Hello, and welcome to Gentex Reports Second Quarter 2019 Financial Results. At this time, all participants are in a listen-only mode. [Operator Instructions]. Later, we will have a question-and-answer session and the instructions will be given at that time. Now, it’s my pleasure to turn the call to Josh O’Berski, Director of Investor Relations..

Thank you. Good morning, and welcome to the Gentex Corporation second quarter 2019 earnings release conference call. I'm Josh O’Berski, Gentex's Director of Investor Relations, and I'm joined by Steve Downing, President and CEO; Kevin Nash, Vice President of Finance and CFO; and Neil Boehm, Vice President of Engineering and CTO.

This call is live on the Internet by way of an icon on the Gentex Web site 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 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 Safe Harbor statement included in the Gentex reports second quarter 2019 financial results press release from earlier this morning, and as always, shown on the Gentex Web site. 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 second quarter of 2019 financial summary.

Steve?.

Thank you, Josh. For the second quarter of 2019, the company reported net sales of $468.7 million, which was an increase of 3% compared to net sales of $455 million in the second quarter of 2018. This growth was in contrast of global light vehicle production that declined approximately 8% in the second quarter of 2019 versus last year.

Once again, the second quarter was very difficult to predict revenue as evidenced by the fact that IHS Markit's forecast worsened by approximately 4% versus the beginning of quarter forecast.

Overall, the second quarter market conditions were very similar to those of the first quarter of this year, both of which included large reductions and global light vehicle production versus the prior year.

Despite the current vehicle production environment being down about 8% from the second quarter of 2018, we were able to outperform the underlying market by approximately 11%, which resulted in a net 3% revenue growth rate for the quarter.

For the first six months of 2019, global vehicle production levels have been off by approximately 7% versus prior year, but we have been able to maintain our growth targets for the year.

In fact, based on the first six months of the year and our forecast for the second half, we are actually raising the bottom end of the forecast range and narrowing our full year revenue guidance to be between $1.87 billion and $1.9 billion.

Based on our first half of 2019 performance and the current IHS Markit forecast for the second half of the year, we are poised to outperform global automotive markets by approximately 7% for the year.

For the second quarter of 2019, the gross margin was 37.7% which was a significant increase when compared to a gross margin of 36.2% in the first quarter of 2019. On a quarter-over-quarter basis, the gross margin for the second quarter of 2019 declined slightly compared to a gross margin of 38% for the second quarter of 2018.

The gross margin in the quarter was negatively impacted by approximately 60 basis points due to tariffs that were not in place during the second quarter last year.

Our sequential gross margin expansion in 2019 was due to positive product mix driven by increases in Full Display Mirror and domestic exterior-mirror growth, better than expected purchasing cost reductions, cost discipline throughout the company, and success in mitigating some of the escalating costs related to tariffs that have been impacting the company since July of 2018.

In fact, if you remove the 60 basis points of margin erosion due to tariffs, our gross margin was up 30 basis points versus last year. Our ability to maintain gross margins in a difficult production environment is a testament to the hard work and cost focus of the entire team at Gentex.

Operating expenses during the quarter were up 5% to $48.6 million when compared to operating expenses of $46.1 million last year. We managed our operating costs carefully during the quarter but with the deliberate intention of continuing to invest in future growth.

The primary driver of increases in operating expenses is funding the resources needed for the development and launch of already sold products including additional auto-dimming mirrors, Full Display Mirrors, Integrated Toll Modules, and our new aerospace program.

In addition, we are deploying resources to expand the product portfolio in the areas of connected car, digital vision and large area dimmable devices, which we believe will provide the potential for long-term growth.

Income from operations for the second quarter of 2019 increased 1% to $127.9 million when compared to income from operations of $126.7 million last year. The increase in income from operations was primarily due to the higher revenue on the quarter, but was partially offset by lower operating margins when compared to the same period last year.

During the second quarter of 2019, the company's effective tax rate was 16.4%, up from 15.5% during the second quarter of 2018, primarily driven by a decrease in discrete tax benefits related to stock-based compensation. Net income for the second quarter of 2019 was relatively flat at $109 million compared to the second quarter last year.

Earnings per diluted share for the second quarter of 2019 increased 5% to $0.42, when compared to $0.40 for the second quarter of 2018, primarily as a result of a 6% reduction in diluted shares outstanding from share repurchases, due to the continued execution of the company's previously disclosed capital allocation strategy.

