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Gentex Corporation (NASDAQ:GNTX)

Q2 FY08 Earnings Call

July 22, 2008, 10:30 AM ET

Executives

Connie Hamblin - VP of IR & Corporate Communications; Corporate Secretary

Enoch Jen - Sr. VP

Steve Dykman - VP of Finance & CFO

Analysts

Himanshu Patel - J.P. Morgan Securities, Inc.

David Leiker - Robert W. Baird

John Murphy - Merrill Lynch & Co.

Brandon Ferro - KeyBanc Capital Markets

Alexander P. Paris - Barrington Research

Mark Warnsman - Calyon Securities (NYSE:USA) Inc.

Jason Rogers - Great Lakes Review

Operator

Good morning, ladies and gentlemen. Welcome to the Gentex Corporation Second Quarter Results Conference Call. I'd now like to turn the meeting over to Ms. Connie Hamblin, Vice President of Investor Relations and Corporate Communication. Please go ahead Ms. Hamblin.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Good morning, thank you everyone for joining our second quarter conference call. This is Connie Hamblin. On the call with me are Enoch Jen our Senior Vice President, and Steve Dykman, our Vice President of Finance and Chief Financial Officer. This call is being broadcast live on the internet today on our website at www.gentex.com. The icon is on the homepage. There's also an auto playback of the conference call available on website as well.

I'm going to go through a brief routine comment and then I will turn this over to Enoch Jen who will give us his comments on the quarter and then we'll open it up to Q&A.

This call is being recorded by Gentex Corporation. All contents of Gentex Corporation's conference calls are the property of Gentex. No such content may be copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the express written consent of Gentex Corporation. Gentex alone holds such rights. While we understand that there may be companies that transcribe and redistribute our conference calls, not withstanding this warning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of the content. We advise that you should not rely on the content of any unauthorized transcript as Gentex Corporation will not be held liable for the content of any such transcript.

Gentex Corporation will hold responsible or liable any party for any damages incurred by Gentex with respect to any such unauthorized use. Your participation implies consent to our taping and to the foregoing terms. Please drop off the line if you do not agree of these terms.

Our Safe Harbor statement. This presentation may include forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about top line growth in the global automotive industry, the economy, the impact on stock option expenses on earnings, the ability to leverage fixed manufacturing overhead costs, unit shipment growth rates, and the company itself. Words like anticipate, believes, confident, estimates, expects, forecast, likely, plans, projects, and should and variations of such words and similar expressions identify forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, expense, likelihood and degree of occurrence, and actual 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 time I will turn the call over to Enoch Jen. He'll make his comments on the quarter and then we will open it up to Q&A. Enoch?

Enoch Jen - Senior Vice President

Good morning, everyone. We are pleased to report record second quarter revenues of $170.5 million. This compares to $163.5 million reported in the second quarter of 2007 and represents a 4% increase. For the first six months, we reported revenues of $348.5 million, a 9% increase over the $320.7 million reported for the first six months of 2007.

Our operating income for the second quarter was $35.8 million, a 2% decrease compared to the $36.5 million reported in the second quarter of 2007. For the first six months, our operating income was $75.8 million, an 8% increase over the $70.5 million reported in the first six months of 2007.

Our second quarter net income was $26.9 million, a 13% decrease compared to the $31 million reported in the second quarter of 2007. This decrease was primarily due to a decline in other income, which we will discuss later. For the first six months, we reported net income of $57.3 million, a 5% decrease compared to the $60.5 million reported in the first six months of 2007.

Our earnings per share for the second quarter was $0.19. That compares to $0.22 reported in the second quarter of 2007. For the first six months, we reported earnings per share of $0.40 compared to $0.42 reported in the first six months of 2007.

Looking next at automotive revenues and auto-dimming mirror unit shipments; our total auto-dimming mirror unit shipments were up by about 1% in the second quarter of 2008 compared with the second quarter last year. Automotive revenues increased by 5% from $157.2 million in the second quarter of 2007 to $164.8 million in the second quarter of 2008. The UAW strikes negatively impacted second quarter automotive revenues by approximately $5.8 million.

Total auto-dimming mirror unit shipments increased by 6% in the first six months of 2008 compared with the first six months of 2007. For the first six months of 2008, automotive revenues increased by 9% to $336.9 million compared with $308.3 million for the first six months of 2007. General Motors Worldwide represented 19% of total company revenues for calendar year 2007. For 2008 year-to-date, GM Worldwide represented approximately 14% of total company revenues.

Auto-dimming mirror unit shipments in North America decreased by 13% in the second quarter of 2008 compared with the same period in 2007, primarily as a result of the lower light vehicle production at the Detroit 3 and the continuation of the UAW strikes that started in the first quarter of 2008.

Unit shipments to Asia and European transplants partially offset the impact of the strikes and the production cuts at the Detroit 3. North American light vehicle production decreased by 14% in the second quarter of 2008 compared with the same prior year period.

GMT900 light vehicle production was down 49% in the second quarter of 2008 compared to the same period in 2007. Auto-dimming mirror unit shipments in North America decreased by 6% in the first six months of 2008 compared with the same period in 2007. North American light vehicle production declined by 11% in the first six months of 2008 compared with the same prior year period.

