its investor relations. We're delighted to have you all here. As I'm sitting, Steve, maybe talk about Gentex, where you see the company today, and navigating some chop within global vehicle markets, but also where you're driving some of the technological development into some growth markets over the course of the next five years to the next decade.
Yeah, thanks for having us, Brian. I'll try to keep this short, but as normal, I'll probably ramble on too long, so just kick me, Brian, if I go too far, but.
My leg's not that long.
Thank God. If you look at where the business is, there's clearly a huge change happening in automotive right now. I mean, if you look globally at what's going on with Chinese OEMs and other competitors, our traditional customer base being primarily OEMs in Europe, North America, and Japan, Korea, definitely have taken some of that blunt force trauma from the Chinese OEMs taking market share from them. We've found ways to grow through increasing technology. In other words, this concept that just pure auto-dimming mirrors were going to be able to drive the type of growth that we need and expect for our business was clearly not the answer. Over the last few years, we've been working really hard on developing the product portfolio to include more than just the auto-dimming.
We've always had additional features, but we've made a real hard press over the last few years to continue to expand the overall technology footprint, not only to add tech to the mirror location, but also to expand into other geographies in the car with our tech. What that starts to look like is our core auto-dimming technology that you've seen in our mirrors, but also in aerospace applications, both with Boeing and Airbus, with dimmable windows. We've got new products that we're launching right now for a dimmable visor product, and then large area devices. When we say large area device, we're really talking about the concept of large sunroofs, panoramic roofs, side windows, and basically the concept of making everything in your car dimmable and controllable using our type of technology.
Beyond that, we're starting to also expand into some other consumer-related fields, and really leveraging our core manufacturing and, as Brian mentioned, some of our sensing technologies into new industries. We've recently launched a new lineup of our connected smoke detector product, fully connected, additional functionality that no one's really put in a smoke detector before. We're also leveraging, and one of the things I think is probably a little shocking to the street, was recently we started talking about a contract manufacturing for circuit boards into other industries. The reason why we've done this, we've always, for 40 years, made all of our own electronics, but it was really for our own consumption.
What we found is there's a giant void being created in the industry right now with electronic manufacturers fully dedicating their capacity to data centers and high-end processing platforms. That creates a void both in automotive, aerospace, and other existing industries. We've recently announced we had our first contract award with an OEM for that first award's only about $180 million in revenue starting in 2029. We believe over the next five, seven years, that'll be anywhere from $1 billion-$2 billion in electronics manufacturing. Obviously, a different margin profile than our traditional one, but unbelievable ROIC opportunities, great cash generation, and it leverages a skill set that we have in-house every day.
Just for some perspective, you're about a $2.6 billion revenue business. That's essentially making another full leg from a revenue perspective for Gentex. You've also made some acquisitions, most recently VOXX, which is more integrated now. You've owned it for 18 months. Can you talk about what that business is, what it does for you from a channel perspective, from a technology platform perspective? Is it part both?
Yeah, I will jump in. I will let Kevin kind of walk through the improvements we have made on the financial side since our ownership. Really, the original idea of this acquisition was focused on a partnership that we had had with VOXX for a long time. They have done our aftermarket distribution for us. So, like at the SEMA Show, we are going to show our tech, but for the most part, we are trying to do high-volume applications. We try to rely on partners to help with boots on the ground doing the local sales and distribution aspects. That was the first kind of part of the synergy that we saw. Number two, as you start looking at the rest of their lineup, they had other automotive tech. So inside of VOXX, they own the Klipsch brand, Onkyo brand, so consumer-facing high-end audio products.
Obviously, a lot of electronics involved in those. One of the advantages we see longer term is to further increase the amount of electronics manufacturing we are doing in a direct-to-consumer, high-end brands format. The last one that we were really looking at too was, as we talked about just a minute ago, about the new high-end smoke detector product. What VOXX had was a distribution channel for direct-to-consumer. As an automotive supplier, obviously, we always have had great connections into automotive. What we lack, though, is how do we now market this brand-new, high-end functioning product to consumers when we do not have a brand name or a channel to do that?
What they were able to do is through their relationships with big box stores, but also direct-to-consumer, through the Klipsch and Onkyo families and those sales channels, help us grow what we call our PLACE product, which is that high-end smoke detector lineup.