During the second quarter of 2019, the company repurchased approximately 3.1 million shares of its common stock at an average price of $22.72 per share, for a total of $69.9 million of share repurchases.

In the first half of 2019, the company has repurchased approximately 7.8 million shares of its common stock at an average price of $21.30 per share, for a total of approximately $166.1 million of share repurchases.

As of June 30, 2019, the company has approximately 26 million shares remaining available for repurchase pursuant to the previously announced share repurchase plan.

The company intends to continue to repurchase additional shares of its common stock in the future in support of the previously disclosed capital allocation strategy, but share repurchases may vary from time to time and will continue to take into account macroeconomic issues, market trends, and other factors that the company deems appropriate.

I will now hand the call over to Kevin for the second quarter financial details..

Thank you, Steve. Auto-dimming mirror unit shipments increased 2% in the second quarter of 2019 when compared with the second quarter of 2018, primarily driven by a 7% increase in interior auto-dimming mirror unit shipments, which was highlighted by a 39% increase in North American exterior auto-dimming mirror unit shipments.

Automotive net sales in the second quarter of 2019 increased 3% to $456.6 million compared with $444.2 million in the second quarter of 2018. The growth in automotive sales was driven primarily by strength in Full Display Mirror and exterior auto-dimming mirror unit shipments.

These product growth areas helped offset annual customer price reductions and product specific revenue headwinds.

Other net sales in the second quarter of 2019 were 12.1 million, an increase of 13% compared to 10.8 million in the second quarter of 2018 on increased dimmable aircraft window shipments and increased shipments of certain fire protection products. Now for a balance sheet update.

The following items represent a comparison versus December 31 of 2018, which are also included in today's press release. Cash and cash equivalents were 260.3 million compared to 217 million. The increase was primarily due to cash flow from operations, which was partially offset by share repurchases, dividend payments and capital expenditures.

Short-term investments were 190.6 million, up from 169.4 million and long-term investments were 121.1 million compared to 138 million. Fluctuations in the two were driven by changes in fixed income investment maturities within the portfolio.

Accounts receivable increased 12.9 million to 226.4 million, primarily due to the higher sales level compared to the fourth quarter of 2018, as well as the timing of sales within each of the quarters.

Inventory as of June 30 declined slightly to 225.1 million, accounts payable decreased slightly to 90 million and other current liabilities increased 11.2 million to 87.5 million primarily as a result of increases in accrued taxes and accrued wages. Now for some cash flow highlights.

Cash flow from operations for the second quarter of 2019 was 137.4 million compared with 144.9 million during the second quarter of 2018. Year-to-date 2019 cash flow from operations was 273.5 million compared with 292.4 million in 2018. The differences in each of the periods were primarily due to changes in working capital.

Capital expenditures for the second quarter of 2019 were 28.7 million compared with 25.6 million in the second quarter of 2018. The year-to-date 2019 capital expenditures were 45.5 million compared with 51.9 million in 2018.

And depreciation and amortization for the second quarter of 2019 was 25.2 million compared with 27.9 million in the second quarter of 2018. And year-to-date depreciation and amortization was 53.3 million compared with 55.9 million in 2018. I'll now hand the call over to Neil for a product update..

Thank you, Kevin. In the second quarter of 2019, there were 33 total launches of our interior and exterior auto-dimming mirrors and electronic features. Of the total launches, approximately 40% had advanced features.

While the percentage of new launches with an advanced feature was slightly lower than previous quarters, the reason for it offers some interesting insights. During the second quarter, we’ve launched base interior auto-dimming mirrors on four new nameplates for domestic China OEMs and one new nameplate was launched for domestic India OEM.

These nameplate launches represent further penetration of our core auto-dimming technology for emerging market applications. In regards to our Full Display Mirror product, the company launched four additional nameplates during the second quarter of 2019, which means we are currently shipping on 30 vehicle nameplates for this exciting new product.

For the second half of 2019, we are forecasting approximately eight new vehicle nameplate launches of Full Display Mirror. Our last update for today is in regards to our Integrated Toll Module product. Late in the first quarter of this year, we began our first volume shipments to Audi for the E-Tron vehicle.

