Gentex Corporation (GNTX) Q1 2016 Results - Earnings Call Transcript

| About: Gentex Corporation (GNTX)

Gentex Corporation (NASDAQ:GNTX)

Q1 2016 Earnings Conference Call

April 22, 2016, 10:30 AM ET

Executives

Josh O'Berski - Investor Relations Manager

Steve Downing - Senior Vice President and Chief Financial Officer

Kevin Nash - Vice President and Chief Accounting Officer

Neil Boehm - Vice President of Engineering

Analysts

Christopher Van Horn - FBR Capital Markets & Co.

Richard Klass - Wells Fargo Securities LLC

Steven Dyer - Craig-Hallum Capital Group LLC.

Jason Rodgers - Great Lakes Review

Brett Hoselton - KeyBanc Capital Markets Inc.

Ryan Brinkman - J.P. Morgan & Co.

Aileen Smith - Bank of America Merrill Lynch

David Whiston - Morningstar Inc.

Operator

Good morning, ladies and gentlemen and welcome to the Gentex Reports First Quarter 2016 Financial Results Conference call. Today's conference is being recorded.

I would now like to turn the meeting over to Mr. Josh O'Berski with Gentex Investor Relations Manager. Please go ahead, sir.

Josh O'Berski

Thank you. Good morning and welcome to the Gentex Corporation first quarter 2016 earnings release conference call. I'm Josh O'Berski, Gentex Investor Relations Manager, I'm joined by Steve Downing, Senior Vice President and Chief Financial Officer; Kevin Nash, Vice President and Chief Accounting Officer; and Neil Boehm, Vice President of Engineering. This call is live on the Internet by way of an icon on the Gentex website at www.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 and 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's Safe Harbor statement included in the Gentex reports first quarter of 2016 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.

Now, I will turn the call over to Steve Downing who will give the first quarter 2016 financial summary.

Steve Downing

Thank you Josh. For the first quarter of 2016 the company is pleased to report net sales of $405.6 million, which was an increase of 10% compared to net sales of $368.9 million in the first quarter of 2015 on a 1% overall increase in automotive light vehicle production on a quarter-over-quarter basis in the company’s primary market.

The gross profit margin in the first quarter of 2016 was 39.1% compared with a gross profit margin of 38.8% in the first quarter of 2015. The primary drivers affecting gross profit margin on a quarter-over-quarter basis resulted in a net increase in the gross profit margin. Annual customer price reductions were more than offset by purchasing cost reductions and the company’s ability to leverage fixed overhead cost.

Operating income for the first quarter of 2016, increased 12% to $120.8 million when compared to operating income of $107.7 million for the first quarter of 2016. Other income decreased to a loss of $1.3 million in the first quarter of 2016 compared with other income of $0.7 million in the first quarter of 2015. Primarily due to realized losses on the sale of equity investment during the quarter.

Net income for the first quarter of 2016 increased 4% to $80.3 million compared with net income of $77.2 million in the first quarter of 2015. Net income was impacted by a reduction in other income of approximately $2 million on a quarter-over-quarter basis, the reduction in other income was a direct result of the underlying performance in equity markets.

In addition, the percentage increase in net income on a quarter-over-quarter basis was impacted by the fact that in the first quarter of 2015 the company realized incremental research and development tax credits of $3.9 million related to the completion of an audit of calendar years 2010 to 2012.

When comparing this quarter’s net income to last year’s net income, without the benefit of the 2015 tax adjustments, net income increase 10% on a quarter-over-quarter basis. Although prior period tax benefits and poor performance in equity markets had an impact in the first quarter of 2016, the company continuous to deliver sales growth through the operational lines of the income statement.

Earnings per dilutes share in the first quarter of 2016 increased 8% to $0.28 compared with earnings per diluted share of $0.26 in the first quarter of 2015. As previously stated, EPS was positively impacted by one penny during the first quarter of 2015 by the aforementioned prior period tax benefits. When comparing this quarters EPS to last year’s EPS without the benefit of those tax adjustments, EPS increased 12% on a quarter-over-quarter basis.

During the first quarter of 2016, the company repurchased 3.1 million share of its common stock at an average price of $14.27 per share. As of March 31, 2016 the company has approximately 6.4 million shares remaining available for repurchase in the plan including the most recent share authorization of five million shares in February 2016. The company intends to continue to repurchase additional shares of its common stock in the future depending on macroeconomic issues, market terms and other factors that the company deems appropriate.

During the first quarter of 2016, the company paid out $15 million on its revolver loan in addition to its normally scheduled principal repayment on the company’s term loan. The company may at its discretion pay additional principal towards its term or revolver loan in the future depending upon macroeconomic trends, capital expenditure spending, cash and money market interest rate, the non-available free cash flow and other factors that it deems appropriate for timing and amount of incremental debt repayment.

I will now turn the call over to Kevin with some first quarter 2016 financial details.

Kevin Nash

Thanks Steve. Automotive net sales in the first quarter of 2016 were $394 million, an increase of 9% compared with automotive net sales of $360.6 million in the first quarter of 2015 primarily due to an 11% increase in auto-dimming mirror unit shipments quarter-over-quarter. Other net sales in the first quarter of 2016 were $11.6 million, an increase of 39% compared with $8.3 million in the first quarter of 2015 due to a 42% increase in dimmable aircraft window shipments and a 36% increase in fire protection products.

