Gentex - Earnings Call - Q3 2019
October 18, 2019
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by and welcome to the Gentax Reports Third Quarter twenty nineteen Financial Results Call. At this time all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference may be recorded. I would now like to turn the call over to Josh Oberski.
Please go ahead, sir.
Speaker 1
Thank you. Good morning, and welcome to the Gentex Corporation's third quarter twenty nineteen earnings release conference call. I'm Josh Obersky, Gentex Director of Investor Relations, and I'm joined by Steve Downing, President and CEO Kevin Nash, Vice President of Finance and CFO and Neil Boehm, Vice President of Engineering and CTO. This call is live on the Internet by way of an icon on the Gentex 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 Safe Harbor statement included in the Gentex Reports third quarter twenty nineteen financial results press release from earlier this morning and as always shown on the Gentex website. Your participation in this conference call implies consent to these terms. Now, I'll turn the call over to Steve Downing, who will give the third quarter of twenty nineteen financial summary.
Speaker 2
Steve? Thank you, Josh. For the third quarter of twenty nineteen, the company reported net sales of $477,800,000 which was an increase of 4% compared to net sales of $460,300,000 in the third quarter of twenty eighteen. The 4% growth was accomplished despite global light vehicle production declining approximately 3% in the third quarter of twenty nineteen when compared to the third quarter of twenty eighteen. The actual global light vehicle production levels also worsened in excess of 3% for the third quarter of twenty nineteen when compared to IHS Markit's mid July forecast.
For much of the year, actual light vehicle production levels have fallen well short of estimates, and this trend unfortunately continued in the third quarter of twenty nineteen. The lower than expected vehicle production was despite the fact that the third quarter of twenty nineteen had easier comparisons than last year. Additionally, the GM strike limited sales by 2% in the quarter. Our total growth rate of 4% means that we effectively outperformed our underlying markets by 7% to 9% during the third quarter of twenty nineteen. For the third quarter of twenty nineteen, the gross margin was 37.7%, which improved when compared with a gross margin of 37.6% for the third quarter of twenty eighteen.
The gross margin in the third quarter of twenty nineteen was negatively impacted by tariffs that in total represented 110 basis points of headwind. On a quarter over quarter basis, the tariff impact on the gross margin for the third quarter of twenty nineteen was 50 basis points higher than the tariff impact in the third quarter of twenty eighteen. In total, the gross margin in the third quarter of twenty nineteen improved 10 basis points versus the same quarter last year despite the fact that the impact of tariffs created a 50 basis point headwind on gross margin versus last year. The gross margin performance was driven by a mid single digit growth rate, positive product mix, better than expected purchasing cost reductions and the team's success in mitigating some of the escalating costs related to tariffs that have been impacting the company. Operating expenses during the third quarter of twenty nineteen were up 15% to $52,200,000 when compared to operating expenses of $45,600,000 in the third quarter of twenty eighteen.
Operating expenses ran slightly ahead of our expectations for the third quarter of twenty nineteen, but we believe the fourth quarter will be more in line with the growth rates from the first half of twenty nineteen and within our annual guidance range. The increases in operating expense in the quarter were driven by headcount and other resources required to fund development and launch of new products, travel and other resources associated with mitigation of tariffs, increased legal and professional fees associated with a minor acquisition of new technology and our ongoing focus on tax planning. Income from operations for the third quarter of twenty nineteen increased 1% to $128,100,000 when compared to income from operations of $127,400,000 for the third quarter of twenty eighteen. Net income for the third quarter of twenty nineteen increased by 1% to $111,900,000 compared with net income of $111,300,000 in the third quarter of twenty eighteen. Earnings per diluted share for the third quarter of twenty nineteen increased 5% to zero four four dollars when compared to $0.42 for the third quarter of twenty eighteen, primarily as a result of a 6% reduction in diluted shares outstanding from share repurchases due to the continued execution of the company's previously disclosed capital allocation strategy.
During the third quarter of twenty nineteen, the company repurchased approximately 3,600,000.0 shares of its common stock at an average price of $27.07 per share for a total of $96,600,000 of share repurchases. To date, for calendar year 2019, the company has repurchased approximately 11,400,000.0 shares of its common stock at an average price of $23.11 for a total of As of September 3039, the company has approximately 22,500,000 shares remaining available for repurchase pursuant to its previously announced share repurchase plan. The company intends to continue to repurchase additional shares of its common stock in the future in support of the previously disclosed capital allocation strategy, but share repurchases may vary from time to time and will continue to take into account macroeconomic issues, market trends and other factors that the company deems appropriate. I will now turn the call over to Kevin for the third quarter financial details.
Speaker 3
Thanks, Steve. Automotive net sales in the third quarter of twenty nineteen were $464,300,000 compared with automotive net sales of $449,200,000 in the third quarter of twenty eighteen. The 3% quarter over quarter growth in automotive sales was driven primarily by strength in full display mirror unit shipments and an 18% quarter over quarter increase in exterior auto dimming mirror unit shipments. This growth in revenue was partially offset by previously announced product headwinds of approximately three fifty basis points when compared to the same period last year. Additionally, the third quarter of twenty nineteen was impacted by approximately 200 basis points in lost sales due to the GM strike.
Other net sales in the third quarter of twenty nineteen, which includes dimmable aircraft windows and fire protection products, were $13,500,000 an increase of 22% compared to other net sales of $11,100,000 in the third quarter of twenty eighteen, primarily as a result of increased dimmable aircraft window shipments. During the third quarter of twenty nineteen, the company's effective tax rate was 15%, which is up slightly from 14.7% for the third quarter of twenty eighteen. However, this rate is down from the 16.4% tax rate for the first half of twenty nineteen. The effective tax rate was driven below the statutory rate in both quarters due to the foreign derived intangible income deduction, tax planning strategies and discrete benefits related to stock based compensation. Now for a balance sheet update.