During the second quarter of 2019, the first consumers began registering their ITM systems online to activate the device and begin using the system for normal tolling use. We are watching and waiting for feedback from the consumers, dealers and OEM to help other customers understand the use case and consumer acceptance of this product.

While the volumes are relatively low on this vehicle, we are excited to have successfully launched a new innovative connected car product that includes transactional capability. Over the next 18 months, we continue to expect further nameplate launches with our launch customer Audi as well as the initial launch of ITM at two additional OEMs.

I will now hand the call back over to Steve for guidance and closing remarks..

Thanks, Neil.

Based on the mid-July 2019 IHS Markit light vehicle production forecast for our primary regions of North America, Europe, Japan, Korea and China, current forecasted product mix and expense growth estimates and year-to-date actual performance, the company is updating guidance for the remainder of calendar year 2019 in each of the following areas.

Revenue of $1.87 to $1.9 billion for the year; gross margins in the range of 36.5% to 37.5% for the year, which represents a 50 basis point improvement in the gross margin forecast for the year and includes estimates for the additional tariffs that became effective in June of 2019; operating expenses between $195 million and $200 million; estimated tax rate between 16% and 17%; capital expenditures between $90 million and $100 million; and depreciation and amortization between $100 million and $110 million.

Additionally, the company is maintaining its previously announced revenue guidance for calendar year 2020 to be between 3% and 8% above 2019 revenue estimates. The second quarter of 2019 was a challenging vehicle production environment, but the company delivered growth that outperformed our underlying market by approximately 11%.

While we were pleased to see the sequential improvement in sales growth versus the first quarter, the most impressive performance was evidenced by the strong gross margin during the second quarter, which improved 150 basis points versus last quarter.

The focus and hard work from the entire team at Gentex combined with our disciplined approach to capital allocation led to a 5% increase in EPS for the quarter. Thank you for your time today. And we can now proceed to questions..

Thank you. [Operator Instructions]. Our first question comes from Chris Van Horn with B. Riley FBR. Your line is open..

Good morning, guys. Thanks for taking the call and congrats on the quarter..

Good morning, Chris. Thanks, Chris..

So just on the gross margin guidance coming up a little bit, just a little bit more detail on what you’re seeing, is it around the Full Display rollout, is it around some mixed tailwinds that you see, is it cost control? Just a little bit more detail on what’s driving that..

Thanks, Chris. It’s a combination of some of the things we laid out earlier in the year. A little bit better participation from our purchasing cost reductions that initially we thought were a struggle. Our teams have done a great job of improving that.

We’ve offset some of the tariffs earlier in the year and are able to mitigate some of that going into the back half. But yes, the mix is going very well right now. As the weakness in China is playing out, we’ve talked before about base level products into the China market. Actually that’s been a tailwind for us on the margin side.

So we’re seeing a lot of that stuff continue into the back half of the year..

Okay, got it.

And then on the new nameplates for Full Display Mirror, would you be able to give us any more information on who the customer was, are they passenger vehicles versus trucks or SUVs, anything else you could give us there?.

Yes, absolutely. There’s four new nameplates specifically. There was the Cadillac XT6, there’s the GMC and Silverado heavy duty and there was the Jaguar Land Rover Discovery Sport..

Okay, got it..

Got it, all right..

And then is there any difference in content of those versus camera and screen or both or one or the other?.

On GM, we’re Display Mirror only and then on the Range Rover we’re system; camera and display..

Okay, got it. So if you look at maybe from a regional perspective how you’re thinking about the back half of the year, we’ve heard other suppliers kind of being really cautious on Europe and cautious on China. It seems like China’s kind of building up a little bit more from a penetration standpoint versus a market risk perspective.

But I guess could you just comment regionally how you’re feeling for the back half of the year?.

Yes, I think when we came into the Q1 call heading into Q2, we made some comments that we were a little more pessimistic than what the IHS data showed in Q2 and actually our forecast played out almost entirely the way we had expected it to.

We did make some manual adjustments to the IHS data which actually served us pretty well, helped us plan a little better than we would have if we had gone purely off of that data. We’re taking the same approach in the back half of this year.

So despite – you see the Q3 numbers that we’ve posted in the press release, the IHS numbers, we’re probably a little more pessimistic than what those show. So we’re hopeful. Obviously, the comps get a little better in the second half of the year because the China market started to fall apart really in the whole second half last year.