GMT900 light vehicle production was down 40% for the first six months of 2008 compared to the same period in 2007.

Auto-dimming mirror unit shipments to offshore customers increased by 12% in the second quarter of 2008 compared with the same period last year. The increase in unit shipments was primarily due to higher penetration of interior and exterior auto-dimming mirrors at certain European and Asian customers. Light vehicle production in Europe increased by 4% in the second quarter and increased by 2% in Japan and Korea in the second quarter of 2008, compared with the same period last year.

Auto-dimming mirror unit shipments to offshore customers increased by 14% in the first six months of 2008 compared with the same period last year. Light vehicle production in Europe increased by 3% for the first six months of 2008 compared with the same period last year. Light vehicle production in Japan and Korea, increased by 4% for the first six months of 2008 compared with the same prior year period.

Looking next at average selling price per auto-dimming mirror unit, the ASP for the second quarter of 2008 was $41.50. The ASP increased from $40.94 in the first quarter of 2008 to $41.50 in the second quarter of 2008, primarily due to increased sales of advanced featured mirrors. Based on our current forecast, we would expect ASP in the third quarter and for the calendar year 2008 to be in the range of $41 to $42 depending upon product mix.

The ASP increased on a year-over-year basis from the second quarter of 2007 when it was $40.32 to $41.50 in the second quarter of 2008, primarily due to higher contented interior mirrors, partially offset by annual customer price reductions. Second quarter 2008 and calendar year 2008 ASPs exclude non auto-dimming mirrors and microphone units. This is how we will report ASPs going forward.

Fire Protection revenues decreased by 10% to $5.6 million for the second quarter of 2008 compared with the same period last year. Fire Protection revenues decreased by 7% to $11.6 million for the first six months of 2008 compared with the same period last year. The decreased revenues during both periods were due to the weak commercial and residential construction markets.

Gross profit margin of 34.7% in the second quarter of 2008 declined sequentially from 35.2% in the first quarter of 2008, primarily due to the lower top line growth, limiting the company's ability to leverage its fixed overhead costs. The gross margin also declined on a year-over-year basis from 35.3% in the second quarter of 2007, primarily due to annual customer price reductions and top line growth below 10%, which caused negative leverage on fixed overhead costs. The impact of the annual customer price reductions was partially offset by purchasing cost reductions and foreign exchange rates.

We currently expect our gross margin in the third quarter and calendar year 2008 to be in the range of the margin reported in the second quarter of 2008, depending upon top line growth, purchasing cost reductions and the depth of global light vehicle production cuts. The gross margin will continue to be impacted by annual customer price reductions, uncertain global automotive production levels, our ability to leverage our fixed overhead costs, purchasing cost reductions, and VAVE initiatives and manufacturing yields.

Turning to engineering, research and development expense, ER&D expense increased by 8% in the second quarter of 2008 compared with the same 2007 period. The increased expense was primarily due to additional staffing in engineering for new product development and new vehicle programs such as Rear Camera Display and SmartBeam, partially offset by decreased patent litigation expenses.

Expense related to the Muth patent litigation was $1.4 million in the second quarter of 2007. That litigation was settled on February 15, 2008. Excluding the Muth litigation expense, ER&D expense would have increased by approximately 22% in the second quarter of 2008 compared with the same prior year period.

ER&D expense increased by 6% in the first six months of 2008 compared with the same 2007 period. Excluding Muth litigation expense in 2008 and 2007, ER&D expense would have increased by approximately 21% for the first six months of 2008 compared with the same period in 2007.

Selling, general, and administrative... no, excuse me. ER&D expense is currently expected to increase by approximately 5% to 10% for the third quarter and calendar year 2008. Excluding the Muth litigation expense, ER&D expense is expected to increase by 15% to 20%.

Next, selling, general, and administrative expense, SG&A expense, increased by 13% in the second quarter of 2008 compared with the same prior year period. The increase was primarily due to the continued expansion of the company's overseas sales offices and foreign exchange rates.

SG&A expense increased by 15% for the first six months of 2008 compared with the same prior year period, primarily due to continued expansion of the company's overseas sales offices and foreign exchange rates. We currently believe that SG&A expense will increase in the third quarter and calendar year 2008 by approximately 15% to 20%. This increase is primarily due to continued expansion of our overseas offices and foreign exchange rates.

Looking at other income; total other income decreased by 50% in the second quarter of 2008 compared with the same prior year period, primarily due to lower realized gains on the sale of equity investments and lower interest income due to lower interest rates. For the second quarter of 2008, investment income was $3,240,000, other net was $990,000 for a total other income of $4,230,000.

For the first six months of 2008, investment income was $7,300,000; other net was $2,406,000 for a total other income of $9,706,000. In light of the current stock market environment, we currently expect realized gains on the sale of the equity investments for the balance of the year to be similar to the second quarter of 2008.

A few balance sheet items: as of June 30, 2008, accounts receivable was $71.3 million, inventories were $51.2 million, patents and other assets were $8.8 million, accounts payable was $34.3 million and accrued liabilities was $35.6 million.

