audi, BMW, Chrysler, GM, Honda, Opel/Vauxhall, Peugeot Citroën, [inaudible] Fiat, Tata Motors, Land Rover, Toyota Lexus, Rolls Royce and Volkswagen.

For the 2010 calendar year, we shipped approximately 630,000 SmartBeam units based on the IHS July, 2011 forecast. We currently expect that SmartBeam units will now increase by approximately 60% to 70% in calendar year 2011.

Next, an update on rear camera display. Today, the RCD mirrors are offered on 63 vehicle models, with 9 automakers in the original equipment, including Daihatsu, Ford, General Motors, Honda Acura, Hyundai-Kia, Mitsubishi, Nissan, Subaru and Toyota Lexus. RCD mirrors are also currently offered as a dealer installed option or an after market product in over 20 additional vehicle models.

The company shipped approximately 1.25 million RCD mirrors in calendar year 2010. Regarding legislation, in early July 2011, the Department of Transportation or DOT posted an update on its website related to the timing of certain events associated with the Kids Transportation Safety Act and the pending requirement that all vehicles in the United States will be required to be equipped with cameras and rear camera displays by September 2014 based on the December 3, 2010 Notice of Proposed Rule Making issued by the National Highway Traffic Safety Administration.

The DOT stated that the final rule related to the legislation is scheduled to go to the Office of the Secretary of Transportation by August 8, 2011 and to the Office of Management and Budget by September 24. It further stated that the rule will receive clearance from the OMB by December 23 and that the publication date of the final rule will be by December 31, 2011.

We continue to believe that RCD mirrors will likely be implemented in three overlapping phases. First, the market driven phase which covers the time period prior to any legislation through NHTSA’s NPRM on December 7, 2010.

Second the wait-and-see phase, a period of time from when the legislation will sign it to law on February 28, 2008 until the final rule is issued which is currently expected by December 31, 2011 and third the implementation phase from the time the final rule is issued until September 2014 when a 100% of all vehicles in the US under 10,000 pounds will be required to be equipped with rear cameras and displays based on the December 7, 2010 NPRM issued by NHTSA.

We still believe that the market for camera displays in vehicles will be divided into two primary market segments, the top 15% to 20% of the vehicle model were primarily offered the display for rear camera in the navigation system of the option of purchasing an RCD mirror, the rest of the market is the most likely market area to offer the camera display in the mirror or in other multi-purposes displays in the vehicle, in a number of different locations including the radial instrument panel counsel etcetera. This is a segment of the market with the greatest volumes potential, but also has the greatest and increasing competition.

We’re in the early stages of the implementation phase of this regulation and many automakers are re-visiting any decision that may have been made prior to the December 7 NPRM. There continue to be many uncertainties surrounding the prospects for RCD mirror unit shipments, with that said, based on IHS Automotive July 2011 forecast, we now expect that RCD mirror unit shipments will increase by approximately 40% for calendar year 2011 compared with calendar year 2010.

Next, now is one more comment on the RCD, based on NHTSA’s December 7, 2010 NPRM, our customers continue to busily work to determine to find all they will need in this phase and schedule. And there are many decisions that have to be made.

We believe that this wait-and-see phase may cause a brief slowdown in the ramp up of RCD mirror unit shipments, until customers determine how they’re going to meet the requirements of this new regulations across all their vehicle lines and then implement those plans.

Next, an update on the dimmable aircraft window programs. We current are shipping dimmable windows for the 787 Dreamliner and each passenger aircraft has approximately 100 windows. Boeing has also expressed interest in utilizing dimmable windows for other of their aircraft. Our best information today is that the first shipment of the Boeing 787 Dreamliner aircraft is expected later this year.

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 and business aviation was dimmable windows. Each King Air 350i has 15 windows, other aircraft manufacturers continue to express interest in this technology and we are working on these potential programs with PPG Aerospace.

Next, we’ll look at our net sales estimates. The following projection for net sales in the third quarter of 2011 is based on IHS’s July 2011 light vehicle production forecast.