Both year-end and SG&A expenses increased 7% for the first quarter 2016 to $23.1 million and $14.8 million respectively. The tax rate during the first quarter of 2016 was 32.9%, which varied from a statutory rate of 35% primarily due to the domestic manufacturing deduction. Based on the company’s forecast and current legislation, the company continues to expect its tax rate to be approximately 31.5% to 42.5% for calendar year 2016.

Now, look at balance sheet items. The following balance sheet items represent a comparison versus year-end 2015 also included in today’s press release. Cash and cash equivalents was $626.5 million an increase of $74.9 million up from $551.6 million at year-end primarily due to cash flow from operations. Accounts receivables was $224 billion up from a $196 million primarily due to the timing of sales.

Inventories were $188.6 million, up from a $174.7 million primarily due to increases in raw materials to support increased production in sales. Long-term investments were $71.1 million, down from $95.2 million primarily due to sales of equity investments that were not reinvested. Accounts payable was $79.4 million, an increase from $66.4 million primarily due to increased inventory purchases and capital expenditures. Accrued liabilities were up $115.9 million up from $64.7 million primarily due to increases in accrued income taxes and accrued wages.

Some cash flow highlights. Cash flow from operations for the first quarter of 2016 increased to $146.4 million from $108 million in the first quarter of 2015 primarily due to increases in net income and changes in working capital. Capital expenditures for the first quarter of 2016 were $20.3 million compared with $15. 2 million in the first quarter of last year.

Based on the estimated completion dates for the company’s current and planned capital expenditure projects, the company is maintaining its capital expenditure guidance range from $115 million to $130 million for calendar year 2016. Depreciation & amortization expense for the first quarter was $22.8 million compared to $21.3 million in the first quarter of last year and the company also continued to estimate that depreciation and amortization expense for the calendar year will be between $90 and $100 million.

Now, I will turn it over to Neil for products and business development update.

Neil Boehm

Thank you Kevin. Over the last several quarters, we’ve been providing update about our Full Display Mirror product launches. During our last conference call, we discussed the momentum for the Full Display Mirror at CES. Since that time, the company continues to see a high level of interest in this product for most of its customer base.

This is a byproduct our normal sales in business development process. However, recently we’ve seen an increase in recognition received for this product in the industry. Over the last three months, the company has received one of General Motors’ Inaugural innovation award for the Full Display Mirror our seventh Automotive News PACE award and various other technology awards in nominations.

The Full Display Mirror is a continuation of the company’s longstanding ability to create innovative product that improve safety for driver and add value to the automotive OEMs product portfolio. This technology has the ability to be a game changer in the industry and for the company. During the first quarter of 2016, the company had 11 new nameplate launches of its inside and outside electrical car mirror and advanced electronic features.

This launch rate is consistent with the second half of 2015. The company continues to grow the number of applications of advanced features with approximately one half of revenue growth coming from added electronic content and improvements in styling and designing.

Now back to Steve for the remainder of the year guidance and closing remarks.

Steve Downing

Thanks Neil. Our guidance for calendar year 2016 is based on the mid-April 2016 IHS production forecast for the remainder of calendar year 2016. The current IHS production forecast for our major market is expected to be up 2% for calendar year 2016, but does not include any impact from the recent earthquakes in Japan. Based on the information received this week, IHS is predicting modest loss production in the second quarter for OEMs producing in Japan. However, the volume is expected to be made up by the end of the third quarter.

Based on the information we have received to-date, we continue to estimate that net sales for calendar year 2016 will be between $1.64 billion and $1.72 billion. The company currently expects little disruption or impact on its supply chain, ability to procure raw materials or cost of goods sold as it relates to the Japan earthquakes. Based on actual results for the first quarter currently forecasted in sales mix and product mix in addition to what is currently known about the Japan earthquake situation, the company continues to estimate that the gross profit margin will be between 38.5% and 39.5% for the calendar year.

Lastly, the company continues estimate that operating expenses will be between $152 million and $160 million for calendar year 2016.

And with that, we can now proceed to questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first quarter from Christopher Van Horn from FBR & Company.

Christopher Van Horn

Good morning guys and congrats on all the awards for Full Display. Just on that front, could you give us an update on pipeline and the timing, we know about the GM launches later this year as well as well as the CT6 already, but if you could give us an update on kind of the pipeline and the timing of possible additional awards around Full Display?

Steve Downing

Sure. So we will start with kind of the higher level view of the number of OEM, so like we talked about in the last conference call, there is a total of four OEMs who have given us firm awards now for the product. GM is obviously already launched and continues to roll that product out on vehicles.

The second OEM will launch at the end of this calendar year, probably the fall timing for this calendar year. The third and fourth OEMs I believe are both slated for 2017 SOPs. Beyond that we believe there would probably in the six-months I would estimate there would probably be another opportunity for another couple of OEMs that we believe have interest and that we would like to try to push for awards.