Our tax rate was 32.9% in the second quarter of 2008 as compared with the statutory rate of 35%, primarily due to the domestic manufacturing deduction. Tax benefits pertaining to stock option expense can significantly vary from quarter-to-quarter and year-to-year due to incentive stock option disqualifying disposition activity.

The tax benefit pertaining to stock option expense was 40% in the second quarter of 2008 compared with 80% in the second quarter of 2007. Excluding stock option expensing, we currently expect that the tax rate for 2008 will be approximately 33.25% based on current tax laws.

Our year-to-date cash flow from operations was $72.3 million. Our capital expenditures for the second quarter of 2008 was $14.5 million. Our depreciation expense in the second quarter of 2008 was $8.7 million. For calendar year 2008, our estimate for capital expenditures is now approximately $50 million to $55 million. Depreciation expense for 2008 is now estimated at $36 million to $38 million.

An update on our share repurchase plan. During the second quarter of 2008, the company repurchased 1.2 million shares at a cost of approximately $19 million. The company has a share repurchase plan in place with authorization to repurchase to up to 28 million shares of the company stock. To-date including the prior share repurchases, the company has repurchased approximately 21.4 million shares, leaving approximately 6.6 million shares authorized to be repurchased under the plan.

Cash dividends: On July 18, 2008, the company paid a quarterly cash dividend of $0.105 per share to shareholders of record of the common stock at the close of business on July 8. The ex-dividend date was July 3, 2008.

An update on SmartBeam; we continue to be pleased with the progress we're making and the market acceptance for SmartBeam, the high-beam headlamp assist product that we introduced in the 2005 model year. We are currently shipping SmartBeam for 18 2008/2009 vehicle programs, including the Audi A4, A5, and Q7 that was announced in May.

During 2008, we expect to announce and start shipping SmartBeam mirrors to the third European customer and our first Asian customer. There are a number of follow-on programs for existing and new customers scheduled for the 2009 calendar year. Based on our existing forecast, volumes and incremental sales dollars for SmartBeam will become more meaningful in the 2009 calendar year.

For the 2007 calendar year, we shipped approximately 305,000 SmarBeam units. Option rates have remained strong at 25% to 30% on average. For the 2008 calendar year, we currently expect to ship approximately 350,000 to 400,000 SmartBeam units.

Next, an update on Rear Camera Display; in late 2006, we announced that we had developed a new product that we call the Rear Camera Display or RCD mirror. The product is currently offered as original equipment on the Ford F-150 and Expedition, and the Lincoln Navigator and Mark LT, as well as on the Kia Mohave and Hyundai Grandeur for the domestic Korean market.

In addition, we sent out a note to our mailing list on June 30 confirming that our RCD product will be offered as optional original equipment on the 2009 GMT900 and Lambda platforms. All mirror-based RCDs in these vehicles will be utilized in conjunction with the auto-dimming feature.

Given the announcements for the Mohave and Hyundai Grandeur for the domestic Korean market, you can see that there is interest in this feature in countries where there is no legislation pending, nor past.

We have previously announced that the RCD mirror is available as a port or dealer installed option on the Mazda CX-9. The company also previously announced that the RCD mirror is available as a dealer or port installed option on the Toyota Camry through Gulf States Toyota.

We continue to work with a number of other customers on original equipment development program for this product. This is not a long lead time product. So upon receiving a production order from a customer, we could be in volume production for other programs within 9 to 12 months.

The company shipped approximately 55,000 RCD mirrors in calendar year 2007, and we currently estimate that we'll ship between 350,000 to 400,000 RCD mirrors in calendar year 2008. Based on the current forecast, the company continues to believe that RCD mirror shipments will more than double in calendar year 2009 compared with calendar year 2008.

The automakers currently offer a Rear Camera Display product... currently offering a Rear Camera Display product. They are doing this absent any legislation and made the decision before any legislation was pending.

As most of you have heard by now, the legislation, now called The Kids Transportation Safety Act of 2007, was signed into law by President Bush on February 28, 2008. The bill orders the Secretary of Transportation at the National Highway Traffic Safety Administration, or NHTSA, to initiate rule making to revise the federal standard to expand the field of view so that the drivers can detect objects directly behind vehicles. The requirements may be met by the use of additional mirrors, sensors, cameras, or other technology to increase the driver's field of view, which is the decision that NHTSA needs to make. NHTSA has done some independent studies already and appears to be leaning towards camera-based systems.

With respect to timing, our understanding is that NHTSA has until February 28, 2009, to initiate rule making and then has 36 months to publish final standards and then automakers will need to become fully compliant with the final standards within 48 months. So in general, automakers will have approximately seven years to comply with the rule that NHTSA initiates, However, we expect early adoption by many automakers and we are already seeing that with Ford, General Motors, and Hyundai Kia for the U.S. and Korean markets.

An update on the Boeing 787 Dreamliner dimmable window program, we began shipping parts for the first test planes for the Boeing 787 Dreamliner series of aircraft at mid-year 2007. Boeing has now announced three delays for the final deliveries of aircraft to their customers. Boeing remains resolute that they will achieve the first flight of the 787 before the end of calendar year 2008, and that the first planes will go into service in late 2009.

We now anticipate that we will begin to ship our windows to the aircraft production lines in late 2008 to early 2009. We do not expect revenues from this program to be significant in calendar year 2008.