Please note that any forward-looking information discussed on this call is predicated on IHS’s assumption for Japan that were stated earlier in this call and also our reference in our new release. Our estimate for net sales for the third quarter of 2011 is an increase of approximately 25 to 30% compared with the same quarter in 2010 based on IHS’s July 2011 forecast for light vehicle production levels.

For the third quarter of 2011, light vehicle production for IHS is 3.2 million vehicle units for North America, a 6% increase compared to the third quarter of 2010, 4.4 million vehicle units for Europe, a 4% increase compared to the third quarter of 2010 and 3.2 million units for Japan and Korea, a 2% decreased compared to the third quarter of 2010.

For the calendar year 2011, light vehicle production forecast per IHS is 13 million vehicle units for North America, a 9% increase compared to calendar year 2010, 20 million vehicle units for Europe, a 6% increase compared to calendar year 2010, and 11.9 million vehicle units for Japan and Korea, a 9% decrease compared to calendar year 2010. At this time I will turn the conference call back over to Connie.

Connie Hamblin

As a reminder all listeners should know that this call is being recorded by Gentex Corporation. All contents of Gentex Corporation’s conference call is the property of Gentex Corp. No such content may be copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the expressed written consent of Gentex Corporation. Gentex Corporation alone holds such rights.

While we understand that there may be companies that transcribe and redistribute our conference call, notwithstanding this morning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of the content. We advise that you should not rely on the content of any unauthorized transcripts as Gentex Corporation will not be held liable for the content of any such transcript.

Gentex Corporation will hold responsible or liable any party for any damages incurred by Gentex Corporation with respect to any such unauthorized use. Your participation implies consent our taping and to the foregoing terms. Please drop off the line if you do not agree with these terms. At this time we are going to open it up for Q&A and as usual we do request that you ask single part question and one at a time. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator’s Instructions) We will take our first question from Steve Dyer from Craig-Hallum.

Steve Dyer - Craig-Hallum

Thank you good morning everybody.

Enoch Jen

Good morning, Steve.

Steve Dyer - Craig-Hallum

Couple of quick things I missed, Enoch your guidance for ER&D expense increasing in Q3. Could you go with that again?

Enoch Jen

An increase of 25% and 30%.

Steve Dyer - Craig-Hallum

Got you. Is that the sort of level you would expect going forward or are the increasing?

Enoch Jen

We previously have tied that we expect that ER& D expenses would grow a little higher with rates than the historical trend of 10% to 15% primarily due to the increased program development projects that we have [gullied] on. So on a sequential basis, based on that guidance the expenses will be up approximately 5% from the second quarter.

Steve Dyer - Craig-Hallum

Okay and then the CAPEX I mean the pretty material jump, were you guys caught off-guard with that or is it just demand for some of the new features is just that kind of seem like big jump quarter-over-quarter.

Enoch Jen

Well it continues to be increased demand but one thing to keep in mind, the new piece in CAPEX guidance would be anticipated new facility plant capacity expansions and so we currently carrying our evaluation process of that and expect to finalize that by the end of the third quarter and I guess started after that.

Steve Dyer - Craig-Hallum

Okay and really quickly, I am already two over them or one over my limit, but just with the gas price increasing as they are and you see a shift from trucks to cars and at least smaller car anyway. Does that impact you in any meaningful way? How do you look at that or is it pretty much a wash?

Steve Dykman

I think for us it’s pretty much a wash. I mean, I think, overall light truck sales have been fairly strong. I think there has been some discussion about some weakness in the GM pickup sales. When we look at the alternative vehicles that consumers typically buy instead of light trucks, it has to be near luxury and mid-sized passenger cars and we tend to offer very similar proportion of auto dimmable mirrors and features on those vehicles also. But we don’t expect any significant impact.

Steve Dyer - Craig-Hallum

Okay. Thanks, I will hop back in the queue.

