Gentex Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Gentex Report to the fourth quarter 2019 in-year and financial results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. If you require further assistance, please press start and zero. I would now like to do a special release conference call. Mr. Josh O'Berski, you may begin.

Thank you. Good morning and welcome to the Gentex Corporation fourth quarter 2019 earnings release conference call. I'm Josh O'Berski, Gentex Director of Investor Relations, and I'm joined by Steve Downing, President and CEO, Neil Boehm, Vice President of Engineering and CTO, and Kevin Nash, Vice President of Finance and CFO. This call is live on the Internet by way of an icon on the Gentex IR website at ir.gentex.com. All contents of this conference call are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcast, retransmitted, transcribed, or otherwise redistributed. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any unauthorized use of the content of this conference call. This conference call contains forward-looking information within the meaning of the Gentex Safe Harbor Statement included in the Gentex Report's fourth quarter and year-end 2019 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'll turn the call over to Steve Downing, who will give the fourth quarter 2019 financial summary. Steve? Thank you, Josh.

For the fourth quarter of 2019, the company reported net sales of $443.8 million, a decrease of 2% compared to net sales of $453.4 million in the fourth quarter of 2018. The decrease in revenue on a quarter-over-quarter basis was due in large part to the strike at General Motors. which negatively impacted sales in the quarter by approximately 5%. In addition to the strike creating headwinds that impacted the North American market, the rest of the world light vehicle production declined 5% on a quarter over quarter basis when compared to the fourth quarter of 2018. A 6% decline in Europe and a 10% production decline in the Japan-Korea market quarter over quarter More than offset the modest improvement in the China market versus the fourth quarter of 2018. The fourth quarter has always been difficult to forecast because of inventory adjustments at our customers that often occur at year end. But in 2019, we were also estimating the impact that the strike would have on revenue and profitability for the quarter. Throughout the year, we continue to experience exceptional growth of our full display mirror product, especially with our launch customer General Motors. By the end of the year, GM had become one of our larger customers in 2019, which means we were disproportionately impacted by the strike. For the quarter, revenue ended down 2%, but we lost approximately 5% in the revenue due to the strike. In essence, if the strike had not happened, revenue would have been up 3% for the quarter. In terms of light vehicle production, global volumes were down over 5% for the quarter, but even if you remove the impact of the strike from those numbers, then global production was still down over 4% in Q4 versus last year. This put our outperformance to market for the quarter at 7%. For calendar year 2019, net sales increased 1% to $1.86 billion compared to $1.83 billion for calendar year 2018. Our initial sales forecast for 2019 was based on a global light vehicle production forecast that assumed an approximate growth rate of 1%. However, the actual global vehicle production rates for calendar year 2019 were down 6%, which correlates to our very strong outperformance to market of 7% for the year. The gross margin in the fourth quarter of 2019 was 36.5%, compared with a gross margin of 37.9% in the fourth quarter of 2018. The impact of the strike at General Motors caused margin headwinds of approximately 125 basis points and the resulting lost profitability during the quarter, in addition to our inability to leverage fixed overhead costs due to the lower sales. The gross margin during the quarter was also negatively impacted by approximately 30 basis points of incremental tariffs when compared to the fourth quarter of 2018. The fourth quarter change in gross margin was driven by these two distinct situations of the strike and escalating tariff costs. that negatively impacted gross margins by 155 basis points in the quarter. Aside from these two issues, the overall gross margin would have been slightly better than last year. For calendar year 2019, the gross margin was 37%, compared with a gross margin of 37.6% for calendar year 2018. The gross margin for the year was negatively impacted by approximately 70 basis points from tariffs versus 2018. Other factors that impacted the gross margin during the year included the company's inability to leverage fixed overhead costs on the lower than expected sales levels and annual customer price reductions that were not fully offset by purchasing cost reductions. Considering the very challenging global light vehicle production markets, the strike, and the fact that we were still dealing with some of our own product related headwinds in 2019, the team has done an excellent job of maintaining a consistent gross margin from 2018. All of our teams have been focused on offsetting annual customer price reductions, addressing incremental tariff costs, and finding ways to minimize the impact of fixed overhead pressures given the lower sales levels. The primary areas that helped bring about this improvement were better than expected purchasing cost reductions, improved manufacturing efficiencies, design changes that led to cost improvements, and the success of our full display mirror. As we look back and compare this year to 2018, one thing is very clear. If not for the incremental tariff costs in 2019, our gross margin would have been slightly higher than it was in 2018. Operating expenses during the fourth quarter of 2019 were up 9% to $50.9 million when compared to operating expenses of $46.5 million in the fourth quarter of 2018. For calendar year 2019, operating expenses were $199.8 million up 10% compared to $182.3 million in calendar year 2018, which is in line with the company's original estimates for the year. Net income for the fourth quarter of 2019 was $99.5 million compared to net income of $106.3 million in the fourth quarter of 2018, primarily driven by the reduction in revenue as a result of the strike during the fourth quarter. Net income for calendar year 2019 was $424.7 million, down 3%, compared with net income of $437.9 million in the calendar year 2018, primarily driven by lower vehicle production levels, increases in tariffs, and the impact of the strike. Earnings per diluted share in the fourth quarter of 2019 were $0.39, compared with earnings per diluted share of $0.41 in the fourth quarter of 2018. For calendar year 2019, earnings per diluted share were $1.66, which was a 2% increase year over year, compared with $1.62 for calendar year 2018. I will now hand the call over to Kevin for the fourth quarter financial details. Thank you, Steve.