Christopher Van Horn

Got it. And then if heard you right, you said 11 new nameplate launches during the quarter and that was kind of on-track was what you did in the back half of 2015. Is that kind of a run rate that you guys are confident about heading into the back half of 2016 or do you see it going either up or down from there?

Kevin Nash

No. At this rate that looks like it will be consistent for the second half of 2016 as well.

Christopher Van Horn

Okay. Good. And then just finally, was it 38.5% to 39.5%. Could you just help us with some puts and take that gets us to each of those levels like what are kind of going into your factory in there?

Steve Downing

I think if you think about the leverage points, assuming we’re in the sales range, you get some operating leverage from the fixed overhead, we would expect some improvements in the purchase price variance or what we’re getting out of supply base, but we also have April 1 price concession that we have to give. So that’s the biggest factor that is unknown going in is our product mix. So we saw fairly good leverage in this quarter.

Kevin Nash

But typically the first half of the year is the hardest to achieve your margin and given what we put up in Q1, we feel pretty comfortable with the range that we’ve given there, we’re performing, the engine is kind of firing on all cylinders right now.

Christopher Van Horn

Great. Thanks for taking the questions.

Operator

Next, we will hear from Richard Klass from Wells Fargo Securities.

Richard Klass

Hi good morning everyone. Sort of wanted to follow-up with regards to the gross margin comment. So first quarter came in a bit better, you do have price downs that your referenced starting April 1. What is the cadence of those price downs, kind of first half of the year, is it more weighted to first quarter or second quarter typically speaking.

Kevin Nash

I believe it’s probably 70% to 80% of what we were in January 01, another 15% to 20% are in Q2 and then the remainder kind of trickle on throughout the year, but by the time we get through we’ve gotten through probably 85to 90% of them at least.

Steve Downing

Yes and then consistent with prior year’s, you start to see more leverage on the purchasing cost reductions starting in the second half.

Richard Klass

Okay. So then as you look at Q1, was there anything abnormal that helped the margin in the quarter or just trying to gauge how within the range, because you are slightly above the midpoint with price downs seemingly moderating going forward which suggest that again pending mix that is a potential for upside. But just wanted to get your thoughts on that.

Steve Downing

Yes, I think in 2015 we were leveraging fixed overhead but we were battling some of the variable cost of some of the launch cost and working a tonne of overtime on. So we started to work through some of that so you see the full leveraging your fixed base with the sales growth kind of flowing through in the first quarter.

Kevin Nash

Well and I think clearly to what you are asking about is the remainder of the year too as it relates to being in the middle of the guidance. So if you look at the big thing that helps us in Q1 was mix wasn’t more than high or very high but it was solid mix for us in terms of advanced feature versus base. So the big thing that could hurt you in that out part of the year, the only thing it really can affect us that we don’t have visibility into this product mix.

And so that mix changes from quarter-to-quarter you will see the margin move around as much as 50 basis points based on product mix, sometimes more depending on how [indiscernible] but we don’t see any of that happening throughout the rest of the year, I mean we would expect product mix to kind of continue with what happened in Q3, Q4 and then obviously in Q1.

Richard Klass

So on the mix is it more of an OEM comment or a vehicle comment in terms of light truck, pass car.

Steve Downing

It’s both, really if you look at - and if the business stays inside of an OEM and it just transitions between cars and trucks or SUVs typically it’s not a huge content change. However, as the mix changes from one OEM to another that can have an impact and then also just in general as OEMs try to address their maker whether the mix is towards fleet cars versus personal consumption or otherwise you can see mix changes based on that because the content does change quite a bit. It's Depending on what mix of vehicle the OEs are building.

Richard Klass

And then just a quick one Steve on the buyback so it’s pretty significant in terms of shares bought and the dollar commitment. So would you characterize that as opportunistic is this kind of a new run rate?

Steve Downing

Yes. It's a combination of the two. So really if you look of that prior run rate we've been discussing that's kind of our standard go into a quarter plan for repurchases. The incremental pick up that you see in Q1 is all based on the opportunistic side of that. You look at the price we are trading at inside the quarter that fell well below what we believe to be an acceptable price of the stock given our performance and so we just took advantage of that opportunity to pick up some additional shares at those prices.

Richard Klass

So the 25% to 30% is still a good base to use and then we have to gauge now the opportunity arises if you will?

Steve Downing

Exactly right.

Richard Klass

Okay. Thank you. I'll pass it on.

Operator

Next we'll move to Steven Dyer with Craig-Hallum.

Steven Dyer

Thanks good morning guys. I know you don't break out kind of guidance by the quarter and it remains unchanged for the year, but any material impact you would expect in Q2 from the earthquake and supply chain disruption?

Steve Downing

So really what we are seeing is HIS is saying they are Ghana Cedi 150,000 or so 100,000 to 150,000 vehicles probably pull out of the production of the Japan region this quarter, but their estimate is that those OEMs will be operational fairly quickly and will pick up most of that volume at the end of Q3. So there could be a slight shift, but if you look at the content, our average content in Japan it shouldn't be material to the business per se just this one incident.

