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Gentex Corp (NASDAQ:GNTX)
Q4 2020 Earnings Call
Jan 29, 2021, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Gentex's Fourth Quarter 2020 Financial Results Conference Call. [Operator Instructions]

I would now like to hand the conference to one of your speakers today, Mr. Josh O'Berski, Director of Investor Relations. Sir, please go ahead.

Josh O'Berski -- Director-Investor Relations

Thank you. Good morning, and welcome to the Gentex Corporation fourth quarter 2020 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; Neil Boehm, Vice President of Engineering and CTO; and Kevin Nash, Vice President of Finance and CFO.

This call is live on the Internet and can be reached by going to the Gentex's website at www.gentex.com. All contents of this conference call are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcast, retransmitted, transcribed or otherwise redistributed.

Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any unauthorized use of the contents of this conference call. This conference call contains forward-looking information within the meaning of the Gentex's safe harbor statement included in the Gentex Reports Fourth Quarter 2020 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 get us started today. Steve?

Steve Downing -- President and Chief Executive Officer

Thank you, Josh. Before we get started with the financial performance for the quarter, I want to take just a few minutes to thank everyone who has helped us during the last few months. To our customers' and the supplier community, we want to thank you for your communication and teamwork that allowed us to keep up with orders during the second half of this year. We couldn't have done it without your help. To the entire team at Gentex, thank you. Once again, you have outdone yourself, despite the obstacles, and there have been many this year, you found a way to deliver record-setting results.

Now let's dig into the financial summary. During the fourth quarter, the company experienced record net sales of $529.9 million, which represents a 19% increase over the fourth quarter of 2019. We were able to accomplish this sales growth by a combination of a 14% increase in auto-dimming mirror unit shipments and a 96% increase in FDM mirror unit shipments. This growth rate was in contrast to global light vehicle production that increased by approximately 3% for the quarter. And if you look a little deeper into the global light vehicle production numbers for Q4, you will see that China production was up 6% quarter-over-quarter, but the rest of the regions were only up about 1% versus last year. In total, our outperformance to the underlying market was 16% for the quarter, which represents one of the highest growth rates for the company in many years.

For calendar year 2020, the company shipped 1.053 million units of Full Display Mirror, which was a 42% increase when compared to 739,000 units shipped in 2019. The growth rate of FDM in 2020 was incredibly strong, especially when compared to a light vehicle production market that declined approximately 16% for calendar year 2020 due to the impact of the pandemic.

The gross margin in the fourth quarter of 2020 was 40.9% compared with a gross margin of 36.5% last year. This was the highest gross margin since the second quarter of 2004 and was a 440 basis point improvement from the fourth quarter of 2019. The gross margin increase was driven by record sales levels, positive product mix, benefits from our cost reduction efforts earlier in the year, leverage on our overhead costs and purchasing cost reductions that together more than offset our annual customer price reductions.

Income from operations for the fourth quarter was $162.4 million, which was an increase of 46% and a new record. Operating income improved significantly during the quarter, as a result of the higher sales and gross margin levels. Net income for the fourth quarter was $143.3 million, which was an increase of 44% and also a new record. Earnings per diluted share for the fourth quarter was $0.58, which was an increase of 49% versus last year, and was also a record for the company.

During the fourth quarter, strong sales levels combined with the cost discipline we have been executing throughout the year resulted in record performance at every level of the income statement. During the fourth quarter, the company repurchased 2.5 million shares at an average price of $31.82 per share. For calendar year 2020, the company repurchased 10.6 million shares at an average price of $27.10 per share. Our share repurchases during calendar year 2020 resulted in a 4% reduction in the diluted share count. For calendar year 2020, the company paid $117.2 million in dividends, repurchased $288.5 million in stock for a total cash return to shareholders of $405.7 million. When you combine this level of financial performance with our common sense approach to capital allocation, we believe we are forged a pathway to a significant increase in overall shareholder returns.

I'll now hand the call over to Kevin for fourth quarter financial details.

Kevin Nash -- Chief Financial Officer, Vice President of Finance, and Treasurer

Thank you, Steve. Automotive net sales during the fourth quarter of 2020 were $521.6 million, representing a 20% increase when compared to $433.8 million in the fourth quarter of '19. Interior auto-dimming mirror unit shipments increased 13% compared to the fourth quarter of ' 19 and exterior auto-dimming mirror unit shipments increased 16% for the same period. As previously mentioned, strength in FDM unit shipments also contributed to the significant outperformance for the quarter.

Other net sales in the fourth quarter of '20, which includes dimmable aircraft windows and fire protection products were $8.3 million, a decrease of 17% compared to other net sales of $10 million in the fourth quarter of '19. Dimmable aircraft window sales decreased by 34% for the fourth quarter of 2020 when compared to the fourth quarter of '19. The Company expects that dimmable aircraft window sales will continue to be impacted until the aerospace industry strengthens and the Boeing 787 production levels improve.