Other aircraft manufacturers have expressed interest in this technology, and we'll continue to work on these potential programs with PPG Aerospace.

Turning next to top line growth estimates, the following projections for top line growth are based on CSM's and mid-July light vehicle production forecast. For the third quarter and balance of calendar year 2008, our estimate for top line growth is approximately 10% compared with the same period in 2007, based on our current forecast for product mix, light vehicle production levels and take rates. However, due to uncertainties in the marketplace, we believe there is potentially more downside than upside to current global light vehicle production levels.

For the third quarter of 2008, light vehicle production per CSM for North America is currently 3.1 million vehicle units, which is a 12% decrease compared to the third quarter of 2007.

For Europe, the CSM forecast is 4.9 million vehicle units, a 2% increase over the third quarter of 2007. And for Japan and Korea, the CSM forecast is 3.6 million vehicle units, a 7% increase compared to the third quarter of 2007.

For calendar year 2008 light vehicle production, the current CSM forecast for North America is 13.4 million vehicles, an 11% decrease compared to calendar year 2007. For Europe, the current CSM forecast is 22 million vehicles, a 2% increase compared to calendar year 2007. And for Japan and Korea, the CSM forecast is 15 million vehicles, a 2% increase compared to calendar year 2007.

At this time, I will turn the call back over to Connie and then we will go into Q&A.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Just as a quick reminder, all listeners should note that this call is being recorded by Gentex Corporation. All contents of Gentex Corporation's conference calls is a property of Gentex. No such context may be copied, published, reproduced, rebroadcast, retransmitted or otherwise redistributed without the express written consent of Gentex Corporation. Gentex Corporation alone holds such rights. While we understand that there maybe companies that transcribe and redistribute our conference call not withstanding this warning, Gentex Corporation provides no authorization to do so and expressly disclaims any responsibility for any unauthorized use of the content. We advise that you should not rely on the content of any unauthorized transcripts as Gentex Corporation will not be held liable for the content of any such transcript.

Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex with respect to any such unauthorized use. Your participation implies consent to our taping and to the foregoing terms. Please drop off the line if you do not agree to these terms.

At this point we will open the call up for questions and the answers. And again we would appreciate it if you would try to limit your questions to single part questions and ask one at a time to allow everyone to get in the queue. Thank you. Operator?

Question And Answer

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions]. Our first question is from Himanshu Patel from J.P. Morgan. Please go ahead.

Himanshu Patel - J.P. Morgan Securities, Inc.

Hi. Can you guys remind us what is your Chrysler exposure exactly?

Enoch Jen - Senior Vice President

Well, for calendar year 2007, DaimlerChrysler represented approximately 15% of our company revenues and Mercedes represented approximately two-thirds of that total and Chrysler represented the other third.

Himanshu Patel - J.P. Morgan Securities, Inc.

Okay. And then, Enoch, I am sorry if you have mentioned this already, but assuming industry volumes are consistent with CSM for 2009, what's your initial sense on the direction for gross margins?

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

We haven't given any guidance for gross margins for 2009.

Himanshu Patel - J.P. Morgan Securities, Inc.

I guess, on more kind of --

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

We did for 2008, but I think in general our guidance for gross margins is that there's going to be upside for gross margins if we can achieve double-digit top line growth and upward pressure on them, but at this point, we haven't given any guidance whatsoever for calendar year 2009.

Enoch Jen - Senior Vice President

I think, first off, the CSM forecast in our estimation probably has a little more downside than upside. But our expected growth rate for 2009 is really going to be dependent on the vehicles that our auto-dimming mirrors are offered on, and the new vehicles that we haven't announced. So until we announce our top line revenue at the end of January, probably we are not in a position to make any comments about gross margins for 2009.

Himanshu Patel - J.P. Morgan Securities, Inc.

And you'd still feel comfortable with the statement that if your top line is north of 10% you can expand margins south of 10%, you'd see margin pressure?

Enoch Jen - Senior Vice President

That is correct.

Himanshu Patel - J.P. Morgan Securities, Inc.

Okay. And then one last question, just in the current quarter, in Europe, did you see any last minute production cuts or whatever it happened in the quarter in Europe, was it fairly in line with what you had expected at the start of the quarter?

Steve Dykman - Vice President of Finance & Chief Financial Officer

Pretty much in line.

Enoch Jen - Senior Vice President

I think CSM in their June forecast took down their European forecast for the balance of the year significantly, but we didn't see any unusual activity during the second quarter.

Himanshu Patel - J.P. Morgan Securities, Inc.

When you say you think there's risk to CSM's global production forecast, any particular geography you're thinking about?

Enoch Jen - Senior Vice President

Well, I think North America continues to be weak. And then I think there's some feeling that some of that weakness is starting to spread over into Europe.

Himanshu Patel - J.P. Morgan Securities, Inc.

Thank you.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Thanks.

Operator

Thank you. The following question is from David Leiker from RW Baird. Please go ahead.

David Leiker - Robert W. Baird

Good morning.

Enoch Jen - Senior Vice President

Good morning, David.

David Leiker - Robert W. Baird

Good morning.

David Leiker - Robert W. Baird

Is it afternoon?