Steven Dyer

That's helpful. And then as it relates to inventory the last couple quarters it's crept up well ahead of sort of the pace of revenue year-over-year. I don't know if you can break it out between finished goods, raw materials, et cetera, but any color around why that has risen so much as a percentage of sales?

Kevin Nash

Yes, it's primarily raw material driven and there are some shifts going on in our supply chain where we are moving some of that stuff to ocean shipments within to our distribution office in Germany. And so we're starting to fill the pipeline with that in the last couple quarters with raw materials and then just what we are seeing from releases really for the rest of the year.

Steve Downing

Well really it's primarily raw material pickups like Kevin mentioned. The other factor that with the launch of FDM it's a pretty expensive build material for that product and we need to be prepared to get the system ready to go for the launch of that product for GM and with the other OEMs that are launching later this year. So some of that you see is just in preparation for some new program starts on a very contented product.

Steven Dyer

Got it. okay, thank you.

Operator

And with Great Lakes Review, we will hear from Jason Rodgers.

Jason Rodgers

Wondering if you could talk about the exterior mirror shipments being flat for the quarter, growth was pretty good for interior mirrors and domestic exterior, but wondering why the flatness it was related to difficult prior-year comparisons or any other factors there?

Steve Downing

No, you are exactly right. I mean if you look at the last three-years really of OEC growth especially in international shipments have hovered around the 20% average over that three-year period and so those comps have gotten difficult. One of the things we tried going into this year talk about that that the comps on OEC were going to get hard because of that basically a 65% increase over the last few years in outside mirrors internationally. Additionally we did have one factor with one OEM in particular who was struggling with some cost issues, had made - decided to make some de-content in place just to try to save money.

Typically this happens every few years with us where we have an OEM, because roll through some silent price increases to their consumers by removing content and not changing the price of the vehicle. So that happened this year and we're working through that. That's where our kind of sales and benchmarking activities become very important and also the revenue generation model that we give - that we try to provide OEMs with our products.

Jason Rodgers

On year-over-year basis, should we expect similar performance there?

Steve Downing

Yes, I mean I think the sales growth will probably be fairly muted on OEC internationally this year, primarily driven by those comps and by the flow through of that product. We don't expect it to be materially different from what we did in Q1. Obviously, we would like to think there is more upside than downside in our forecast, but that's probably a fair assessment for the rest of this year.

Jason Rodgers

Alright and are you seeing any changes as you discussed - your discussions with European auto makers as far as using camera as an alternative to mirrors?

Steve Downing

do you mean we're seeing any changes in what their interest is or?

Jason Rodgers

The new rules allowing for camera to replace mirrors in Europe, I don’t if there has been any discussion of doing that with the European automakers?

Steve Downing

Well there is absolutely interest in our Full Display Mirror products from European OEMs. I mean that's a big thing we're focused on right. The outside mirror replacement conversation is one that OEMs are trying to study and understand. There has been really any award given by an OEM for this type of a product. We believe with our camera technology and our Full Display Mirror technology and what we're doing in the space, we think we have the right product offering to meet OEMs requirement and need, when that becomes a conversation.

But right now it's almost all theoretical on studies about what is possible, what can be done, trying to figure out what that impact is on overall vehicle and the driver if something like that were to happen. So that what we would say is we haven’t see anything changes, that’s has really been a conversation, OEMs have been looking at for the last couple of years of theorizing and trying to find a right solution to. We believe whatever happens on the front, we will be well positioned to be a contribution in that space.

Jason Rodgers

And then finally if I could ask one more about the current unrealized gains and losses in the portfolio?

Kevin Nash

Yes, currently we're sitting about breakeven, which is the best improvement versus throughout the quarter obviously the equity markets were fairly weak, but after tax basis we're sitting around breakeven.

Jason Rodgers

Thanks very much.

Operator

David Leiker with Baird. Your line is open.

Unidentified Analyst

Hi guys, this Adam on the line for David. So just on the acceleration in North American interior mirrors, I mean even well above production growth, are there specific segments or customers that are driving strength?

Steve Downing

Well if you look at the segmentation, we've historically done really well on D&E segment, so really when you see us picking up, you are going to see us picking up gains in the B&C segment in the North American space. And there has been some production increase in D&E as well for the first time in a long time inside of the North American markets. So we are benefactor of but then also see us further penetrating those lower segment vehicles.

Unidentified Analyst

Okay and then just globally interior mirror shipments grew significantly faster than exterior mirrors in the quarter which is typically positive for ASPs, were they any offsets I guess or anything that kind of drove the slight ASP decline?

Steve Downing

Really when you come into gain, you are talking about most of that ASP decline is that 2.5% to 3% price reductions we talk about that we average with our OEMs. So there is really not a whole lot more than that other than the peer pricing play from Q4 to Q1.

Unidentified Analyst

Okay and then lastly just in light of the U.S. AB announcement from the automakers this past month. Can you talk about your SmartBeam strategy and then any growth assumptions y you can give through the end of the decade.

Steve Downing

Well so we don’t give guidance for anything beyond 2016 and 2017. What we have continued to state is that we believe there is plenty of opportunity to grow SmartBeam, probably different from the AAB conversation as the one for end cap in North America where for the first time the rating agencies are considering offering points for lighting.