Yeah, if you look at the financial side of it was about just under a $200 million acquisition. We really bought it. If you look at the breakdown of the assets, that was really the book value of the company. It was not making any EBIT at the time. We talked about getting it to a $40 million-$50 million annualized run rate by the end of 2027. I would say in 2026, we are going to finish probably $25 million-$30 million in EBIT, well on our way to get to that last leg. It is a combination of sales growth from new product introductions on the premium audio side, but a lot of getting your hands dirty on cleaning up overlapping costs, a ton of overhead costs that we have cleaned up and taken out.
Yeah, we've done a ton of work, and the team that's been involved has really put a lot of effort into getting to that level.
It's a really interesting acquisition, and one that when you speak to on conference calls, I think it's starting to kind of get into the analyst community's understanding of what it means for you from a growth perspective, and eventually from a profit perspective as well. I want to stay on the technology, and basically kind of mandates that are coming down the pike. We're starting to see in-cabin and driver monitoring becoming mandated in some regions. How do you position Gentex for that business against Tier 1s, against camera specialists, and relative to your core technological advantage?
Sure. I think one of the things we've probably done a poor job of over the last 10 years, really, is how much time we spend talking about our capabilities around CMOS imagers. At Gentex, we've always manufactured all of our own CMOS imagers in-house. When I say that's not the way most people will claim to make a camera, right? They're going to buy a chip already on a board, put a lens on it, and say they made a camera. Gentex is very unique. We dice, probe, wire bond. We take from the wafer up, and we manufacture the entire imager, usually designed around a specific use case that an OEM is trying to accomplish.
We're going to build probably 3.5 million , 4 million cameras this year, and that number continues to grow, both as a video camera, as part of our system for our Full Display Mirror application, also for driver monitoring, in-cabin monitoring, and other type sensor applications. The issue, Brian, it's a great question, the market's bifurcated, really, when you talk about driver monitoring and in-cabin monitoring. Some OEMs are doing this not because of regs, they're doing it because there's a high-end feature set on a way to Level 4 or semi-autonomous driving, as a way to help the consumer have something that's valuable to them while they're in that environment. Other areas, especially the EU, the demand right now is driven by regulations from the EU on having these systems embedded in a vehicle.
The difference and the reason why I say they're bifurcated is that program, there's a lot of volume available there. They are lower margin profiles than what we would typically pursue. What we're seeing, and the reason why we're competing in this space, is the concept of the geography and a camera now looking into the cabin of the vehicle all the time, starts to open up a lot of high-end feature advancements that you can add on top of that platform longer term. The one I like to kind of compare it to is the Mobileye model. When Mobileye first started, we were integrators of Mobileye's tech for a long time.
Their model was actually pretty simple, but very phenomenal and well executed, and that is, I'm going to put a forward-facing camera in with a feature set that may be regulated, then I'm going to add additional feature sets on top of that, and basically sell software as a service. What we're looking at is the long-term opportunity to say, even this lower margin product does give us the geography and the ability to interface with the OEM and start bringing in additional feature sets that we can charge for.
Talk a little bit more about those features. What down the road do you think the OEM is going to want to have embedded within the vehicle, and what are they telling you consumers are going to be willing to pay for?
Yeah. Well, it's interesting, and I think that's where Gentex is pretty unique in this regard. We tend to work with customers to answer that very question. What are the feature sets that a consumer values and is willing to pay for that an OEM may not even thought of yet? When you look at our roadmap for where we want to go in driver monitoring, and really, I call it in-cabin sensing, it's this ability to say, "Listen, I can look at your distance from an airbag, for instance. If I know your speed and I can assess your mass, I can tell how hard to discharge an airbag in the event of an accident." One of our other sensing technologies is a structured light application, and it has an amazing ability to pick up micro-vibrations in a car environment.
The primary use case for this technology would be a baby in a rearward-facing car seat. You can't physically see the child, but the breathing of that child causes micro-vibrations in that car seat. The structured light can actually sense those vibrations, detect presence of life. Obviously, the next phase of that type of technology would be saying, "Hey, how do I monitor a driver for a health event?" If you're cardiac arrest or heavy breathing, other problems, how do we know and be able to sense that to make sure you're taking over the vehicle or creating the safest environment possible? Then you start to layer on some of the other, kind of our legacy technology, which is the smoke and vape sensing.
If you actually ride in a Zoox vehicle today, we're shipping our smoke fire protection technology in a Zoox vehicle. They are fully autonomous. What we're sensing for is smoke or vape that's done in that vehicle while it's in use, and be able to detect and alert the owner that the vehicle needs service. Those are just some examples of why we think the platform can create tremendous amount of new technology.