In terms of the balance sheet, during the fourth quarter, the company increased its activity in share repurchases. But we also continue to keep our focus on maintaining high levels of liquidity, so that we remain well positioned for multiple economic scenarios. Additionally, as mentioned in the press release, the company paid off the remaining $25 million on its revolving line of credit during the fourth quarter of 2020.

I'll now mention some key balance sheet items as of December 31, 2020 as compared to December 31 of '19. Cash and cash equivalents increased to $423.4 million, up from $296.3 million, primarily due to year-to-date cash flow from operations and investment maturities, which were partially offset by share repurchases, dividend payments and capital expenditures. Short-term investments were $27.2 million, down from $140.4 million with the bulk of those maturities not reinvested during the calendar year.

Long-term investments were $162 million, up from $139.9 million. As a reminder, long-term investments include things like FDIC-insured CDs, treasury notes as well as corporate and municipal debt. As of the end of the year, the portfolio remains in a good position with the bulk of the corporate and municipal holdings invested in A-rated or better institutions.

Accounts receivable increased to $284.9 million from $235.4 million. The increase in AR was due to the significant increase in sales during the fourth quarter and the timing of sales within the quarter. Inventories were $226.3 million, down from $248.9 million, as a result of lower raw material and finished good levels. Accounts payable decreased to $84.8 million, down from $97.6 million, and accrued liabilities were $92.9 million, up from $74.3 million. The increases were due to higher accrued salaries and wages and deferred employer payroll taxes as well as accrued income taxes.

Fourth quarter 2020 cash flow from operations was $135.4 million, up from $122 million in the fourth quarter of '19. The increase in cash flow was driven by increases in net income for the quarter, but was partially offset by fluctuations in working capital. Year-to-date cash flow from operations was $464.5 million, which compares to $506 million for year-to-date cash flow for 2019. The decrease on a year-over-year basis was driven by the COVID-19 impacted reduction in overall business and related cash flows during the second quarter of 2020.

Capital expenditures for the fourth quarter were $14.7 million compared with $26.3 million for the fourth quarter of '19 and year-to-date capital expenditures were $51.7 million compared to $84.6 million in year-to-date '19, and depreciation and amortization for the fourth quarter was $26.3 million, compared with $25.4 million for the fourth quarter of '19, and year-to-date D&A was $104.7 million, which was the same as calendar year '19.

I'll now hand the call over to Neil for a product update.

Neil Boehm -- Chief Technology Officer, Vice President of Engineering

Thank you, Kevin. Earlier this month, Gentex participated in the 2021 Virtual Consumer Electronic Show. CES has become the preferred platform for Gentex to showcase our technologies and capabilities. This year, at CES, we had to adjust our normal product-driven approach to the new virtual venue. Gentex created all new virtual tools to help communicate our product evolution and the direction of the technology. The first product area, I'll discuss is in digital vision. As we continue to rollout and develop our Full Display Mirror product, we have been focused on ways to add new features that have been either requested by customers or are where we see opportunity to leverage the platform as a part of the major developing trends in the automotive market. For CES this year, we created individual videos demonstrating how digital video recording and trailer towing could be added to the portfolio. Both of these products utilize the base FDM technology and by adding additional cameras or recording technology, we've expanded the feature set to meet an ever-increasing demand from our customers.

In the sensing product area, we also have shown some new technology pass. First, we announced the acquisition of Vaporsens, a nanofiber sensing company out of Utah. The Vaporsens technology is capable of being deployed across multiple verticals to support sensing for hazardous chemicals, explosives or to provide data regarding air quality. We're excited about the potential for this technology because it harnesses our core competencies to create sensing capability that surpasses anything in the market today.

Second, we announced that we're bringing smoke and vape sensing to a robotaxi as part of a sole [Phonetic] program that we're currently launching. This development leverages our heritage as a particular smoke detection company but now expanded into the automotive HVAC system. Gentex has the unique ability to deliver smoke detection while meeting the stringent requirements of automotive. The third area of focus was in-cabin sensing. We demonstrated in the virtual platform, how visual sensing system in or near the mirror area could help provide greater visibility into the vehicle. This demonstration showed how our technology can provide in-cabin sensing for driver monitoring features but can also provide sensing in the rear seats of the vehicle, so that features like child detection. Notification of objects left behind or which seats passengers are occupying can all be seen to provide new safety and convenience features for our OEM customers and consumers.