Operator

We will take our next question from John Murphy with Bank of American, Merrill Lynch.

John Murphy - Bank of America\Merrill Lynch

Good morning guys. Just one follow-up on the CapEx here because I mean it’s a pretty sizeable number relative to what you’ve been talking about before and what’s your expectations. I mean, it almost looks like looking back at some of your past expansion; this is the equivalent of almost two plans.

I mean I am just trying to understand how much capacity you are really adding and that would be, it looks like its a very big add and so secondly on that, I mean there is typically been some pressure on margins when you add capacity because the Cap used takes time to ramp, that’s utilization takes time to ramp up and I was just wondering how we should be thinking about margin progression as you are adding this capacity?

Steve Dykman

So the increase in the CapEx to two anticipated new facility cost, that really would be the equivalent of one new facility if you look back to the ’06 facility we added. I think that when we added the facility in 2006, we had talked about initially that would have a negative impact on margins of roughly 0.5% so it’s not that significant but we also are working off a larger base when you look at the CapEx numbers as well.

Enoch Jen

And I think the one other thing John is the additional facility CapEx that we are expecting for this year will be expected to be spread over a number of projects, so we are not constructing one single large facility as we did previously and so we would expect less of a negative impact on our gross margins.

Connie Hamblin

And I think that if the Board do look at the comps, last quarter when we gave our guidance for CapEx it was $60 million to $70 million and that was primarily for the production line equipment purchases. Now that's moved to $70 million to $80 million. So that moved up by $10 million approximately and then you've got the new facility component that wasn't any other.

John Murphy - Bank of America\Merrill Lynch

You talked about $40 million for the new facility add roughly?

Connie Hamblin

$30 million to $35 million.

Steve Dykman

$30 million to $35 million

John Murphy - Bank of America\Merrill Lynch

$30 million to $35 million, okay, got you. And then just one follow-up question, I apologize on the gross margin here, I mean I was also just trying to understand the components, I understand the supply chain disruption and some lack of or shortage I should say of electronic parts and you know the volume hit and stuff like that. But just really trying to understand as we go forward in RCDs become a bigger component in the revenue stream and some marketing does as well, how we should think about the margins on those products versus the mirrors and are they coming in at lower margins?

Steve Dykman

Well, what we said with respect to rear camera display and smart beam to date their margins are slightly above the corporate average. So as that becomes a bigger piece that should help margins incrementally, but we do have annual customer price reductions as well.

John Murphy - Bank of America\Merrill Lynch

Okay, great. Thank you very much.

Operator

We’ll hear next from Adam Brooks with Sidoti & Company.

Adam Brooks - Sidoti & Company

Yes, good morning.

Enoch Jen

Good morning Adam.

Adam Brooks - Sidoti & Company

Just a few quick questions. One, on SG&A, it seemed you’ve had a few quarters in a row now you’ve run ahead of the high-end of expectations. Can you may be give a little bit of color as to what’s driving that?

Steve Dykman

Yeah, one thing in the second quarter to keep in mind is of the 23% increase on a year-over-year basis approximately 5 percentage points of that increase related to foreign exchange rate. So absent foreign exchange it’s been somewhat light over the last few quarters when you look at increases year-over-year.

And the drive-in those factors within that increase like Enoch had mentioned earlier our overseas office expenses and that’s primarily driven by hiring and travel related expenses as we continue to add resources with those offices and regions that where our business is really growing.

Adam Brooks - Sidoti & Company

Sure. And one more quick one if I may sneak in here. As far as driver-assist you just may be can you provide us an update with may be when you would announce the first platform and may be any increase competition you're seeing and kind of what’s your thoughts are over the next 12 to 24 months thus far as the driver-assist program?

Connie Hamblin

I mean we’re basically still on the same track for announcing somewhere in the next 12 to 15, 18 months. We would expect to announce the new features as well as a program with the consumer that we’re shipping for it. In terms of competition, the competition continues to be what it was. We don’t see anything increasing, but there certainly is more competition in that area of our business.

