Gentex Corporation
Q2 2008 Earnings Call Transcript

Published: 23 Jul 2008

[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:]

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:]

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

[Connie Hamblin:]

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:]

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

[Enoch Jen:]

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:]

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:]

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

[Himanshu Patel:]

I guess, on more kind of --

[Connie Hamblin:]

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:]

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:]

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:]

That is correct.

[Himanshu Patel:]

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:]

Pretty much in line.

[Enoch Jen:]

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:]

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

[Enoch Jen:]

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:]

Thank you.

[Connie Hamblin:]

Thanks.

[Operator:]

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

[David Leiker:]

Good morning.

[Enoch Jen:]

Good morning, David.

[David Leiker:]

Good morning.

[David Leiker:]

Is it afternoon?

[Enoch Jen:]

No, still morning.

[Connie Hamblin:]

Don't worry.

[David Leiker:]

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:]

141,942,000.

[David Leiker:]

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

[David Leiker:]

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

[David Leiker:]

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

[Steve Dykman:]

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

[David Leiker:]

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:]

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:]

Okay. Thank you.

[Connie Hamblin:]

Thanks.

[Operator:]

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

[John Murphy:]

Good morning.

[Enoch Jen:]

Good, morning, John.

[Connie Hamblin:]

Good morning.

[John Murphy:]

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:]

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:]

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:]

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

[John Murphy:]

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:]

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:]

Okay.

[Enoch Jen:]

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:]

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:]

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

[John Murphy:]

Okay.

[Enoch Jen:]

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:]

Okay, alright, thank you very much.

[Connie Hamblin:]

Thank you.

[John Murphy:]

Welcome.

[Operator:]

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

[Brandon Ferro:]

Good morning, everybody.

[Enoch Jen:]

Good morning, Brandon.

[Connie Hamblin:]

Good morning.

[Brandon Ferro:]

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:]

That's correct.

[Brandon Ferro:]

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:]

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:]

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

[Steve Dykman:]

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:]

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:]

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

[Brandon Ferro:]

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:]

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:]

Okay. Thank you guys, I appreciate it.

[Enoch Jen:]

Welcome.

[Operator:]

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

[Alexander P. Paris:]

Good morning.

[Enoch Jen:]

Good morning, Alex.

[Alexander P. Paris:]

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:]

Yes.

[Alexander P. Paris:]

In 2007?

[Connie Hamblin:]

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

[Alexander P. Paris:]

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

[Enoch Jen:]

Of revenues.

[Connie Hamblin:]

Revenue.

[Enoch Jen:]

Globally.

[Alexander P. Paris:]

Oh, I was mixing revenues with the units.

[Connie Hamblin:]

Yes, yes.

[Alexander P. Paris:]

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

[Enoch Jen:]

Yes.

[Alexander P. Paris:]

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

[Enoch Jen:]

For 2007 --.

[Alexander P. Paris:]

And then you are doing business with Ford?

[Enoch Jen:]

For 2007, yes.

[Connie Hamblin:]

Yes.

[Alexander P. Paris:]

Right.

[Enoch Jen:]

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

[Alexander P. Paris:]

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

[Connie Hamblin:]

Well, that's included in the 75%.

[Alexander P. Paris:]

You include that in the international.

[Connie Hamblin:]

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:]

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:]

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:]

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:]

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:]

Yes, if you look at the Chinese market today, there is really free segments

[Alexander P. Paris:]

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

[Enoch Jen:]

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:]

Okay, thank you very much.

[Enoch Jen:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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

[Unidentified Analyst:]

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

[Connie Hamblin:]

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:]

Welcome.

[Operator:]

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

[Jason Rogers:]

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:]

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:]

Okay, thank you.

[Operator:]

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

[David Leiker:]

Hey, I am back.

[Enoch Jen:]

Great.

[David Leiker:]

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:]

Yes.

[David Leiker:]

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:]

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:]

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

[David Leiker:]

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:]

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:]

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:]

We're a year and a half into it.

[David Leiker:]

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:]

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:]

So, we still --

[David Leiker:]

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:]

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:]

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

[David Leiker:]

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:]

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:]

And from our perspective

[David Leiker:]

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:]

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

[David Leiker:]

Right.

[Enoch Jen:]

It can also go across other vehicle lines.

[David Leiker:]

Okay, great. Thank you very much.

[Connie Hamblin:]

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:]

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:]

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:]

Okay.

[Enoch Jen:]

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:]

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:]

Okay. Thank you.

[Connie Hamblin:]

You are welcome.

[Enoch Jen:]

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:]

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.