Enoch Jen - Senior Vice President

No, still morning.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Don't worry.

David Leiker - Robert W. Baird

Okay. Two really quick numbers questions and then I'll come back to something; what was your share count at the end of the quarter, actual share count?

Steve Dykman - Vice President of Finance & Chief Financial Officer

141,942,000.

David Leiker - Robert W. Baird

Okay. And then you CapEx and D&A numbers have moved higher, or what's behind that?

David Leiker - Robert W. Baird

Well, the increase in our guidance for calendar year 2008 is just primarily due to additional anticipated production equipment purchases.

David Leiker - Robert W. Baird

That's being RCD related or interior and exterior --?

Steve Dykman - Vice President of Finance & Chief Financial Officer

Most of it is in exterior mirror side of the business.

David Leiker - Robert W. Baird

Okay. And then there's just the last thing here; if you look at efforts you guys have done on your manufacturing floor, how flexible do you think your manufacturing is today between different products, different customers, those types of things that would be either better or worse than we've seen in the past with big volume swings?

Enoch Jen - Senior Vice President

I think the flexibility of our manufacturing line today is probably the most flexible it has ever been. We continue to reduce change over time, we're able to convert production lines over to a wide variety of different mirrors very quickly. So it's pretty flexible.

David Leiker - Robert W. Baird

Okay. Thank you.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Thanks.

Operator

Thank you. The following question is from John Murphy from Merrill Lynch. Please go ahead.

John Murphy - Merrill Lynch & Co.

Good morning.

Enoch Jen - Senior Vice President

Good, morning, John.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Good morning.

John Murphy - Merrill Lynch & Co.

Just thinking about the pressure on gross margin, really the lid here, is there anything going on with yield levels that have improved or potentially gotten worse in the short run or is there anything other than really just the operating leverage that we should be thinking about here in the near term?

Steve Dykman - Vice President of Finance & Chief Financial Officer

With respect to yields, they're pretty stable. We haven't had any significant shift whatsoever. So within the second quarter on a sequential basis, the drop in the margin was primarily due to our inability to leverage our fixed over head costs.

John Murphy - Merrill Lynch & Co.

Okay. And then just two quick clarifications; what is the definition for the window in which you can buy back stock or really what are the blackout periods as you to happen to find?

Steve Dykman - Vice President of Finance & Chief Financial Officer

Our blackout periods are from the end of the quarter through 48 hours after we release our earnings.

John Murphy - Merrill Lynch & Co.

Okay. And then, Enoch, you mentioned something about the ASP being $41.50 and you said there were parts that were being excluded from that. What's going on there? That's slightly different than you have been talking about the ASPs or the revenue premier in the past.

Enoch Jen - Senior Vice President

Well, for the past couple of quarters, we've talked about that we are beginning to ship some non auto-dimming mirrors that offer some electronic content.

John Murphy - Merrill Lynch & Co.

Okay.

Enoch Jen - Senior Vice President

And we are also beginning to sell growing amount of microphone units that are not tied to our mirrors. And so it gives everyone an accurate apples-to-apples comparison on auto-dimming mirror ASPs, we're excluding those revenues and units from the calculation.

John Murphy - Merrill Lynch & Co.

Okay. Is there a way that we could get that disclosed going forward just in the financials so we can model that or is that already in the Q?

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

It's not in the Q and at this point in time we do not plan to disclose it.

John Murphy - Merrill Lynch & Co.

Okay.

Enoch Jen - Senior Vice President

We don't expect it in the near term to be that significant, but again, just for accuracy sake, we began doing that, I think, in the end of 2007.

John Murphy - Merrill Lynch & Co.

Okay, alright, thank you very much.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Thank you.

John Murphy - Merrill Lynch & Co.

Welcome.

Operator

Thank you. The following question is from Brandon Ferro from KeyBanc. Please go ahead.

Brandon Ferro - KeyBanc Capital Markets

Good morning, everybody.

Enoch Jen - Senior Vice President

Good morning, Brandon.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Good morning.

Brandon Ferro - KeyBanc Capital Markets

I think, Enoch, you had said that gross margin in the third and fourth quarter is going to be roughly in line with the second quarter?

Enoch Jen - Senior Vice President

That's correct.

Brandon Ferro - KeyBanc Capital Markets

Can you give me a sense of why we're going to see those fail to expand given the acceleration in growth rates related to the second quarter in the back half?

Steve Dykman - Vice President of Finance & Chief Financial Officer

Well, if you think of the third quarter's margin, we do have a number of annual customer price reductions that take place during that quarter. So that would have some downward pressure on our margins that will... is expected to offset any improved leverage on fixed overhead costs.

Brandon Ferro - KeyBanc Capital Markets

Okay. Is that the same in the fourth quarter then?

Steve Dykman - Vice President of Finance & Chief Financial Officer

I think when you look to the fourth quarter that would be the same and there also is some additional risks within the production light... vehicle production levels.

Brandon Ferro - KeyBanc Capital Markets

Okay. And then I wanted to touch on your RCD guidance in 2009. When you guys say more than double, what do you mean by that? And I guess in the context of a lot of that growth in 2008 and 2009 coming from the GMT900 on RCD, I know we have seen some pretty significant cuts to production forecast. I would think given those cuts we would potentially need to see a reduction in that guidance. Does that mean that guidance is just extremely conservative? What do you mean by more than doubling?