So the comps were a little easier, but we really don’t think there’s a recovery there fully in place yet either. So we’d expect probably closer growth in a couple of regions, like in Europe and North America in the back half of this year but we’d probably look at those are more flattish-type markets than we would growth markets..

Okay, great. Thanks again for the time..

Thanks, Chris..

Thanks, Chris..

Thank you. Our next question comes from David Leiker with Baird. Your line is open..

Good morning, everyone..

Good morning, David..

I should know this number but if you’d remind me please, how many FDM customers do you have now?.

We’re shipping at five currently. We’ve announced that we have nine total sourced but we haven’t released the last four yet because they’re not in production..

Okay, great. Thank you. And then a couple of things. So growth above market, a great number here in the quarter what you’re talking about something a little bit less than that. Can you talk through that a little bit? I think you’re 11% in the quarter and you’re talking about 7% going forward..

Yes. Well, I think that’s really the gap you see is the actual outperformance to the market in the first half. The 7% is really representing kind of what we believe IHS numbers forecast in the second half or probably a little higher than what they’ll actually be.

So the difference between the two would be not completely but part of that’s going to be kind of the manual adjustment that we’re making to our back half forecast..

I follow you.

So if you look over the next and let’s say three to five years, what do you think from what you know today that you can commit to or suggest that you could do in terms of revenue growth relative to a flat – say the market’s flat, what do you think you’re able to ship to grow that?.

Yes, we believe really our long-term projection is like mid-upper single digit outperformance to market conditions. So if you look at it and call it five to eight or something in that range, that’s what we’re really targeting right now is to outperform the market by those types of levels..

And then a similar comment here on margins. You’ve got some headwinds that you’re doing a nice job of offsetting. You’re running gross margins today that are a couple of points below what they had been historically.

What’s the longer-term target as it relates to gross margins?.

Yes, we think somewhere in that kind of 36 to 37.5 range is kind of the realistic range. We talked about this a couple of years ago when the margins got into like the high-38s that we didn’t believe those were sustainable margins. If you look at that margin level, there was a lot of things factoring into that that helped.

But what I would say is if you – like we mentioned, if you took tariffs out of this which shouldn’t exist obviously a few years ago, you’re talking about a 38.3 gross margin which would be at the very high end if not outside of what we would look at as kind of a realistic long-term target.

So really if you look at the natural evolution in margins, remember if you back up seven, eight years ago, there were actually well below where we are now. They were in the kind of 33%, 34% range. And so we’ve improved those significantly over the last few years.

We do think there is kind of a natural barrier and really what that’s driven by is the products that Neil talked about, some of the launches with base auto-dimming applications in emerging markets are going to be a natural barrier to margin growth, but they also help drive revenue opportunities and then longer-term market opportunities..

And then one last item. It sounds like you’re doing – you’re pretty good on mitigating some of these tariff issues.

What’s the path being able to mitigate all of that or is that just not reasonable?.

I think some of it is not reasonable until we have a change in business structure potentially and we’re evaluating that all the time. At this point, it’s about a 50-50 split between tariffs inbound from raw materials and then tariffs on the export of our materials into the China market.

So we’re evaluating that business model all the time and we continue to hope that there’s a trade deal that would happen that would help us keep most of our business close to home. But, again, if it goes too long, then we recognize that there is embedded cost that we need to address.

But we’ve addressed a significant amount of the potential tariffs already and we’re continuing to work towards action plans to mitigate smaller portions of those as we move forward.

Then the question will become structurally how much of that can you accomplish versus how much do you have to spend to achieve the savings? And so those are simple make by decisions that we make every day..

Okay, great. Thank you very much..

Thank you..

Thanks, David..

Thank you. Our next question comes from Ryan Brinkman with JPMorgan. Your line is open..

Hi. Thanks for taking my question. I saw the earnings release made some mention of better progress in mitigating the impact of tariffs.

Can you talk about what those actions were? Whether they relate to sourcing components from countries other than China, some other factor? I think you previously discussed the possibility of potentially local assembly in China, mentioning maybe you’ve done some of that in the past, although the facility there may have been used as a warehouse, et cetera.

To what extent do you expect to make additional progress mitigating tariff costs? And then just lastly along these lines, should China trade tensions be resolved, what happens then? Are you able to or would you desire to revert to your past practices thereby eliminating all tariff-related costs or would you want to or need to continue with these alternative sourcing or other coping mechanisms which would mean maybe some elevated costs relative to prior?.