The last product area I’ll focus on today is the connected and transactional vehicle. As our Integrated Toll Module product has been rolling out with our lead customer Audi. We've been working on building relationships in different areas to further enable the capability of ITM product in the area of transactional vehicle. Late in 2020, we announced a partnership with a company called PayByCar. PayByCar is utilizing Toll-Tag systems such as ITM and hardware infrastructure placed at a gas station site to enable payment for fueling through the toll system. We believe, this is the first step of many that could utilize the ITM hardware to perform non-toll based transactions.

Additionally, we announced a partnership with Simplenight. Simplenight is an e-commerce aggregator. We're working with them to broaden their offering for the vehicle. This includes the ability to make reservations at restaurants, buy movie tickets, make hotel accommodations and much more. Gentex is currently working to connect Simplenight to our HomeLink Connect app, which will allow users the ability to perform e-commerce function seamlessly. While the necessity for virtual CES format created some challenges for us in engaging with our customers, our marketing team did an outstanding job of creating new tools that help explain these new products. These tools will support our sales and technology initiatives as we go through 2021 and beyond. We welcome everyone to go to our website at gentex.com and look for the Virtual CES link, where you can also head to gentextech.com to explore the new product concepts for yourself.

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

Steve Downing -- President and Chief Executive Officer

Thanks, Neil. The company's current forecast for light vehicle production for 2021 and 2022 is based on the mid-January 2021 IHS Markit forecast for light vehicle production in North America, Europe, Japan, Korea and China. Based on this information, light vehicle production in the company's primary markets is expected to increase approximately 12% over the 2020 calendar year volumes.

For calendar year 2022, light vehicle production in the company's primary markets is forecasted to increase over the 2021 estimated volumes by approximately 3%. Based on these light vehicle production forecast, we are providing guidance estimates for calendar year 2021 for each of the following areas. Revenue for 2021 is expected to be between $1.94 billion and $2.02 billion. Gross margins for the year are expected to be between 39% and 40%. Operating expenses are currently forecasted to be approximately $210 million to $220 million.

Our estimated annual tax rate, which assumes no changes to the statutory rate is forecasted to be between 16% and 18%. Capital expenditures for 2021 are expected to be between $85 million and $95 million, and depreciation and amortization is forecasted to be between $105 million and $110 million. In addition, based on the mid-January 2021, light vehicle production estimates for calendar year 2022, the company is currently estimating net revenue for calendar year 2022 will grow between 4% and 8% above our current revenue estimates for calendar year 2021.

In closing, as I reflect on 2020, there is no doubt that it was one of the most trying and turbulent years we have encountered as a team. We know these issues have not completely gone away and that there are still many risks ahead for the industries we support and for our business. However, despite these issues, we are hopeful that 2021 will develop in line with our forecast, which suggests a record year for the company, not just in terms of revenue, but for the profitability of the business as well.

Perhaps the most important reason why I'm optimistic is the team. This team delivered world-class operating results within months of encountering crippling shutdowns and changes to our business due to the pandemic. The results this quarter shattered many records of the company and reset the profitability of the business as we move forward. But more importantly, it showed all of us, as this team is capable of doing anything, it sets its mind to. We believe that our financial discipline and performance combined with our operational efficiency, new product pipeline and common sense approach to capital allocation provide the pathway to significant shareholder returns.

That completes our prepared comments for today, thank you for your time and we can now move to questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of James Picariello with KeyBanc Capital Markets. Your line is open. Please go ahead.

James Picariello -- KeyBanc Capital Markets -- Analyst

Good morning, guys, and congrats on a fantastic quarter here. So FDM shipments, I will start there, finished the year just under 1.1 million, which given that it's a pandemic year, pretty phenomenal. I mean how should we be thinking about FDM unit growth for 2021? I mean, previously, I think the idea was to take the average unit growth over the last 3 years, but I mean I think that exercise would have been far too conservative even for 2020. So I'm just wondering if there is another way we could look at this.

Steve Downing -- President and Chief Executive Officer

I think if you look -- I think it would be about this -- we would guide about the same methodology. And if you include this past year's performance, you'd start to see an uptick obviously this year in the growth rate of FDM. So I think it would probably be -- if you did a 3-year moving average, it would probably be closer to what the trajectory looks like for next year.

James Picariello -- KeyBanc Capital Markets -- Analyst

Okay. And then just to follow-on to that, I mean, any update on the timing for OEMs 9 and 10? When they should begin shipping?

Steve Downing -- President and Chief Executive Officer

Yes. So I think both 9 and 10 are in the first half of this year.

James Picariello -- KeyBanc Capital Markets -- Analyst

Okay. As we think about the cadence for this year, I mean, we could obviously see IHS production volumes, but how can we think about the company's growth over market. I mean, clearly, there will be a difficult fourth quarter comp this year, but I mean, also just from a margin standpoint, any color on what we should extrapolate and not extrapolate from this second half '20 performance from a margin standpoint? Thanks.