Enoch Jen - Senior Vice President

Well, I think mathematically we're talking about that if we expect to ship between 350,000 and 400,000 units in calendar year 2008 that we currently believe that we will ship more than 700,000 to 800,000 units in calendar year 2009. And it's really from a combination of two factors: the one is most of the new programs that we're announcing for 2008 calendar year are mid-year program. So you are going to get the benefit of the full year next year. And then secondly, we have a number of 2009 calendar year programs that we will be announcing in due course. So the reductions in the GMT900 platform that CSM has already incorporated in their mid-July forecast has been taken into account.

Brandon Ferro - KeyBanc Capital Markets

Okay. So just one clarification question before I jump off here. There is upside to the 700,000 to 800,000 to the extent that you haven't announced additional 2009 RCD programs.

Enoch Jen - Senior Vice President

Yes, I mean there is upside because 700,000 to 800,000 is exactly double, and we're currently expecting that we will more than double those shipments in 2009.

Brandon Ferro - KeyBanc Capital Markets

Okay. Thank you guys, I appreciate it.

Enoch Jen - Senior Vice President

Welcome.

Operator

Thank you. The following question is from Alexander Paris from Barrington Research. Please go ahead.

Alexander P. Paris - Barrington Research

Good morning.

Enoch Jen - Senior Vice President

Good morning, Alex.

Alexander P. Paris - Barrington Research

Just some questions on your geographic breakdown, I think maybe I've got confused. I think you were kind of talking about units or revenues where you said North America is about 25% of units... unit shipments?

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Yes.

Alexander P. Paris - Barrington Research

In 2007?

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Well, that's shipment to customers headquartered in North America.

Alexander P. Paris - Barrington Research

Okay. And then you said General Motors was 19%?

Enoch Jen - Senior Vice President

Of revenues.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Revenue.

Enoch Jen - Senior Vice President

Globally.

Alexander P. Paris - Barrington Research

Oh, I was mixing revenues with the units.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Yes, yes.

Alexander P. Paris - Barrington Research

And then Chrysler is... DaimlerChrysler is 15%. Is that revenues?

Enoch Jen - Senior Vice President

Yes.

Alexander P. Paris - Barrington Research

And 5% of that is Chrysler, of the 15%?

Enoch Jen - Senior Vice President

For 2007 --.

Alexander P. Paris - Barrington Research

And then you are doing business with Ford?

Enoch Jen - Senior Vice President

For 2007, yes.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Yes.

Alexander P. Paris - Barrington Research

Right.

Enoch Jen - Senior Vice President

In terms of Ford, I think for 2007, they were less than 10%. So their percentage was not disclosed.

Alexander P. Paris - Barrington Research

Okay. So that doesn't leave much for, like, Japanese companies producing here, does it, transplants?

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Well, that's included in the 75%.

Alexander P. Paris - Barrington Research

You include that in the international.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

The unit shipments, when we say that more than 75% of our unit shipments are to customers headquartered outside North America, that includes the transplant.

Alexander P. Paris - Barrington Research

Okay. So it's... where they are headquartered. Okay. And just one other thing related to that is are you shipping anything at all into China that's maybe included in your Japan, Korea numbers?

Enoch Jen - Senior Vice President

Yes, we are shipping some mirrors into China, primarily through joint ventures between global OEMs and Chinese companies that those units are included in our Asia-Pacific total unit.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

So, basically the way that we count our units is the destination to where they are shipped and some of those units actually might be included in very small part in some of the European because some of the European manufacturers, we'd ship it to them and then they later on ship it to China, but for the most pat it'll be in Asia.

Alexander P. Paris - Barrington Research

There's something I hear of 100 Chinese auto companies producing small amounts, but most of those shipments are to companies... major companies outside of China that are manufacturing in China?

Enoch Jen - Senior Vice President

Yes, if you look at the Chinese market today, there is really free segments: the very top end segment is dominated by these joint ventures between Mercedes, Audi, BMW, General Motors, Toyota and their local Chinese partners. The next segment, there is a few fairly large national Chinese automakers like Geely, Chery that have international aspirations. And then below that there is a large number of relatively small and inefficient Chinese automakers that are producing vehicles for the domestic market.

Alexander P. Paris - Barrington Research

Those are mostly smaller cars or maybe not, not a market premiers?

Enoch Jen - Senior Vice President

Well, they are smaller, less expensive cars. We also expect that there will be some significant industry consolidation over the next few years in that lower segment.

Alexander P. Paris - Barrington Research

Okay, thank you very much.

Enoch Jen - Senior Vice President

Welcome.

Operator

Thank you. The following question is from Mark Warnsman from Calyon. Please go ahead.

Mark Warnsman - Calyon Securities (USA) Inc.

Good morning.

Enoch Jen - Senior Vice President

Good morning, Mark.

Mark Warnsman - Calyon Securities (USA) Inc.

Reference was made to the negative leverage on fixed cost as well as the downside risk to top line growth. Interested to understand whether there are any initiatives in place to either reduce fixed costs or to at least slow the rate of fixed cost growth as a means to limit the potential downside to negative leverage on margins going forward.