Adam Brooks - Sidoti & Company

Alright. Thank you.

Connie Hamblin

Yeah.

Operator

We’ll take our next question from Himanshu Patel with JPMorgan.

Himanshu Patel - JPMorgan

Hi, good morning guys.

Enoch Jen

Good morning Himanshu.

Connie Hamblin

Good morning.

Himanshu Patel - JPMorgan

A couple of questions Connie, just on the drivers and features, are you guys, I think there is one of this pretty complex collision avoided systems on one of the Volvo’s, are you guys like a Tier II supplier on any of these future systems or would you be kind of Tier I on that?

Connie Hamblin

No. We would be the Tier I in providing the camera-based systems.

Himanshu Patel - JPMorgan

Okay. And then if I could go back to RCD, you know at least externally we’ve been hearing more about competitors than the reconfigurable instrument panels display area to talk about, you know that product being you know more readily available and you know potentially a competitor due to you guys on the RCD. First of all, have you guys sense that there has been any increase in the number of participants in the reconfigurable IT space? And number two specifically does that products face the same response time disadvantages relative to your RCD product that I believe you guys have ventured infotainment systems?

Connie Hamblin

Yeah, most anything that’s located in the dash there is a right time just because I mean they have to boot out -- the systems have to boot out. We haven’t seen anything new or any new entrance in that area, I mean and again that’s a competitive area of our business as well but we haven’t see anything new in that area.

Himanshu Patel - JPMorgan

Okay. And then lastly, can you just remind us approximately the T900 revenue mix for Gentex where that stands today?

Connie Hamblin

Significantly lower than what it used to be, given that the number of vehicles that they are producing are significantly lower. I don’t know that we have actually calculated what the mix is recently.

Enoch Jen

No. I think several years ago at one time the T 900 was clearly the dominant portion of our business with GM and as Coney has pointed out that had significantly decreased with their reduced production as well as our increased take rates with other GM vehicle as well as with the RCD mirrors. So it still is a meaningful portion, but not near as dominant share as it formally was.

Himanshu Patel - JPMorgan

Okay. Last and somewhat related question, inside of your North American unit volume number, can you help us breakdown domestic versus transplant mix?

Enoch Jen

Yeah. I think what we said was that the primary driver of our growth in unit shipments in North America are the domestics. Certainly some of the transplants particularly the Japanese ones were hampered by some of the March 11 events.

Himanshu Patel - JPMorgan

But just you know, if.

Connie Hamblin

Are you talking about on an ongoing basis?

Himanshu Patel - JPMorgan

Yeah. Is it sort of a 50-50?.

Connie Hamblin

We typically only do that calculation once a year in terms of determining, we do it at the end of year in terms of determining the amount that transplants.

Steve Dykman

And just gave that idea now to transplant for the calendar year 2010 where we are about 15%.

Himanshu Patel - JPMorgan

Of global revenues.

Steve Dykman

Of the auto dimming unit shipment.

Operator

Okay. Your next question from Peter Nesvold with Jefferies & Co.

Peter Nesvold - Jefferies & Co.

Admittedly a little bit backward looking, but I guess I am curious on Japan’s supply chain items. I think the universal view coming on the first quarter earnings reports from all the public companies was that everyone will be able to scale down very quickly without any friction cost related to Japan and then scale back up and now it seems, like if you see that three reports in last two days where the revenue hit weren’t as big as anticipated, but it will have some of the supply chain related costs equated and anticipated. And I was curious if you could add any kind of perspective about what led to perhaps cost being a little bit more elevated to accommodate the Japanese situation?

Enoch Jen

If you look at the anticipated impact of revenues and costs, our actual results were pretty much in line with what we had provided guidance for in April. So they may have certainly been other suppliers who had estimated something different, but ours were pretty much in line.

I think our supply chain related costs was slightly higher or at the higher end of the range that we provided because we did have some opportunity to secure access to some critical automotive grade electronic parts, that were already constrained and we decided to take advantage of that opportunity to ensure that we could meet all of our customer orders.