Now, the light bulb that just went off was, "Oh, this must be great for our autonomous vehicle development and adoption." I think it's really exciting, and obviously coming down the pike. Let's talk a little bit more near term to some of your core markets. Clearly, we have to start with China and the difficulty that that market has been, not only for you, but for a lot of other suppliers. We see local OEMs gaining share there. Let's just ask, what are your thoughts on Gentex competing within China?
Yeah, it's a wild world, let's just put it that way. If you look at the geopolitical changes that have happened in the last four years, I think we always assume longer term that there would be some type of incident that was going to cause some type of conflict between U.S.-based suppliers and the China domestic OEMs. That happened way faster than I think even we predicted at the time. But in theory, this is just a form of nationalism, not dissimilar from what really the U.S. is experiencing right now as well. If you look at it, we had a very unique business model. We were on pace to have about $250 million in exports to China out of the United States, right?
Not a lot of companies are probably sitting at a conference talking about manufacturing in the U.S. and shipping to China, but that was our business model, and it worked really well. Obviously, as the domestic Chinese customers have started to overcome the JVs and take over most of that market share in China, the vehicle prices have dropped significantly. The amount of tech deployed on those vehicles is not as high as it would have been under a JV model. That directly impacted us. Not to mention now you start to have some knockoff competitors in the domestic China market that are copying products. They're not the same quality, definitely not the same performance, but for a Chinese OEM, they may be good enough. Between those two, we've taken some losses in our core auto-dimming business.
Now, I will say our outside auto-dimming business in China has held up much better, and the reason why is it's technologically a much more difficult product to build, and most of the competitors don't have capacity in place for forming glass, shaping glass, and doing the electrochromics there. Longer term, we look at it, and we believe the best thing we can do for the company is to assume the worst-case scenario at this point. Even though we continue to compete in China, we're looking at it assuming that we're not going to get any help, that there's not going to be kind of a rebirth of technology with the domestic Chinese OEMs. We're going to have to find a way to win and grow through the rest of the world.
Makes a lot of sense, particularly given where your margins are and where they were, and your march to get back to there. Kevin, this is probably a better set of questions for you. You have returned the core business to the mid-30s gross margins. What are the structural levers that you need to hold or expand to grow that over the course of the next three to five years, particularly given the inflation that we've seen in electronics and some other areas that are input costs for you?
A couple of the bigger pieces are getting that growth rate up beyond that low single-digit level. If we can get to mid-single digits, it really plays well into our vertical integration play where we start to leverage, we continue to leverage our fixed cost base. If we can do that, then margins tend to be expansionary and help offset what we have to give to the customer from an APR perspective or what you start to see on the, what we're seeing in the short term with the memory cost increases and those things. Even if we get pass-throughs on those, they tend to be zero margin pass-throughs, so it has an impact on your margins.
Our operational improvements, we've done a ton of work in the last 18 months, and that's one of the big areas of improvement is our labor and our throughput. After the supply chain crisis of 2022 and 2023, the labor pool was inexperienced. There was lack of labor availability. If you fast-forward to now, our teams have gotten way more efficient, but we have to take it to the next level over the next two to three years to continue to offset the headwinds that we're seeing in the business primarily. That's always our goal is to offset any cost increases with manufacturing improvements.
Yeah. I mean, really a question for both of you. We've seen some pockets of excess inventory in the U.S. as well. How do you as a supplier prepare your lines for, let's say, a supplier that's undergoing a little bit of some extra weight as it relates to their end stock? What have the last maybe, I don't know, last seven or eight years taught you about how best to prepare for that?
Yeah, I think number one is, for us, it's really focused on flexible automation. Trying to be able to put lines in place that can build a product for any customer and they can switch over easily, because it's really difficult to predict right now which OEMs are going to win. For us, we try to stay focused on the flexible automation side. Also try to pay attention to what's going on in the space. There are tells. I've beaten myself up and the team up over the last few months on the Micron situation, meaning that this should have been somewhat predictable. Even though they didn't tell us until the last minute that they were leaving automotive and therefore you had all these designs that include, and you can talk about RAM all day long.
If you buy me a scotch, I'll share with you the ugly sides of what's happened in the DRAM space. With the team, we're saying, man, with the advances of AI, people talk about AI as it relates to things that help them on the company side. I believe we're under-utilizing it in ways of getting a forewarning when these type of crises are about to come. Unfortunately, they're highly inefficient. It drives huge cost increases. I mean, you're talking about, if you haven't read about this, like DRAM in the space, pricing has gone up 10x. So a chip that's primarily, and you talk about DRAM, you're usually talking about a support memory chip for vision systems. It's the primary use case. The problem with this is when you're in automotive anyway.