Enoch Jen - Senior Vice President

There certainly are a number of cost reduction programs on the manufacturing side of the business and we are trying to manage our fixed cost. One of the issues we have is that we do have to continue to ramp up production to meet some of the mirror products that are continuing to sell very well and grow rapidly such as our Comring [ph] exterior mirrors, our Rear Camera Display and SmartBeam products. And in the short term, we can't immediately take some of the production capacity offline in terms of production line equipment for some of the decreases in domestic production levels. So we definitely are focused on that, but some it is somewhat of a balancing act for us.

Mark Warnsman - Calyon Securities (USA) Inc.

Is there a timing difference between... obviously the revenues dropped off very quickly and your fixed cost is easily and quickly managed. Is there a timeframe... is that we are talking two or three quarters where you could in fact make that transition on your... in terms of your manufacturing capacity?

Enoch Jen - Senior Vice President

I think if you look we've talked about plant capacity being a step function over a five to six-year period and manufacturing production equipment being added on an annual basis. So, I would say like you pointed out with the suddenness [ph] of some of the production decreases, we had a lot of equipment on order for this year. And so it probably will take a few quarters to work that out.

Mark Warnsman - Calyon Securities (USA) Inc.

And if I could, slightly different subject, market mix and its impact on your overall margins. You noted a significant shift in your shipments overseas versus what you are selling domestically. Does that have a meaningful impact on your margins, or is it roughly the same given that the vast majority of what you are selling is in U.S. dollars?

Steve Dykman - Vice President of Finance & Chief Financial Officer

Generally speaking, our gross margins across the board are pretty similar. So a lot of that is due to that fact that many of our customers have global purchasing departments. So we have to be consistent with our pricing in different regions.

Mark Warnsman - Calyon Securities (USA) Inc.

Great, thank you very much.

Enoch Jen - Senior Vice President

Welcome.

Operator

Thank you. The following question is from Rich Kwas from Wachovia. Please go ahead.

Unidentified Analyst

Hi, this is actually David Lynn [ph]. Just had a couple of questions on the commentary about the 10% revenue growth in Q3, when you mentioned... first, is that correct? And then when you mentioned the downside to CSM's production, are you... can I tie those in together saying that there could be downside to that 10%?

Enoch Jen - Senior Vice President

You are correct that we're estimating approximately 10% top line growth for the third quarter and the balance of this year. There certainly have been a significant amount of changes, as you're aware, in the CSM and other forecasting services forecast globally. And the vast majority of those changes recently have been down rather than up. So, we certainly recognize that there is some risk for the balance of this year, as well as for next year. I think in terms of volatility, the potential volatility is probably a little greater for next year compared to the balance of this year.

Unidentified Analyst

Got you. So I could conclude that there is some downside risk to that 10% revenue growth?

Enoch Jen - Senior Vice President

Yes.

Unidentified Analyst

Okay. Finally, can you give us some color as to kind of mirror... the contenting of the mirrors that were lost because of the UAW strike over at American Axle understanding that it is the higher content SUVs as well as the trucks?

Enoch Jen - Senior Vice President

Well, it was across most of the GM plants. And as we've said in the past, the majority of our business with GM is on the full size SUV and pick-up vehicle models. And we have talked about also in the past that historically we've had a contented inside mirror as well as a driver side exterior mirror on many of those models.

Unidentified Analyst

Got you.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

The content on those vehicles is slightly higher than our average.

Unidentified Analyst

Okay. Slightly higher, that's what you said?

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Yes, it's not... I mean, a lot of people have made some pretty large estimates in terms of what the content for vehicle is and I would say, it's slightly higher. They're certainly not our highest contented vehicles by any stretch.

Unidentified Analyst

Got it, got it. Great, thank you very much. That's all I have.

Enoch Jen - Senior Vice President

Welcome.

Operator

Thank you. The following question is from Jason Rogers from Great Lakes Review. Please go ahead.

Jason Rogers - Great Lakes Review

Hello. I noticed the inventory levels were up about 22% year-over-year and sequentially, just wondering what the reason for that was.

Steve Dykman - Vice President of Finance & Chief Financial Officer

On a sequential basis inventory levels were up a little bit, primarily at a few different areas; we had some additional lead times on some of our material components. We had some finished good inventory builds in anticipation of some line moves and some new product launches. So those were the main contributing factors on a sequential basis.

Jason Rogers - Great Lakes Review

Okay, thank you.

Operator

Thank you. The following question is from David Lieker from RW Baird.

David Leiker - Robert W. Baird

Hey, I am back.

Enoch Jen - Senior Vice President

Great.

David Leiker - Robert W. Baird

Just a couple of quick things here. Enoch, the other income, the gains and losses that, I think you made a comment you expect Q3 and Q4 to be comparable to the second quarter of 990,000, correct?

Steve Dykman - Vice President of Finance & Chief Financial Officer

Yes.