Operator

We will take our next question from David Lynn with Wells Fargo Securities.

David Lynn - Wells Fargo Securities

The question that I have is, is there any way that you can sort of box the gross profit or gross margin impact related to the Japanese OEMs?

Steve Dykman

We really don’t look at it in that way. I mean, we did, in the case that, the loss revenues associated with the Japan earthquake and Tsunami was about 17 million in the second quarter, which were primarily due to the Japanese automakers.

David Lynn - Wells Fargo Securities

Then on my follow-up question, again, related to the CapEx, obviously it looks like you are spending money for another plant. Can we get an idea on the volume or the capacity that’s going to go in to that particular plant? Is it going to some much of your current plants that you have?

Steve Dykman

Well, I think, one it’s not going to be one new facility. The number of different projects and since we are on our evaluation phase, those plants have not been totally finalized. So, specific capacity numbers we have finalized.

Operator

We will hear next from David Leiker from Robert W. Baird.

David Leiker - Robert W. Baird

So if we look at, just a follow-up on the Japan item, I mean, $17 million, that’s fair to just like a contribution margin and flow that through other, any tweaks or adjustments that you should do that would reflect the actions you might have taken to reduce the impact from that perspective?

Enoch Jen

That will give you the ball park impact.

David Leiker - Robert W. Baird

If I did my math right, that’s right around $0.03 a share.

Enoch Jen

I trust you on your math, David.

David Leiker - Robert W. Baird

Okay. And then a different item on RCD, I mean, you previously you gave guidance for the first half of up 50% and now for the first time you are giving full-year guidance of 40%. Two pieces of that, one, was your first half requirements and I know you don't like to talk this way, but I think its important in this context, did your first half come in above or below that 50%?

Enoch Jen

I think it was inline with our expectations and forecast.

David Leiker - Robert W. Baird

And then secondly, as we look at the full year guidance of 40% shipment is it as simple as saying 50 in the first half, 30 in the second half, and gets 40 before the full year or are there some adjustments there, other items you should be aware of in there?

Enoch Jen

No I think that is the ballpark and again I think this is inline with our discussion over the past number of quarters regarding the three phases.

David Leiker - Robert W. Baird

Right.

Enoch Jen

And that we are seeing the end of the market driven phase and because of the delay in the midst of ruling many automakers have delayed their decision since the legislation was signed into law at the beginning of 2008.

David Leiker - Robert W. Baird

Okay. Thank you very much.

Enoch Jen

You’re welcome.

Operator

We’ll hear next from Greg Halter from the Great Lakes Review.

Greg Halter - Great Lakes Review

Good morning.

Enoch Jen

Good morning Greg.

Greg Halter - Great Lakes Review

I wonder if you could delineate the foreign exchange impact to sales and your operating income in the quarter?

Steve Dykman

Okay, it wasn’t that significant in the second quarter the impact on revenues was just under 1%.

Greg Halter - Great Lakes Review

And anything on operating profit?

Steve Dykman

Well like I mentioned earlier, our SG&A expenses, foreign exchange rates accounted for about 5 percentage points of that 23% year-over-year increase.

Enoch Jen

And as we talked about before some of our purchase parts are tied to foreign currencies also, so we have somewhat of a natural offset with some of our cost of goods sold as well as some of the SG&A expenses.

Greg Halter - Great Lakes Review

Okay. And is there any way to gauge the customer price reductions if you will specifically for smart beam and RCD or is that all in for a mirror product?

Enoch Jen

Yeah, that’s part of the overall annual price reductions and what we’ve said is our expectations for 2011 and the actual for 2010 are in the range of 2% to 4%.

Greg Halter - Great Lakes Review

Okay. And one last, I know you have that facility that you bought I think three miles down the road or up the road or across the road. I’m just wondering how that is performing if that’s up to speed at this point or just give us a status update?