When you are talking about DRAM that was trading at $7 a few months ago, the new price now, if you can get a chip, because it is constrained, is $47. When you start talking about anywhere from 10x, 7x- 10x pricing, in the short term, it creates massive headwinds on the profitability side. Longer term, we will work our way through it. But in that medium term, let us call it 18 months, it is pure chaos. The irony is it is just the same chaos we went through in 2022 and 2023 when part shortages caused redesigns. We have the muscle memory. It is just really unfortunate because it is a waste of effort at times. But this is the world we live in, right?
You have to get used to this. I believe when we will be at our best is when we start to become more predictive, and to your point, leverage our balance sheet to reduce risk by carrying inventory in areas that we are concerned about.
How does that manifest itself over the course of the next six to 12 months, vis-a-vis the balance sheet?
Yeah, I mean, nothing drastic right now, because unfortunately, even if I wanted to execute what I just said, I couldn't because of availability. Thanks.
Thanks for an idea way too late, Steve.
But this is part of the things we are looking at, though, is modeling where are the weaknesses in the supply chain? Who are those suppliers that we don't have? We believe we had a long-term agreement that got canceled very quickly. We have got to do a better job on the business discipline side of making sure, and the one advantage we have at Gentex is we are smaller, we move fast. It has always been our corporate style, very thin management layers. We meet, we move, we make a decision, we rock and roll. The nice part is with the balance sheet we have, we don't have to ask for a lot of help to make those decisions and execute them.
Once again, please feel free to ask any questions here. I want to ask a question about sourcing decisions vis-à-vis IEEPA tariffs and the invalidation thereof. Have you rethought at all how you go about your own sourcing decisions, and how do you think about Section 232 as we move forward here?
Yeah. No, we've already, really starting as soon as the tariff conversation happened, started working really hard with our suppliers. The tariffs that did impact us were actually only the tip of the iceberg. There were a lot more. We were able to work with suppliers to move their production facilities and change where their country of origin was coming from to help avoid those. The biggest challenge you have is that after the first waves of tariffs become basically null and void and ruled illegal, now a new series of rules go in place that basically accomplish the same thing, but the rules of engagement are completely different. We're starting to address those now, and really, this has helped position us. I will say, part of the reason why the contract manufacturing side on electronics is moving so fast is because of this.
If you look at Gentex, we are unique in this regard. A lot of the capital that contract manufacturers have on the ground are either in Southeast Asia, India, or if they are in North America, they're in Mexico. They're all in low-labor regions. Gentex's facilities are all in West Michigan, all in the United States. As OEMs have been making this push, and usually the term that's used in the industry is resilience, a lot of OEMs are asking, "How do I build a car where I have very little, if any, exposure to China and Taiwan?" What we're stepping up is answering that question, showing how we can do that through our supply partnerships and where our manufacturing footprint is.
And then it begs the other question, which is why we're getting a lot of inbound traffic on the electronics side, is us suggesting, "Well, if you're looking for this in other places, let us know. We have the capacity, we have the business model to be able to support manufacturing in the U.S., and really supporting beyond just our traditional OEMs, but a lot of different customers that are looking for that same type of manufacturing.
As it relates to your OEM customers, thinking about all of the decisions that have been made from a sourcing perspective, movement within the broader Tier 1, Tier 2, Tier 3 supply base, do you see any potential risk to launches from the OEMs that basically just need to keep their feet underneath them for this period of time?
Yeah, I think there's some. I would say that, I think if we were sitting having this conversation in the hallway, I think we would probably all point to a handful of OEMs that we'd say that we know are probably more at risk versus the others. Anybody who went way overweight EV for the North American market is obviously playing catch-up right now. So, the Wall Street Journal can tell you everything you need to know about OEMs' decisions and positions on EV versus ICE vehicles. But what we're seeing is a lot of our customers have actually executed really well through that transition, and a lot of our largest customers tend to have a very broad portfolio of powertrain, which bodes really well for us.
And one of the things we always try to do with technology is stay powertrain agnostic. We're not here in the game of trying to predict what's going to win. On a personal technology standpoint, I've always believed hydrogen was going to be the long-term winner, but that's uninvestable right now, quite frankly.