We believe that would position us much better than we have been in the past where it’s purely been a customer convenience type product. I think the Legislative Bodies are starting to realize the importance of lighting, not just by itself but also in combination with these other type systems.

And so we continue to see plenty of opportunity for our SmartBeam products. The key is like how you sell it and how you market it to your OEMs changes based on the rating systems changes, but it doesn't mean that it's vastly different, it's just a different approach and different business case you can offer OEMs than what we've been able to in the past.

And that's net improvement for us. Before we were selling just like we have been historically, customer product, the convenient product and a safety product that our consumers wanted to pay for. Now for the first time, we have the ability actually tie safety points to that system if this plan goes through as originally submitted to the community.

Unidentified Analyst

Great. Thanks, I'll leave it there.

Operator

And moving on we'll hear from Brett Hoselton with KeyBanc.

Brett Hoselton

Good morning Steve, Kevin, Neil, Josh.

Neil Boehm

Good morning.

Steve Downing

Good morning Brett.

Kevin Nash

Good morning.

Josh O'Berski

Good morning Brett.

Brett Hoselton

So I know you provided some revenue growth guidance for 2016 and 2017. I was hoping if you could speak to HomeLink, it appears to be a significant opportunity in China. I’m kind of wondering where are you at in the development stage there and should we anticipate it just kind of dovetailing or layering on and just contributing a small amount to your revenue growth or is there a potential for maybe a significant acceleration in revenue growth in year two, three, or four, something along those lines?

Steve Downing

Well, if you look at it corporately, the answer is it's going to dovetail and it's going to be a smooth transition and hopefully a long-term growth plan. I mean what we would love to see from HomeLink is what we’ve had from HomeLink in North America is that 15-year or 20- year growth curve, because that’s really what the history of HomeLink has been in the North American market.

And if you look at it on a percentage basis of growth where you are going from zero, obviously HomeLink sales in China, the percentages are going to look huge, because you are working up such a small base. We really have our first couple of OEM programs that we’ve been awarded, those are scheduled to launch on I think late in 2017, maybe one this year.

Neil Boehm

Late this year.

Steve Downing

Yes, late this year and then there is potential beyond that but those are fairly modest volume programs to begin with, but it starts with the benchmarking activities and that’s primarily what we use to help grow businesses like these and new markets.

Brett Hoselton

I know you weren’t necessarily there let’s say 15-years, 20-years ago at HomeLink. But what is your sense of the adoption rate or the interest level from the OEMs on the product in China? Is it very strong interest, is it kind of middle of the road, I mean how do we think about that?

Steve Downing

Well, it's interesting, when you are creating a new market like this, you have to first study and understand the market. And so we’ve done some marketing endeavors in China to understand the consumer, the use case and try to understand what the value equation is from a consumer standpoint. So we’ve accomplished that. We believe there is plenty of good use cases. When we first started marketing the concept of HomeLink in China, you are talking to people either sitting in foreign countries at the JV who don’t understand the China market, and so you are having to make sure you make that explanation very clear.

Now we are starting to market more towards the product planning teams in the China market who obviously understand that market better. And so the amount of interest has varied by OEM, but most of them understand clearly that the use case makes sense and it's fairly common. And so therefore it's not a niche market per se, it's just about getting that OEM to make the decision, to go through the steps that it takes for them to accept the product, to understand it, how it works and then get those awards.

So typically in automotive you are talking about two to three year business development exercise from the time you start pitching with good data while they make an award and you see something go into production. And so we are in the middle of that. We started selling HomeLink about a year ago, but we are making pretty good progress with OEMs and their interest is definitely there.

Brett Hoselton

And then just finally, from a margin perspective thinking sequentially from the fourth quarter to the first quarter, your margins - they do fluctuate sometimes throughout very rarely they are down, this year you went - in my calculations on an operating basis just that your margins declined 140 basis points from the fourth quarter of 2015 at the first quarter 20. And is that primarily maybe a shift in mix just sequentially quarter-on-quarter or is there anything else that might have caused the margins to decline sequentially?

Steve Downing

Yes, the biggest change sequentially from Q4 is our first quarter price downs, and that’s virtually the single biggest negative factor, and was actually better than we were expecting, but the margin themselves did not decline.

Steve Downing

Yes, the net operating margins were…

Neil Boehm

And the gross margins were over [indiscernible].

Brett Hoselton

I guess what I’m asking is I’m looking sequentially margins from the fourth quarter of 2015 they were 32.1 and then they went to 29.8 in the first quarter of 2016, if I have done my numbers correct, so that was down 140 basis points. And I kind of go back and look at that same margin progression for the fourth quarter to first quarter in previous years, and the average was an increase of 90 basis points which would have incorporated the price downs that maybe you normally see. And so I’m just wondering if there is something unusual this year.

Steve Downing

No, the thing was not that the margins - overall gross margin didn’t changed, but the gross margin of the product themselves didn’t change, other than the pricing that Kevin talked about, really you are talking about the difference in mix from quarter-to-quarter. So that’s the thing that we would like to point out. Usually in most in quarters you are going to see 30 bps to 50 bps difference on fluctuation and product mix and what does that, how does sales come in based on that. So if you look at the individual product so that add up to the total, right. There is nothing significantly that changed or nothing drastic that happened on any one of those product lines that changes the gross margin of the underlying products minus the pricing that gave on January 1.