Thanks, Ryan. I’ll try to start and then I think Steve will finish, so it’s a pretty long statement there. So most of the work if not all of it so far has been around the first priority was looking at our existing supply base and seeing if they had manufacturing capabilities outside of China. So that’s been one leg of the process.

The other process has been changing some suppliers to places – new suppliers outside of China. The other one is honestly our team’s going to work to look at the country of origin of some of the materials that we’ve sourced and we’ve had some rulings of stuff that was originally thought to be China that’s now Taiwan or another Far East region.

So that’s been the primary work so far and I’ll let Steve talk about kind of the longer-term strategy there..

Yes. So like Kevin mentioned, everything has been focused right now on supply base; low risk, low cost of entry to get these components done really with little or no cost impact over what we would say a year ago in terms of the build material of these items. So that was the primary focus which we’ve executed very well.

The next stage of that, like we had mentioned on our prior call, so it’s a little more difficult and cost impacts both lasting or upfront capital. And so what we’re doing right now is evaluating those constantly. We have not started to manufacture in the China market for sales there yet.

So we haven’t made any permanent or lasting decisions in terms of the cost we’ve been able to mitigate. These are ones that are still before us.

So we have plans right now we’re working on both to go further with additional suppliers to help mitigate tariffs and then also looking at alternatives for our own supplier products back into the China market, but none of those decisions are final yet..

Okay, very helpful. This will be a much shorter question.

What would you say are the primary factors that are allowing you to roughly maintain your full year revenue forecast at least at the midpoint in the face of some materially lower industry light vehicle production forecast? Is it primarily a penetration issue as in higher take rates or more attraction on new launches, et cetera? Thanks..

Yes, if you look at – we tried to – probably not the greatest job, but we tried to highlight a few of those in terms of growth into emerging markets with our base auto-dimming capabilities. Obviously, some of the takeover business that we’ve talked about the last few quarters from our competitor on the outside mirror space has helped drive growth.

And then the really strong interest and launch of FDM has been one of the key drivers of the business in the first half of the year. And so we continue to watch this. The one thing that’s very interesting is we’ve been talking about the industry headwinds, but we’ve also had some of our own product headwinds with Mobileye losses.

And so as we’re posting these growth rates, this is in the face of losses on the Mobileye integration. So if you look at that and add that back, you’re really talking about even another 100 to 150 basis points better performance because of the headwinds that we’re facing on the product side..

Great. Thanks a lot..

Thank you..

Thank you. Our next question comes from John Murphy with Bank of America Merrill Lynch..

Good morning. This is Aileen Smith on for John.

The first question, we’ve heard from a North American supplier earlier this quarter that there was an incremental pricing pressure and concessions that occurred intra-quarter and midyear which is a bit abnormal and you guys have talked about at length that the majority of the price that you faced hit in the first quarter which you then worked to offset through the course of the year.

Is there any indication that automakers are pushing for more now from you or from any other supplier or are the pricing dynamics you face pretty well known at this point and it’s just the function of what you’re able to offset in terms of purchasing cost reductions or other productivity initiatives?.

Our experience is that the pricing pressure is relatively similar to what we faced the last few years, so I wouldn’t say that anything’s changed from an OEM standpoint. Obviously with every supplier, there’s unique situations that occur in your business with – in your business relationship with the customer.

So my guess is, is that some of it is related to that. Sometimes these things are a little more subjective than objective in terms of what this pricing pressure will feel like. It does vary from time to time but I would say ours is relatively in line with our forecast and exactly with where we expected it to be at the beginning of the year..

Okay, great. And second question, you referenced that part of the sequential margin expansion in the second quarter was a function of positive product mix with the Full Display Mirror. Correct me if I’m wrong but I was under the impression that Full Display Mirror is more of a corporate average margin.

So is the margin benefit really just attributable to exterior mirrors or are you now also seeing some margin uplift on FDM?.

It’s really about that and the product mix. So you’re not incorrect. The FDM is really in line with corporate average margins.

However, when you’re rolling off a Mobileye integration product as that product’s winding down and affecting our revenue growth rate, but it’s actually being replaced with FDM products that are a better margin profile than the Mobileye integration product.

So even though that represents a slight headwind of revenue, because we’re losing some business, it does improve profitability..