Steve Downing -- President and Chief Executive Officer

Yes, I think if you look at the last 6 months, we're just over 40% average. We know that that's a hair higher than it will be in '21 for a couple of reasons. We know, there's a lot of shortages happening in the industry, which means obviously pricing pressure on components is going to be a little tougher than it was in 2020. But then we also know that sales aren’t going to run at the same rate, it was, for instance, in Q4, so which would have a slight negative impact on margins going forward. But if you look at that guide for the full year of 39% to 40%, we feel pretty comfortable with operating in and around that range for the whole year. We don't really see it over-weighted in any one quarter. I think the risk factor like you mentioned really comes down to the second half of the year, in terms of what are those comps going to look like, and then we know there's a lot of catch up happening in the industry right now from the Q2 shutdowns. And the question is, what is the new run rate for production once that catch up periods done? What is the global SAAR? And what does that look like for the entire supply base?

James Picariello -- KeyBanc Capital Markets -- Analyst

Got it. Thanks, guys.

Operator

Thank you. And our next question comes from the line of David Kelley with Jefferies. Your line is open. Please go ahead.

David Kelley -- Jefferies -- Analyst

Good morning and thanks for taking my question. Just maybe following up on the last point, the gross margin discussion, your guide for 2021, it's better than the target you referenced during Q3 earnings specifically, so maybe if you could just talk about, what specifically has changed in the last few months? The revenue growth guidance hasn't changed. So is it the product-specific or anything from the cost saving side, we should be thinking about?

Steve Downing -- President and Chief Executive Officer

Yes. It's really a combination of a couple of variables. Number one is the mix has been very positive with FDM strength and OEC strength that's been a margin tailwind. On the cost efficiencies and the things we did in the second quarter to improve the profitability of the business are playing out, perhaps even better than what we had initially estimated. So those are all positive trends. And there's a whole lot others, but then there are some headwinds as well, as it relates to, especially on the component side. So we're trying to -- we're looking at all those positives and the customer pricing and what's going on in the marketplace on the shortage side, looking at all those. And we feel like it's still a net improvement versus our long-term guidance we had given previously, which was the 38.5% to 39.5%. So if you look at that and say, hey, you're 50 basis points, basically better than where we were a few months ago, we feel really good about the discipline of the business and our operational efficiencies at the levels we're at right now.

David Kelley -- Jefferies -- Analyst

Okay, great. That's helpful. And then maybe following up with the opex 2021, we have the structural cost savings benefit. At some point, I would expect we should see some T&E expenses start to ramp back up. But can you just talk about some of the puts and takes there? And maybe how you're thinking about R&D this year?

Steve Downing -- President and Chief Executive Officer

Yes. So I mean that's a good acknowledgment. As you mentioned, travel and entertainment still been fairly low, but some of the things that have kind of fill the gap there is air shipments. So a lot of premium freight that we've been experiencing really in the back half of the year with a tighter supply chain. So we would expect that as things calm down a little bit, the freight costs kind of abate a little bit, backfilled by some of that travel. But we would expect that that probably isn't going to really pick up until the back half of the year. I mean, as we sit today travel restrictions are heavier than they were a year ago.

But all the things that Neil mentioned, obviously, don't come for free. So we are very focused on that R&D budget. Partnerships that are either have equity stakes with them or things that drive us for the longer term, we're continuing to be focused on them. So we feel really good about the things that we've done so far. But there are other things in the hopper that we continue to invest in and we're putting resources to the things that Neil mentioned earlier.

David Kelley -- Jefferies -- Analyst

Okay, great. Thanks, and then one last one if I could squeeze it in. 2022 revenue growth guidance, I get that's a long ways away. But it is a bit below your usual targeted out your outgrowth. Is there some conservatism built in here, just given some of the ongoing market uncertainties you referenced? Or if you could just talk about if there are any other inputs, we should be thinking about that might change the outgrowth cadence? That would be great.

Steve Downing -- President and Chief Executive Officer

Yes, I think the biggest factor there isn't necessarily conservatism built-in, it's really about the 2021 guide being quite a bit higher than what we actually think production will come in at. So that outgrowth of market and the growth that we've experienced in the back half of this year and then compounded with the growth rate for next year. When you start to look at those in combination, we look at it and say, hey, 2022 is a tough comp coming off of very solid '21 number that we're guiding to right now. If there is any conservatism built-in to it, it's really a little bit of skepticism. If you look at a lot of that growth that's estimated for '22 on the vehicle production side, a lot of that's out of Europe, I think it's like a 6% growth rate in '22 for Europe. And so we're maybe a little skeptical about whether or not that's actually going to pan out to those levels. If you look at the macro side of what's going on in that space, and I'm not sure that we would necessarily agree with IHS number there that it's going to be that kind of a growth rate in Europe in 2022.