Enoch Jen

Yeah, we’re running production in that facility in the middle of the first quarter, so we have moved production lines and people into that facility and that facility is expected to be full and operational by the end of the summer.

Greg Halter - Great Lakes Review

And any kind of issues at this point?

Enoch Jen

No.

Greg Halter - Great Lakes Review

All right, great. Thank you.

Operator

Next, we’ll hear from Brett Hoselton from KeyBanc.

Brett Hoselton - KeyBanc Capital Markets

Good morning Enoch, Steve and Connie.

Enoch Jen

Good morning Brett.

Connie Hamblin

Good morning Brett.

Steve Dykman

Good morning Brett.

Brett Hoselton - KeyBanc Capital Markets

RCD, I was hoping that you could talk a little bit about the automakers and their perception towards the adoption of your product versus some of your competitor’s products. What are they thinking today versus you know what you saw let’s say six months ago or a year ago, are they in your opinion more or less favorable towards the adoption of one product versus another and why?

Enoch Jen

Well, I think a number of the auto makers had established a primarily strategy involving the locations within the vehicle and the direction they want it with the NHTSA ruling in the last December, some of them had to reevaluate their strategy and I think especially with the response time requirement and the brightness of requirement, some of the locations are challenged to determined how to meet those requirements without significant additional cost.

So I think the overwriting objective for most automakers is to meet the new safety standard at the least cost to them because they do -- they expect that everyone will have -- will be required to provide it, but there is not an incentive to do anything other than the least cost for the base dilutions.

Brett Hoselton - KeyBanc Capital Markets

Okay. And as you think about obviously that appears to me most favorable to your product. So as you think about let’s say slowdown in terms of shipment into the back half of the year. How do you think we got to think about 2012, 2013 in terms of the shipments, would you expect them to kind of reaccelerate back into the first half of 2012 or is it going to be maybe a further push out into the back half of 2012 or even in 2013?

Enoch Jen

It’s really going to be affected by several factors that are not within our control. The first is the timing of the final NHTSA ruling.

The second is their decision, whether they are going to hold to the September 2014 due date or whether they will allow an extension, and the third will be exactly or whether they make any changes to the response time and brightness requirements, and the fourth is with these, if they don’t change these requirements, will they allow any relaxation on an interim basis.

So there is probably three or four factors that really we and you will have to monitor because those will drive the automaker’s decision and the speed in which they make those decision.

Brett Hoselton - KeyBanc Capital Markets

Does that suggest that we are going to have to wait until that December timeframe before the automakers can make a final decision and then they pick up the phone and then call you and say, hey, let’s do something on this or is there something that just kind of developed over the next six months?

Connie Hamblin

I mean they are going to wait to see what the final rule is. I mean, we continue to have conversations with all of our customers and I mean they are really starting to take deep dive into this to look at how this impacts all of their vehicles.

And you know, even if they, like for instance even if they have lamp systems in some of their vehicles, they still may need something to satisfy certain requirements on certain different trim levels or I mean so there is a very complex situation for all of our customers and they are going to wait until the ruling comes out, the final rule to see, based on all of those different things they need to talk about it. I mean, there are lot of different factors that can swing this one way or the other.

Brett Hoselton - KeyBank Capital Markets

So it sounds, at least to my kind, it sounds like the margin, it may be little bit more positive for you longer term, but in the short term for the next six months to a year we could see may be a little bit more of a low than might have been originally expected.

Connie Hamblin.

I think that we have continued to talk about the same thing that there would be this kind of wait and see period and I think we continue to be in it so.

Brett Hoselton - KeyBanc Capital Markets

Very good. Thank you very much, Connie.

Connie Hamblin.

Thanks.

Operator

At this time there are no further questions I will try to turn the call back to our speakers for any closing remarks.

Connie Hamblin.

Okay thanks everyone for participating in our second quarter conference call. Follow up with us if you have additional questions. Thank you.

Operator

This does conclude today’s conference call. Thank you for your participation. You may now disconnect.

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