Brett Hoselton

Yes. That makes perfect sense. Thank you Steve, I appreciate it.

Steve Downing

No problem. Thank you.

Operator

Our next question comes from Ryan Brinkman of J.P. Morgan.

Ryan Brinkman

Hi good morning, thanks for taking my questions. So first can you talk about the biggest drivers of that nine points of outperformance of revenue versus global light vehicle production in 1Q. Of course, we can see the mirror unit shipments and I know you don't like to talk to average selling price as much anymore, but I'm just thinking generally in terms of how much of your growth is driven by increasing penetration of auto-dimming mirrors versus the additional value add features like your newer drivers products or SmartBeam et cetera. And then lastly, if you could just sort of venture to say what you think the normalized outperformance of Gentex revenue is relative to global production going forward.

Kevin Nash

Sure. So on the first part of that question, if you look at most of our sales growth, revenue growth about half it comes from increased penetration of units, the other half comes from content. And that's true really of our current make up of our business as well. About half of our revenue is kind the mirror portion the other half is advanced electronic features. On a go forward basis that question Ryan was about your ability to outgrowth.

If you look at the market, we believe that typically we are going to outpace the market by mid to high single-digits is kind of what our current plan is. And we don't see any reason why that changes over the next several years. What that equates to normally if you look at our kind of estimates of the production environment over the next several years is high single to low double-digit growth rates for the Company?

Ryan Brinkman

Okay great and then another question on HomeLink to follow on Brett’s, but from another angle. So is there anything different now to say about HomeLink versus Smartphone enabled Wi-Fi based solutions relative to the time that you bought the business and then also how is it progressing the plan to get HomeLink more involved in assets of the SmartHome and maybe beyond Garage Door Opener?

Steve Downing

So that sounds like a softball lead into a sales pitch, so I appreciate the question, but actually Neil’s team is working really hard on what our interface is. So fundamentally no nothing has changed versus when we acquired HomeLink. In fact, we probably see more opportunity to interface with those devices to help bring clarity to the vehicle environment through a HomeLink application. At CES this year, we actually had our first kind of demo of a products where we believe HomeLink can be one of the leading consumer kind of lead points in the vehicle, in other words initiate a lot of the home automation type function.

And so if you guys are going to be out at CMR or CES this year, we welcome you to stop by and see this product, it's difficult to explain in a conference call setting. When you see the application and what we are modeling and working on from an engineering perspective, we think it's pretty exciting and we hope that OEM shows same amount of interest that we have for them.

Neil Boehm

So I think it was last year for CES.

Ryan Brinkman

Perfect, last question then on the TransCore Universal Toll Monitor product discussed at CES. Can you remind us of when do you expect that to potentially translate into revenue and then maybe you could share, have you been having discussions with I don’t know either automakers or toll authorities and what kind of interest there seems to potentially be out there in the marketplace?

Steve Downing

Sure. So if you look at that we literally gave you that product in January at CES and so we just started that week on the initial sales pitch, we've been working on that and refining that customer presentation that's quite a bit of customer interest in that product. Typically that’s kind of a three-year out development before they will generate revenue and that's kind of the still window we are operating inside of for UTM, it has been a very exciting product and we think there will be tremendous amount OEM interest in there.

Ryan Brinkman

Okay great. Thanks for all the color.

Operator

Next we have John Murphy with Bank of America Merrill Lynch.

Aileen Smith

Good morning guys, this is Aileen Smith on for John. First question regarding the North American plant that you started construction on in 2015, can you give us any on how that's progressing. I mean last time I read in your 10-K, your production was expected to begin in early 2017, as we think about margins do you see that being a headwind to margins in 2016 and 2017 as you're getting that plant fully ramped up?

Kevin Nash

So the development plan, the rollout is we are going to begin to occupy that later this summer from a distribution center standpoint and then it will probably end of the year and we are going to start to occupy that building from a final assembly standpoint. And no, we don't see any step function increase in overhead related to that plant.

Its' really if you look at the Gentex's facility history, people referenced 30 to 50 basis points kind of headwind when we launch a new facility, but that was all predicated on a company that was anywhere from $300 million to $600 million in revenue given the size of the business today and what those launch cost will for that facility. We don't expect a tremendous amount of issue to cost based on the opening of that building.

Aileen Smith

Okay great that’s very helpful. And secondly, can you remind us of your overall priorities for capital allocation. You have talked about the buybacks being more opportunistic depending on the stock price and I’m assuming also dependent on the M&A pipeline. So if you could just give us an update there and if there any technologies or things you are seeing in the market right now that you would potentially look at acquiring?

Kevin Nash

Sure, so the M&A strategy is always front in center from our capital allocation standpoint. That's the factor of the type of technology that are available and also the multiples that our businesses are going for. So we're interesting in new technology where at the same time obviously interested in paying fair prices for those technologies and so we always kind of check that box early on in the process to make sure it's a fair price. That's kind of priority one.