David Kelley -- Jefferies -- Analyst

All right. Got it. Thanks guys.

Operator

Thank you. And our next question comes from the line of Ryan Brinkman with JPMorgan. Your line is open. Please go ahead.

Ryan Brinkman -- JPMorgan -- Analyst

Thanks for taking my questions. Maybe to start, what is the latest that you're seeing in terms of the semiconductor shortage impacting the industry? Can you talk about the degree to which you're seeing any indirect impact to Gentex from lower customer production? And I know, you incorporate chips into some of your devices, are you seeing any direct impact? I think as of the time of CES you hadn’t yet, but I thought to ask just given I know a lot of suppliers are scrambling here to avoid direct impacts?

Steve Downing -- President and Chief Executive Officer

Yes. It's absolutely impacting the industry in two ways. Number one is obviously, there's a lot of de-commitments happening from the supply base in terms of volumes that we've put in orders for, and then many times almost a year out and suppliers are struggling to keep up. Obviously, it's a complicated supply chain that they're dealing with. And so that has everyone moving around. The couple of safeguards that Gentex has always put into place is we tend to carry a little higher raw inventory than most suppliers to try to help prevent these types of issues. The other one is, the team has been working really hard, looking at product redesigns, other alternatives when there are issues. Fortunately, so far we haven't had any shutdowns of customers.

But to your point, that's the second half of the issue, and that is that many OEMs are starting to take days off or portions of a week at certain plants and certain product lines, to give the industry time to catch up on the silicon side. So it's something that we continue to watch. Fortunately, so far it hasn't affected us directly in terms of our ability to supply, but it's always a risk factor. And then number two, what is probably more likely is that it's going to impact overall production levels at some point, probably not an extended period. Most of the industry is looking at the first half of '21 being really tight. And then hopefully the second half will start to free up a little bit.

Ryan Brinkman -- JPMorgan -- Analyst

Okay, thanks. And then just to dig into that earlier discussion of gross margin a little bit more and maybe the trajectory throughout the year. I think, historically, you see a little bit of a step down in 1Q, maybe given a disproportionate number of annual customer price reductions taking place around the turn of the calendar. Then you claw that back via performance and productivity throughout the year. Do you see that pattern taking place this year again? And then just also is the tone and tenor of annual customer price reductions, any different this year versus prior years, just given maybe some of the stress that some of the customers might be feeling and I hesitate to ask, but 39% to 40% gross margin, I don't see why that would necessarily be an embarrassment of riches when 37% to 38%, you guys were able to get away with for a long time, but just any kind of thoughts on discussions with automakers if they’re any different from the past, etc.?

Kevin Nash -- Chief Financial Officer, Vice President of Finance, and Treasurer

Thanks, Ryan. Yes. So as you mentioned, you're the best at asking 7-part question. So I'll forget the back half. But all else being equal, APR typically is frontend weighted January and April, a lot of our customers take those price downs. The one unique thing about this year like Steve already mentioned is, they’re still playing catch up for the most part. So sales levels are probably elevated a little higher, so that tends to -- that may offset it. But then the one other factor is tightness in the supply chain side. So components, the shortages are putting the ball back into the suppliers' hands as far as the leverage. So pricing is going to be a little bit constrained or cost down, if you will. So I would say, all in all, it's probably pretty evenly textured, but you still do have the same constraints on APR dropping kind of first quarter margin all else being equal. And then build back up over the year.

Steve Downing -- President and Chief Executive Officer

And I would say, that the pressure on the supply community from OEMs isn't really any different than it has been, I think right now, what we're seeing is mostly collaboration OEMs trying to work with the entire supply base to make sure that components are being handled, distributed and that they can keep all their supply base up and running. I think everyone's aware, what's going on in the silicon industry. So I think most OEMs understand there's going to be some price pressure from the supply side on raw components.

Ryan Brinkman -- JPMorgan -- Analyst

Okay, that's very helpful. Thank you.

Operator

Thank you. And our next question comes from the line of John Murphy with Bank of America. Your line is open. Please go ahead.

John Murphy -- Bank of America -- Analyst

Good morning, guys and thanks for taking the time. Just a first question on vehicle mix, I mean obviously, the automakers are hustling to rebuild inventory and meet growing demand. So they're building everything sort of at the higher end. I'm just curious what you're seeing in schedules and if you expect that to continue into 2021 and maybe this is sort of a new phenomenal that produces a little bit less with better and better mix. I'm just curious on your thoughts on that?