Yeah, it's really struggling.
But it is something that we look at and try to pay a lot of attention to, which is how do you make sure you have products and you don't end up in just a segment of the industry that's tied to one type of powertrain?
You mentioned the balance sheet, I mentioned the balance sheet. You're in a net cash position, even with the struggles that the Chinese market has created for the entire supply ecosystem. As you kind of go forward, you were able to make the VOXX acquisition. There are probably some other tuck-ins or some other acquisitions that might look attractive. What are the thoughts on leverage now, maybe relative to what they were? Are you more conservative about it than maybe you otherwise would have been?
I would say no. I'm definitely open to. When we bought HomeLink in 2013, that was our first time taking on debt. Turned out to be a fabulous acquisition, like 4.5-year payback period roughly, and still very relevant product in the space. We're on pace with VOXX to be just a hair longer than that from a payback period standpoint. If we find the right target, we're very open to debt. The biggest challenge is when we are very difficult to deal with on the acquisition side, because we have a very high bar of what we think is an acceptable price to pay for a technology. Basically, we look at it very simply. Any acquisition is also compared against share repurchases, which is the better return profile for shareholders.
Right now, the reason why we are overweight share repurchases is as the price has retrenched, we look at where we are going, our sales growth projections, our cash generation, this seems incredibly cheap to us. That is why you see us moving really heavily on share repurchases over the last six months, because we believe we are the best investment out of the peer group. That being said, we are not opposed to taking on debt to do that as well, if it becomes necessary or opportunistic. One of the things I love is that despite all these challenges, 2021, 2022, 2023, again in 2026, the amount of cash generation has not changed drastically during that time period.
We operate a very thin, if you look at our operating expenses, we tend to operate a very thin OpEx business. I always joke we are Midwestern guys, so we like to keep it real simple and work hard, and that has tend to play out really well for us. At times, obviously, the volatility in the space, the stock price does not always reflect that. We believe we are in one of those moments right now. If you see us get really aggressive, it would probably be more on the repurchase side than on the acquisition side.
Last word, I want to give you an opportunity to talk outside of your core automotive market, and maybe talk about some of the opportunities in aerospace, in medical, and maybe some other adjacencies that the market may not otherwise be thinking about as it relates to Gentex.
Yeah, I think if you look at the other spaces, it is really interesting. We get asked this a lot, like, "How do they correlate to what you do?" If you actually look at all of our product strategy, it is all born out of similar skillsets. So when we talk about it, if you look at any of our investor presentations, we always talk about our core competencies. What are we good at? We build off of that. If we are something we are good at and we can build a new product, have some type of a unique application, it is something we feel like we can invest in, and we can use our own cash generation to create those R&D space and build a new product line, especially stuff that has great IP coverage.
If you look at a lot of what we've been working on in the last few years, I've mentioned the visors, the large area devices, further growth in the aerospace sector. One of the things I think probably gets missed a little bit, we talk about our windows at Boeing and Airbus, but with every one of those windows, we're selling an electronics module. We're certified in aerospace, both as an electronics supplier and as a window provider, both to Boeing and Airbus. We're pushing really hard in that space right now, trying to say, "Hey, what other advantages? What else could we be doing on the electronics side?" Then you look at our fire protection division, which has been a very legacy-based product, older technology.
This new PLACE lineup that we just discussed, this is all brand new, cutting-edge technology, fully connected, first time doing an app development for a direct-to-consumer product. These are the things that we believe, and I should say it wasn't just the one app development that was very relevant. We've also been introducing our own HomeLink app for automotive. You look at these, we love them because they're multi-leg opportunities. You're not doing a development just for one plate appearance. You're actually doing a development that has use both in automotive and outside of automotive and direct to consumer. We believe there's quite an opportunity. We believe there's quite an opportunity to continue to leverage our existing footprint and skillsets to grow outside of automotive.
The one thing I always like to caution there is that is not us saying we're getting smaller or walking away from automotive. That's not the case. You look at our 10-year plan, the plan is to double our automotive business, but we believe there's a way to add to it outside industries, all using the same skillsets that we're using in automotive every day.
I think it's terrific. I think it's a great opportunity. Steve, Kevin, and Josh, thank you very much for being here. We really appreciate you taking the time. If you do have the opportunity to go to SEMA, please check out the Gentex booth and all the technologies that they have coming. Thank you all very much for making 50th as special as it is so far.
Thanks, my pleasure.
Thank you.