David Leiker - Robert W. Baird

Then in your interest and dividend income for the last several fourth quarters, you've had a pretty large distribution, is there any way to gauge what the size of that is this year versus what we've seen in the past? I know it's out of your control, but --

Steve Dykman - Vice President of Finance & Chief Financial Officer

That's very difficult to predict and we are anticipating it's going to be quite a bit less than the previous year because a large portion of that are the year-end mutual fund distributions that occurred.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

If you could tell what us what the market is going to do, we could give you a better estimate.

David Leiker - Robert W. Baird

I worked on that already. Can you talk a little bit about your purchasing initiatives and where you are in those starting to bear some fruit for you?

Steve Dykman - Vice President of Finance & Chief Financial Officer

As we've talked about, we initiated more aggressive purchasing cost reduction program back in the middle of 2006, and I think in the tail-end of the 2007 calendar year, and into the first quarter of 2008, you're seeing the compounding effect of some of those purchasing cost reduction benefits, as well as some of the VAVE initiatives. So that is continuing, our forecasts still expect some good benefits going forward that are assisting in offsetting the annual customer price reductions.

David Leiker - Robert W. Baird

Okay. And where do you think you are on terms of realizing that? I mean, you are a year into that. So there is something... a year and a half into it, still --

Steve Dykman - Vice President of Finance & Chief Financial Officer

We're a year and a half into it.

David Leiker - Robert W. Baird

So if you looked at what you thought your opportunity would have been from kind of A to B in realizing that you have some ongoing initiatives, do you think you kind of closed some of that gap... most of that gap there, or is there still quite a bit left?

Steve Dykman - Vice President of Finance & Chief Financial Officer

There's still additional opportunities, I think going forward it's going to be a combination of true purchasing cost reductions and continued future VAVE initiative benefits.

Enoch Jen - Senior Vice President

So, we still --

David Leiker - Robert W. Baird

And then just one last thing. When we were out last month, we talked about this a little bit. Just wanted to see if there are any incremental opportunities you're seeing in this premium compact market that's always existed in Europe, but is likely to be merged here in the U.S., and whether you're seeing any increased movements in that direction?

Enoch Jen - Senior Vice President

Yes, I think we are beginning to see some increased interest from automakers. The consumers that are switching to more fuel efficient vehicles are doing it because of gas prices, but they still expect many of the features that they currently have in their vehicles.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

The customers definitely seem to realizing that they need to offer featured up smaller vehicle like they do in Europe.

David Leiker - Robert W. Baird

Do you think that's something that can happen relatively quickly or is that something out in that two to three-year planning cycle?

Enoch Jen - Senior Vice President

Well, I think it's really primarily dependent on the automakers' ability to change. I think a week or so ago, Ford announced plans to convert some of their assembly plants from larger vehicles to the production of smaller vehicles. So I think it's primarily going to be dictated by their timing.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

And from our perspective

David Leiker - Robert W. Baird

So, to the extent that you are already on a car and they make the move of making more high-end focuses, if there is such a thing [ph].

Enoch Jen - Senior Vice President

Right. And then also if we already offer that particular auto-dimming mirror product --

David Leiker - Robert W. Baird

Right.

Enoch Jen - Senior Vice President

It can also go across other vehicle lines.

David Leiker - Robert W. Baird

Okay, great. Thank you very much.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Thanks. I think we have time for one more question.

Operator

Certainly. The following question is from Brandon Ferro from KeyBanc. Please go ahead.

Brandon Ferro - KeyBanc Capital Markets

Hey guys. Just one follow-up, as far as Kids and Cars Safety Act goes, Enoch, can you just generally talk about when the earliest date might be at which we see an automaker potentially make a 100% of its fleet compliant with the Kids and Cars Safety Act rater than waiting until that 2015 cut-off date?

Enoch Jen - Senior Vice President

Well, I think it's going to be potentially a couple of situations. The first is we expect one or more automakers to decide that they want to be early adaptors and position themselves as leaders in the safety feature. I think the second factor that will affect how early the across the board adoption will take pace will be dependent on the timing of new vehicles... new vehicle platforms at a specific automaker.

Brandon Ferro - KeyBanc Capital Markets

Okay.

Enoch Jen - Senior Vice President

And, for example, if you have got an automaker and they are going to introduce a new vehicle two years before the deadline, they may decide that they are not going to try to add the feature two years into the vehicle life, but they prefer to do it at the beginning.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

And the two automakers right now that are at the forefront of that in the U.S. at least are Ford and General Motors because Ford obviously was the first one to offer it as an OEM option and now General Motors is offering it as an OEM option. And they also have come out and published a study that they did with, I believe, Virginia Tech saying that they believe that the best place and the safest place to put a display, a rear camera display is in a rearview mirror and to use the 3.5 inch display they have. They even showed in the study that it decreases the number of back-over incidents by putting the display in the mirror as opposed to in a NAV... like in a NAV screen or in the radial.

Brandon Ferro - KeyBanc Capital Markets

Okay. Thank you.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

You are welcome.

Enoch Jen - Senior Vice President

Thank you very much for joining our conference call. And if you have any further follow-up questions, Connie will be available to handle those.

Connie Hamblin - Vice President of Investor Relations & Corporate Communications; Corporate Secretary

Connie and her friend Steve. Thank you, everyone. We appreciate you participating in the call.

Operator

Thank you. This concludes today's conference call. Please disconnect your lines and thank you for your participation.

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