Steve Downing -- President and Chief Executive Officer

Yes. I think at the beginning, you're absolutely right, when they were coming out of those shutdowns, they were obviously trying to build very rich mix of vehicles. I think, now that's kind of settle down. It's more about what is the consumer -- what's the demand from the consumer side? That's probably the most shocking part of coming out of the pandemic is the flow and optimism in the consumer base like how many vehicles themselves are being purchase. I think that was a little surprising to us, watching inventory levels overall, as it -- for each OEM and what's happening. There’s still a little bit of work to do, but I would estimate that sometime in Q2 will be through that catch up period and back into a normalized run rate.

And the question about mix is always a fascinating one. It's really about interest rates borrowing and what the consumer wants. So we don't see anything changing that drastically. One thing, we know for sure is, our features right now are doing really well with the consumer, they’re desirable, they’re priced appropriately. Products like FDM have a lot of pull right now with the consumer.

John Murphy -- Bank of America -- Analyst

Okay. And then just a second question, [Indecipherable] or sort of the wrong complex going into the vehicles is generally kind of inflating. Just curious what you're seeing on that side. I mean obviously, that's being driven by strong demand and volume. So it's a good thing, right. So the reason it's rising is because there is demand pull. Just curious what you're seeing there and how much of headwind or not, that might be in 2021?

Steve Downing -- President and Chief Executive Officer

John, you broke up just for a second at the beginning. Could you say that again?

John Murphy -- Bank of America -- Analyst

Yes. I'm just curious, what you're seeing on raw cost -- raw material cost there, you guys are dealing with. I mean, the reason they're rising is because demand -- there is demand pull. So it's for good reasons, I'm just curious how you're thinking about that in 2021?

Steve Downing -- President and Chief Executive Officer

Yes, in fact and honestly, that's one of the things we've modeled in, is that we're not expecting to get the same out of the supply base is what we have historically. So we do have some contracts that cover products longer term on the pricing side. But anything that you're negotiating this year, yes, there is definitely some pressure from the supply community for -- if not price stability in some instances even price increases. So when we look at it, we model it. We're not -- this year for instance, all those factor both what we got our suppliers and all the operational efficiencies offset our customer pricing and some. Next year probably won't get quite that same level of performance. So it's definitely one of the negative factors as we put together, but it's all contemplated inside of our margin guidance as well.

John Murphy -- Bank of America -- Analyst

Got you. And then just lastly, as you look at, it's not post-COVID, because we're still in the middle of it, but the actions you've taken initially because of COVID and what you worked through last year. What kind of structural changes do you think you'll be able to capture? Or what changes you made that you think will be structural over time that might help incremental margins over time, or just margins generally?

Steve Downing -- President and Chief Executive Officer

Yes. I think all the changes that we made in Q2 were structural and that we expected those to continue as we build back the business, the costs like we have for the last several years. The cost, we're adding back are in line with growth rates and supports all business. So you shouldn't see anything change from that model, which is, you would expect our costs both on the growth -- on the COGS side, all the way through operating expenses to move roughly in line with sales growth.

John Murphy -- Bank of America -- Analyst

So this 39% to 40% gross margin, you think is the new baseline off of where you will potentially grow or improve in 2022, is that a fair statement?

Steve Downing -- President and Chief Executive Officer

Yes, like we mentioned before the 38.5%, 39.5%, we have talked about for the last year. So we didn't believe that there was any reason why we couldn't sustain that for at least a couple of years and I would say that that new guidance, I mean we haven't looked at product mix all the way into 2022 yet. But if we manage the costs the way we're describing, there is no reason why that's not attainable.

John Murphy -- Bank of America -- Analyst

Okay, great. Thank you very much.

Operator

Thank you. And our next question comes from the line of Luke Junk with Baird. Your line is open. Please go ahead.

Luke Junk -- Baird -- Analyst

Yes, good morning, everyone. First question, I want to ask about ITM and connected cars. So based on your announcement over the past few months, you’re increasingly leaning into this space relative to PayByCar and Simplenight partnerships, but I'm wondering is how that's being informed by the interest level that you're seeing in general from the OEM community, and if we look at ITM specifically, how that's tracking versus your expectations a year ago. And then second part of the question would just be, in terms of the value proposition for us in these elements that could have maybe recurring elements to them, how you sort of position after the OEMs as well at a high level?

Neil Boehm -- Chief Technology Officer, Vice President of Engineering

Sure, absolutely. Good morning. I think one of the interesting parts with ITM in general is that product continues to rollout across the Audi fleet, like we've described before. This coming year there'll be more platforms that will deploy it and I think they’ll be on every platform when we get into 2022 if I'm not mistaken. So it's continued to grow. When we talk about expanding the features and capability of the transactional vehicle, that's not just something we're dreaming of. It's something that our customers are looking for an expansion of. So as the technology in the hardware platform gets added to the vehicle, how do you continue to add more value to the vehicle itself, or to the consumer and how it gets used?