Priority two is obviously share repurchases. I would add a little bit of color to your statement that it's not just opportunistic, there is a $25 million and $30 million kind of a quarter run rate that is consistent. Anything above that or below that will be kind of a function of where we are at from a market value standpoint, and so the opportunistic portion is what layers on top of that baseline of 25 to 30. Beyond that obviously, we have a history of moving dividends in line with earnings and so our plan is to continue to work on and making sure we return value to shareholders through our consistent dividend plan and policy.

Aileen Smith

Okay great. And then just more of a high level question, have you guys been seeing any material market share shifts in the electric car mirror market recently or do you see a potential for market share shift going forward among your competitors?

Kevin Nash

No, in fact, if anything over the last four-years, five-years, and we have shown a pretty strong trend towards growing our market share. If you look back to 2001, 2002, we’re just under 80% to 78%, 79% market share, we’re now probably in the high 80% to around 90% market share and we don’t see any significant change in that market share.

Aileen Smith

Alright, great. That’s helpful and I'll pass it on.

Operator

And David Whiston with Morningstar. Your line is open.

David Whiston

Good morning. Question on your [indiscernible] products standalone separate from Mobileye. Like where is that pipeline process? Is there anything holding you back from being a much bigger player in that market today?

Kevin Nash

So, as it relates to the forward facing camera, our strategy is primarily focused on lighting and ancillary features as an OEM wants to either round out their product offering. Our goal as a company is not to try to compete with a product that already exist in the marketplace. So for instance, the company is not pursuing AAB or FCW type application for the very reason that there is already several suppliers in the space and more coming as larger Tier-1s look to get into that arena.

Gentex is focused on leveraging what we have in our cost advantage standpoint with our internal camera and leverage that into a product offering that we believe offer superior value to the OEM through a lower cost point and marketable product to their consumers. So our strategy is pretty clear there that we’re not trying to be a Mobileye per se, it's definitely a different play as it relates to forward facing cameras.

David Whiston

Okay thanks. And I’ll give you another opportunity to put on your sales hat here, because I still get investors asking me about the mirror is going away, the unit price my cameras, if you would just like to give your thoughts on why you don’t think that’s the case? And then how much business you can do with your standalone camera expertise that maybe people don’t know about, love to hear your thoughts on that. Thanks.

Steve Downing

Sure. So, the first thing we would like to talk about as it relates to cameras and displays and digital technology is we believe we have a proven track record of showing that we have the right skill sets in-house to participate in whatever OEMs, direction OEMs want to go in the future as it relates to mirrors, cameras and displays. So that kind of set the stage that we believe we are well positioned to compete for that.

The evidence of that is that Full Display Mirror and the growth that we see in that product, the interest in the marketplace, the awards from the industry. We believe this is really the next five-years to 10-years of automotive production as it relates to volume application that OEMs are looking for the redundancy. And the reason why they are looking for the redundancy is because it's a safety critical item.

There is multitude of reasons why that camera and the display system won’t perform perfectly, everything from weather to lighting to night time driving to block conditions. Additionally, there is a significant portion of the population that’s not comfortable with the display vision of what is behind them because it's a two dimension view of a three dimension world and a mirror offers you a three dimensional view of what is going on behind you. Additionally, so there is people that are comfortable with that, there is people that due to eye issues whether that they were bifocals and other things struggle to focus on displays in those type of areas and geography in the car.

The last thing and I don’t think that there is a laundry list of reasons why we don’t view it as the eminent threat that some investors view it as is because it's a very difficult transition for an OEM to make this happen. You have to design the system that is not an easy task. More importantly, it's incredibly expensive. These digital technologies cost more than traditional mirrors. And lastly, the thing I’ll point out is that you remove optionality if you try to design a car only around digital technology. What is interesting about the redundancy of our system, it allow consumer to chose between display or reflective technology is that allow it to be a priceable option.

Very important for an OEM, they can’t afford necessarily to throw $600 to $1,000 of content on a vehicle and not get reimbursed to that by the consumer. What is important about an optional product and the one that we offer in Full Display Mirrors that you can very simply remove, change the interior of the vehicle from traditional mirror to a Full Display Mirror application and still find a way to be on the market that vehicle as an upgraded feature items. If you imagine trying to change the entire center council to add displays or door panels or wherever you want to put displays, you basically has a very rough system or you have to tool that car interior of that vehicle twice to be able to keep the optionality part of that economics in place.

So that’s kind of the abbreviated list, but I could go on for another half hour, but probably drawn down long enough already. So I’ll kind of leave it at that but that’s kind of the longer short. We believe with the full display momentum that we have right now that we continue to grow that business, we really position ourselves really well to help with that transition on outside mirrors by leveraging the technologies we’re developing on the inside mirror.

David Whiston

Thanks, and just a very short one on 787 program, how much longer can we expect these rates of growth? And are you any closer to any new layer of wins?

Kevin Nash

Well, really that rate of growth is really a function of Boeing production. so really it's kind of at about where we would expect the 787 max production to be. Obviously it's as dash 10 rolls out, you will see a small increase, because it will replace some dash 8 and dash 9 planes, so there will be a small incremental pick there, but really we are kind of at about what we expect to be the 787 volume level to be.