Great. That’s very helpful. And last question to follow up on one earlier around tariffs.

As we think about the opportunity for some of the trade friction that exists right now to maybe be more structural in nature rather than what I think many assume to be transitory and as you guys in particular work to expand further into international regions and emerging markets, do you have any updated thoughts around whether having an international footprint with another planned in Europe or Asia would ultimately make sense?.

Yes, we have actually a very large facility in Central Germany and we have in the last two years have purchased a larger building in the Shanghai area and that is always the one that we’re refurbing right now and getting ready. It’s something that offers the potential.

We distribute all the time out of our Shanghai facility for all the China market currently. And so if these things remain, the possibility for us to do localized final assembly in China is always on the table..

And how long would a transition like to move from a distribution center to a production facility take?.

Well, right now what it is, is we’re actually getting the purchased facility up to our current specs and how we like facilities designed and build. And so that should be done hopefully by the end of this year or early next year.

And then from there you’re looking at probably another 12 months roughly when you could have final assembly going inside – up and running inside of a facility..

Great. That’s very helpful. Thank you so much for the questions..

No problem. Thank you..

Thank you. Our next question comes from James Picariello with KeyBanc Capital Markets..

Hi. Good morning, guys..

Good morning, James..

So you mentioned the driver assistance, SmartBeam headwind, I believe in the first quarter was roughly 250 to 300 basis point headwind.

What was it in the quarter and what are your expectations now for the full year?.

Yes, it was pretty much the same. There’s a combination of weakness in our strong markets for the SmartBeam weakness, but when you put it altogether it’s between 200 and 250 basis points of headwind in the quarter..

And then 200 still for the full year?.

Yes, 200 to 250..

All right. And then regarding FDM, do you have any update on maybe what your annualized shipment target is? I know you’ve previously said greater than 500,000.

Just curious if you got a cleaner update on that?.

Yes, I think in the last quarter conference call, one of the things we mentioned is that we felt very comfortable with we should be above that 0.5 million unit target for the full year, and at the time we said well above..

So that’s just unchanged..

Correct..

And is FDM included in your interior domestic unit number?.

Wherever it’s been shipped, it’s included in --.

As a unit..

As a unit, yes..

Okay. Just last one for exterior domestic, another quarter of very strong growth from market share capture there.

Just wondering what your thoughts are for the back half for that particular product?.

It’s going to start to revert to kind of normal growth rates in the back half of the year as we lap really to think about – yes, we’re in the --.

Q3..

I think Q3 was the start of that takeover business last year..

But could that still be up year-over-year or would you expect --?.

Yes, it’s a possibility depending on production obviously what’s winning in the market, but yes it still shows outside mirrors in general or exterior mirrors in general are still growing above market..

Okay. Thanks, guys..

Thank you..

Thank you. [Operator Instructions]. Our next question is from David Kelley with Jefferies..

Good morning, guys..

Good morning..

Another one from FDM on me, could you update us on the customer pipeline? I think you were targeting a 10th customer announcement by next quarter, but any update on new customer traction would be appreciated..

I think the customer side of it is going extremely well. We don’t have a 10th one to announce this quarter. We still do expect that in the third quarter. And we have some positive engagement with some additional customers as well..

And then as we begin to ship these more and more vehicles, more consumers are getting acclimated to the product and then obviously OEMs are getting to experience it on competitive vehicles. So we believe that can help drive interest in the product longer term..

Okay, great. Thank you. And you maintain full year operating expense guidance. You’ve obviously got some fair amount of new product ramp and several new products in development.

Could you just talk about the balances of managing the OpEx line while also investing in several of these growth portfolios?.

Absolutely. In fact that’s probably the most challenging part of our job and quite frankly is it’s a difficult production environment. Obviously, we have a strong income statement. But making sure that we operate with discipline and we fund those ideas appropriately is probably the hardest part of the job in terms of finding that right balance.

We believe like what we’ve seen in the first half of this year is probably the best execution we’ve had in the area in a while. It is growing slightly faster than our top line, but we believe we’re funding those new development in technologies appropriately.

Obviously that can subject to change and as a very innovative company when new ideas come up, we don’t idol them purely based on the budget. We look at the ideas and almost like a venture capital type model.

If there’s an amazing idea that’s outside of our budget for the year but we see the long-term growth prospects, we’re willing to step that up to make sure we’re funding the appropriate innovations..