So the PayByCar is a great example, leveraging the existing technology. But now offering to the consumer that next step advantage of a transactional piece at the gas pump using that platform, they've already paid for. So we see that continuing to build. And Simplenight is another stretch on that where it's now getting into additional features and functions, reservations and beyond, where we believe the consumers want that seamless interface from their computer to their car to their phone and that's what Simplenight enables, as that ability to bring all those together and offer them one complete system. So we're excited about it. We think there is some great opportunities on how that can help grow and expand. The PayByCar is great initial one leveraging the hardware and the Simplenight takes it beyond just a hardware play.

Luke Junk -- Baird -- Analyst

Okay, that's great, really helpful. Follow-up question on the adoption rate curve for the Full Display Mirror and what I was hoping you could comment specifically on is, what you're seeing in terms of take rates right now, relative to what you've disclosed in the past. In the comment earlier in the call that products like FDM have a lot of pull, seems to suggest there is some movement there and just hoping for any additional color you could share?

Steve Downing -- President and Chief Executive Officer

Yes. I think if you look at the last half of the year, for instance, the product mix was really strong. One of those like we mentioned was partially because OEMs were billing higher content vehicles. And with that, what we're seeing is very high take rates on the vehicle we were on. So initially, we had said, we would expect on a high end very luxury vehicle like Cadillac when they first launched, you run on 50% to 70% take rates. And then as you move down, trucks -- higher end trucks and SUVs, maybe in the 20% to 30%.

And then on entry level vehicles are going to have much lower take rates. What we've seen in the last 6 months are actually running even above those levels. And the fundamental question is, how long will that last, is it the new norm or is it going to come back down to more standardized packaging. What we're seeing for the first half of 2021 would imply that that trend continues at higher take rates. And so we're pretty optimistic. One thing that's for sure, there has been some studies and some consumer engagement from OEs that really like the feature, so we think regardless of what goes on with the whole product line, we think, we're going continue to see a lot of pull on the Full Display Mirror side because of the customer interest.

Luke Junk -- Baird -- Analyst

Great. I'll leave it there. Thank you.

Operator

Thank you. And our next question comes from the line of David Whiston with Morningstar. Your line is open. Please go ahead.

David Whiston -- Morningstar -- Analyst

Thanks, good morning. The first on gross margins, I know for this year, it's 39% to 40% guidance, but were you saying long-term you still think it’s 38.5% to 39.5% or do you think now better?

Kevin Nash -- Chief Financial Officer, Vice President of Finance, and Treasurer

No. I think there is the potential for it to run at that guidance for '21 and to '22. We have obviously a lot of work to do to make that happen, but that's definitely feasible.

David Whiston -- Morningstar -- Analyst

But you don't want to talk about beyond that at this point, right, it's too uncertain?

Kevin Nash -- Chief Financial Officer, Vice President of Finance, and Treasurer

Yes. I think right now, we haven't modeling out that far, it’s a little difficult to predict, but then as you know with us, David, I mean, if we get -- once we get there, we don't like retrenching at all. So I could promise you that by the time we get close to it, we're going to be doing everything in our power to make sure we can maintain it.

David Whiston -- Morningstar -- Analyst

All right. And your guidance for this year right now though, it does not include any shutdowns related to the shift orders even if they’re beyond Gentex's control?

Kevin Nash -- Chief Financial Officer, Vice President of Finance, and Treasurer

Yes. IHS is actually modeling in downtime at most OEMs not extended for very long periods but kind of rolling shutdowns week or 2 at a time for the first half of the year. And then there is not much contemplated in the second half due to supplier issues or part shortages. So it's a fairly modest impact, I forget, there is a few hundred thousand vehicles, I think when IHS made their latest update globally. So it's not a huge change to overall production, but there is some of that built in to the forecast.

David Whiston -- Morningstar -- Analyst

Right. And you were talking earlier about skepticism about HIS’ EU number. Was that for 2022 only or both this year and next year?

Kevin Nash -- Chief Financial Officer, Vice President of Finance, and Treasurer

More for '22.

David Whiston -- Morningstar -- Analyst

Okay. And then just one last more big picture question, strategic one. Have you guys ever thought about making software for AVs or is that something you think that's really not in your wheelhouse and there's plenty of other players already?

Steve Downing -- President and Chief Executive Officer

Well, I think when we look at that, I mean we're open to the concept, if an OEM partner wanted to come and ask us for help then we would be open to that concept, but to go out and try to market that is probably not something that, a, we would have necessarily the credibility to pull off right now. And so we're -- like we wake up every day, always willing to look at new opportunities and assess whether or not we can create a value proposition there. I think as we sit here today, we would look and say, well, we're probably not the right partner necessarily to develop that and provide it, but if that changes, we would absolutely try to create a new business model that would work for the OEM and for us.