Steve Downing

And we’re actively pursuing other programs from a work perspective.

David Whiston

Okay. Thanks.

Operator

[Operator Instructions] And we will take a follow-up question from Brett Hoselton with KeyBanc.

Brett Hoselton

All right gentlemen so this is going to be a bit of a softball question, but obviously one of the questions you have and has been asked couple of times is, how does Gentex’s SmartBeam fit into the picture going forward. In a world where the likes of Bosch and Conti and Mobileye and Autoliv seem to be able to simply a SmartBeam feature on to their product at a lower cost maybe than Gentex has and so that’s kind of the general barricades of perception. I'm kind of wondering how you would kind of counter that barricades. It sounds like you may have a cost advantage but can maybe talk to that.

Steve Downing

Well sure if you talk about standalone features and cameras obviously there is cost advantage. I'll let Neil kind of hit the technology side, but the important part at least in our perception of this is and what we are seeing from OEMs. The assumption that there's a one camera fits all that's going to be cost optimized to a vehicle and that’s what - they are going to be their platform forever, where we would disagree with that thesis and primarily because as you look at standardizing a product cost becomes very important and cost optimization becomes very important. It's hard to keep a scalable program cost optimized.

And so what our focus is and what we're seeing in OEMs is saying hey if I'm going to standardize AEB type features, I need that system to be cost optimized and B I don't want to changed it a lot, because that means new validation cost. When you are talking about a safety critical feature take A, B or forward crash you need to make sure that that validation cost remains as low as possible, there is literally hundreds of thousands of scenarios you have to drive that vehicle. When you look at lighting, it's a plug-and-play feature right and so we believe there is plenty of opportunity longer term for OEMs who are now working to standardize AEB to find a way to make that architecture more flexible, we believe our camera is one of the ways they can do that.

Neil Boehm

Yes and I was just going to add, but the only other aspect of that is, people believe AEB is going to be only a camera-based system. There other technologies that OEMs will be employing in order to accomplish that function which then opens a window for a lower-cost lighting module help to get additional point as we look at some of the end cap stuff as well.

Brett Hoselton

So, let's say as I understand that barricades, the general thought would be Autoliv, Mobileye or Bosch or Conti or whomever would provide a system which would provide AEB for example for lane departure warning, something on those some combination of features. And their ability to just tack on additional features is that the cost associated with that is fairly de minimis. And therefore, why would somebody want to pay for Mobileye system plus or Gentex system, if they can just buy a Mobileye system and then tack on a SmartBeam like application. It seems like it would be less expensive.

Kevin Nash

Well so two things like Neil just mention, not everyone is going to be using - accomplishing AEB using cameras. There is other technologies lidars, radars and other systems that can do AEB, right. So if they choose to go with different technology route then cameras are an open door. Secondly, even if they do use another forward facing camera system and it appears to be cheaper by adding software. Like we talked about before, the overall system cost and the overall development cost associated with taking an off-the-shelf system and now modifying, it adding either horsepower from the processing standpoint or changing the hardware schematic in order to make sure it functions as an additional challenge as it relates to the R&D and the investment side of the equation.

And so it's not as simple as just a dollar-for-dollar comparison on building materials and it’s definitely a part of that OEM strategy and what their choices are. There are several OEMs who don't buy a Mobileye system for their AEB functions. A couple of OEMs developed a software in-house and they haven't focused on lighting as one of the preferred methodologies. And the last thing I will point out is that, there is a value equation associated with how those systems perform. We still believe that our lighting as best-in-class and if you look at the new rating systems, how it will performed in lighting environment is beginning to get interest not only from OEM but from the rating agencies on how important lighting really is.

Right now, our comp is better than others systems on a peer SmartBeam - turn you high beams on and off. We believe this legislation and the conversations that are happening will hopefully lead to legalization of our dynamic forward lighting system, which is all the time high beams in which case you can truly see the benefit and the improved performance of the Gentex system over these other systems. So as the market changes and these products become more allowable in the U.S., we believe that will help drive the differentiation strategy between those products that you are talking about in ours.

Brett Hoselton

And just to make sure I understand this. Certainly it sounds like from some of the conversations I had with Bair’s that there is the impression that you can easily plug and play in Mobileye system more than Autoliv system. It's something like you can simply plug-and-play a SmartBeam application in there with very little effort and cost and so forth. And yet, it sounds like what you are suggesting is that altering the algorithms and hardware and all this other stuff requires a significant amount of validation, because it safety critical component and it may alter the performance of that safety function and therefore may result in a significant amount of liability, is that kind of a conceptually the idea?

Steve Downing

Yes, that's absolutely it.

Brett Hoselton

Perfect. Thank you very much gentlemen.

Steve Downing

Thank you.

Kevin Nash

Thanks Brett.

Operator

And we have no further questions at this time.

Steve Downing

Great. Thank you everyone for your time. Thank you for listening in. If you have any further questions, please let us know, but have a great day.

Operator

And that does conclude today’s conference call. We thank you all for your participation.

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