Okay, got it. Thanks. And last one for me and I’ll pass it along and I really appreciate the color on the China and India launches.

I guess how quickly do you think your emerging market exposure can ramp in the next couple of years? Do you have either a shipment or maybe an annual sales growth target that you could share?.

Well, I think really what we look at there is it’s not in terms of units, it’s really looking at outperformance to market there as well. We want our growth rate in emerging markets to be kind of at the higher end of our growth rate range for the company.

And now it’s difficult to do because in emerging markets you’re shipping lower cost products or introductory base auto-dimming type technology. But we believe there’s absolutely an avenue for us to continue to grow on those emerging markets at the high end of the corporate growth rate range..

All right, perfect. Thank you. I appreciate the color..

Thank you..

Thank you. Our next question is from David Whiston with Morningstar..

Thanks. Good morning. First just going back to tariffs, a two-part question.

Given guidance raise and I assume your German and Japanese customers are not that worried about new auto tariffs under Section 232, if you could just talk about the [indiscernible] and any chatter you’re hearing from the German OEMs and the Japanese ones that would be helpful? And then, Kevin, you talked about – if these tariffs were to be enacted later this year there are more costs you can address, so why not go ahead and make those costs production actions now anyway regardless of the tariffs?.

Well, I think some of the stuff has been enacted in June, List 3 going to 25%. Our teams have not stopped looking for ways to optimize that going forward. I think the one that I mentioned is there is also a retaliatory tariff that started in June going into China.

And what I was referring to is changing the manufacturing process like Steve already had mentioned is that’s a longer-term play. And if we do nothing, then that cost staying in the pipeline until we do change kind of our – if we were to do final assembly in China, for instance. So that’s the piece of why it’s there and not addressed..

And the reason why we’re careful about that one is because we believe we have the right cost optimization model currently if there were no tariffs or if it was back the way it was say a year ago from a trade standpoint.

And so we don’t want to necessarily add this cost or the capital infusion that would require to get there to offset something that may not be a permanent part of our future. So we’re just carefully watching that. We’re actually building our plans around both models just in case. We’ll continue to refine those.

And if it looks like it’s destined to stay, then we’ll have to consider at least making different decisions which we’ll have multiple plans in place to address if that time comes. As it relates to the sentiment from OEMs, what I would say is all the OEMs are obviously very aware. All of them take a different stance.

One thing that is consistent is most OEMs ask us, okay, what would be the mitigation plan and how do we work through that together to make sure if something like this were to happen to make sure that we could continue to do business in a cost effective way? So while this is all happening on the China front, we actually have request from OEMs all over the world talking about their specific situation and we discuss quite openly what our plans would be and what our capabilities would be to help support them..

Okay. Thanks. That’s helpful. And then moving on to the language in the press release on moving to large area dimmable devices.

Are you talking outside of autos or are you talking more like parts of the vehicle interior and windows? And related to that, how do you avoid competing with many other firms in that space because I know it’s something you try to avoid?.

Yes. Well, the interesting part is if you look at our core electrochromic technology, there’s not a long list of natural competitors for that type of technology. So we’re not trying to compete with people that are doing commercial glass or automotive glass for that matter that is fixed transparency.

We’re looking at basically helping create a new version of a technology in a new space. So our primary focus right now has been the aerospace market and that expansion and adding the 777 and that launch that we’re working on currently. But then it’s also looking at multiple used cases for dimmable glass or dimmable surfaces in a vehicle environment.

Last year at CES we showed that with multiple used cases, everything from sensor shrouds to kind of visor applications, the sunroofs. And as we move forward, we’re going to continue to look at new ideas and ways where that type of technology could be useful for a car today or the car of the future..

Okay. Thanks, guys..

Thank you. I will like to turn the call back.

Thank you. I will like to turn the call back to Josh O’Berski for any final remarks..

Thank you. Thank you everyone for your time this morning. As a reminder, our Analysts and Investor Day is coming up on August 21st and will be held at our headquarters in Zeeland, Michigan. If you or someone from your firm is interested in attending, please reach out to me at your convenience and I’ll send over more details about the event.

With that said, this concludes our call. Thank you and have a great weekend..

Thank you, ladies and gentlemen, for participating in today’s program. You may all disconnect. Have a wonderful day..