David Whiston -- Morningstar -- Analyst

Okay, thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Josh Nichols with B Riley. Your line is open. Please go ahead.

Josh Nichols -- B. Riley -- Analyst

Yes, thanks for taking the question, exceptionally strong quarter. I was wondering if you could maybe provide a little bit more detail about like the cadence of the revenue trajectory. Given that this is a little bit of a different set up here. The OEMs are still playing catch up right as far as inventory levels, especially in 1Q probably into 2Q. And are you expecting that 1Q to be a little bit stronger and how may that trend through the rest of the year?

Kevin Nash -- Chief Financial Officer, Vice President of Finance, and Treasurer

Yes. You're exactly right. I mean Q4, Q1 don't look too dissimilar outside of the chip issues, if there are any hiccups there. It’s really strong into the second quarter, but then I think like Steve mentioned already comp starts to get hard. And then the normalization of what production actually looks like in the second half, probably starts to play out a little bit more. So you have a little bit of a strength and then maybe a little taper heading into the back half of the year.

Josh Nichols -- B. Riley -- Analyst

Yes. And as you kind of mentioned there is always a number of things up in the air, right, especially this year is a little bit different than obviously, what we've seen before. I just wonder kind of your thoughts about like the impact to Gentex, we've been seeing, one, some higher-end vehicles and an increasing percentage of mix, right, trucks and SUVs also the potential for like fiscal stimulus on the federal side and a return of more aggressive, maybe manufacturing symptoms as inventories normalize and just kind of your thoughts on those areas?

Steve Downing -- President and Chief Executive Officer

You're absolutely right. I think that's what's really kind of driven the strength in the second half of this year and the first half of next year is going to be plans that catch up from the second quarter, which was pretty much non-existent in a lot of the markets. And so that -- once that catch up period is over then it really comes back to consumer demand and the question I think longer term, we all have to wrestle with is, what are the lasting economic impacts of the pandemic and some of the policies that have been put in place. So one we're watching carefully. And the reason why we made a lot of the structural changes we did in Q2 was, we knew we needed to prepare for either scenario. And fortunately, that's worked out well so far. We know we have to continue to watch it and no one ever knows if it's going to be completely done and if this is a recessionary market for the next few years or whether or not it's a stable market. One thing is for sure is we've lowered the fixed overhead of the business significantly. And so we feel like we're prepared for both either a flat to an expanding market or even if this market retrenches, we believe we’ve put the right discipline in place and we have adjusted our cost structure to be able to handle that first wave of any type of a downturn or recession.

Josh Nichols -- B. Riley -- Analyst

Thanks. And then last question for me, this is a little bit longer-term question, I guess, but you are seeing an increasing number of auto OEMs talk about moving to a much larger percentage of their lineup going to EV right, over time, also some legislation out of states like California, right. Where that tends to be the new ship going forward, if you look at least 5 to 10-year horizon? How is that like Gentex positioned for that? Does that -- are you kind of a different to whether you’re using gas or EV? Is there a better mix shift for you or just kind of curious about the longer term opportunity puts and takes on that?

Steve Downing -- President and Chief Executive Officer

Yes. The short answer is that we're really not affected by the powertrain, whether that is gas or diesel or electric. So there's nothing structurally there that will impact it. The one side benefit to us is what we've seen is most EVs right now are selling on the higher end of the marketplace, which tends to be good for us. We would look at and say that's not necessarily correlated. But it is a happy accident of sorts, where most of the EVs that are rolling out right now tend to be by luxury OEs are higher end builders. Most of the cost focused EVs have even added higher technology features and that's worked out really well for us over the last several years.

Josh Nichols -- B. Riley -- Analyst

Great, thanks for the color. I hop back in the queue.

Operator

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to Mr. Josh O'Berski for any further remarks.

Josh O'Berski -- Director-Investor Relations

This actually concludes our call. Thank you everyone for your time and the great questions. Hope you have a great weekend.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Josh O'Berski -- Director-Investor Relations

Steve Downing -- President and Chief Executive Officer

Kevin Nash -- Chief Financial Officer, Vice President of Finance, and Treasurer

Neil Boehm -- Chief Technology Officer, Vice President of Engineering

James Picariello -- KeyBanc Capital Markets -- Analyst

David Kelley -- Jefferies -- Analyst

Ryan Brinkman -- JPMorgan -- Analyst

John Murphy -- Bank of America -- Analyst

Luke Junk -- Baird -- Analyst

David Whiston -- Morningstar -- Analyst

Josh Nichols -- B. Riley -- Analyst

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