The following balance sheet items represent a comparison versus December 3138, which are also included in today's press release. Cash and cash equivalents were $260,200,000 compared to two seventeen million The increase was primarily due to cash flows from operations, which was partially offset by share repurchases, dividend payments and capital expenditures. Short term investments were $207,200,000 up from 169,400,000.0 and long term investments were $103,000,000 compared to $138,000,000 Fluctuations in the two were driven by changes in fixed income investment maturities within the portfolio. Accounts receivable increased $39,600,000 to $253,100,000 primarily due to the higher sales in the quarter and timing of sales within each of the quarters. Inventories as of September 30 increased by $13,400,000 to 238,700,000.0 Accounts payable increased by $2,500,000 to $95,300,000 and other current liabilities increased $10,600,000 to $86,900,000 primarily as a result of increases in accrued wages.
Now for some cash flow highlights. Cash flow from operations for the third quarter of twenty nineteen were $110,500,000 compared with $105,800,000 during the third quarter of twenty eighteen. And year to date cash flow from operations was $383,900,000 for 2019 and compared with 398,200,000 in 2018. The differences in each of the periods were primarily due to changes in working capital. Capital expenditures for the third quarter of twenty nineteen were $11,200,000 compared with $16,900,000 in the third quarter of twenty eighteen.
And year to date 2019 capital expenditures were $56,700,000 compared with $68,800,000 in 2018. And depreciation and amortization for the third quarter was $26,000,000 compared with $24,800,000 in the third quarter of twenty eighteen. And year to date, depreciation and amortization was $79,300,000 compared with $80,100,000 in 2018. I'll now hand the call over to Neil for a product update.
Speaker 4
Thank you, Kevin. In the third quarter of twenty nineteen, there were 16 net new nameplate launches of our interior and exterior auto dimming mirrors and electronic features. Of the total launches, approximately 60% had advanced features. The percentage of new launches with an advanced feature was slightly higher than our current ratio of advanced feature products to base auto dimming products. Advanced feature launches in the quarter were led by new launches of HomeLink, where there were seven net new nameplate launches.
During the third quarter, we launched base interior auto dimming mirrors on five new nameplates for domestic China OEMs. These nameplate launches represent further penetration of our core auto dimming technology into the China market. During the third quarter, there was one new nameplate launch for full display mirror, and we continue to forecast that we'll be launching seven additional nameplates in the fourth quarter. We're also excited to announce that during the third quarter, we were able to secure our tenth OEM customer for Full Display Mirror. Our final launch update for today is in regards to our Aerospace business.
During the third quarter, we made our first production shipments of electronically dimmable windows to Boeing for the 777X program. This program represents our second commercial aircraft program. And while our dimmable window technology is optional on the seven seventy seven, we're excited about the successful launch. The seven seventy seven launch is the first aerospace program for Gentex, where we were sourced as a Tier one supplier into the aerospace industry. This launch is a testament to the hard work of our chemistry, engineering and manufacturing teams, because not only did we achieve full certification as an aerospace supplier, but we also accomplished this while launching our brand new generation three dimmable technology.
We believe that the launch of the seven seventy seven and our status as a Tier one supplier in aerospace will continue to provide growth opportunities for us. I'll now hand the call back over to Steve for guidance and closing remarks.
Speaker 2
Thanks, Neil. Today, we provided revenue and margin guidance in our press release, specifically for the fourth quarter of twenty nineteen due to the GM strike and the estimated impact this will have versus our previously forecasted fourth quarter revenue and gross margin. The following information reflects the company's best estimate of the impact of the General Motors strike as well as changes to IHS Markit's estimate for light vehicle production in the fourth quarter. We are using order changes over the last several weeks from GM as the basis of our calculation, and we estimate the impact to be approximately $7,000,000 to $8,000,000 in lost sales per week of the strike. Given the lost sales to date for the fourth quarter of twenty nineteen and our estimate of additional lost sales before the strike ends, the company now estimates that the revenue will be between $430,000,000 and $455,000,000 for the fourth quarter of twenty nineteen.
Based on the updated net sales guidance, the company is estimating that the gross margin for the fourth quarter will be between 3536%. Our full year estimates for calendar year 2019 are based on the mid October IHS Markit light vehicle production forecasts, current forecasted product mix, expense growth estimates, actual performance through the first nine months of twenty nineteen and estimates regarding the impact of the GM strike. Given these inputs, the company updated certain of its previously announced annual guidance ranges, which were published this morning in our press release and are summarized below. Net sales between 1,840,000,000.00 and $1,870,000,000 gross margin between 36.637% operating expenses between $198,000,000 and $200,000,000 tax rate between 1616.5% capital expenditures between 90,000,000 and $100,000,000 and depreciation and amortization between $104,000,000 and $107,000,000 Lastly, twenty twenty light vehicle production forecasts have continued to worsen as the year has progressed. However, the company is making no changes to its previously announced net sales estimates for calendar year 2020, which is estimated to be over and above the foregoing 2019 net sales estimates in the range of 3% to 8%.
The third quarter of twenty nineteen was a challenging vehicle production environment, but the company delivered growth that outperformed our underlying market by approximately 7% to 9%. Our third quarter growth rate was very strong given the industry headwinds and the Gentex product specific headwinds that serve to limit our growth. Additionally, our gross margin on a year over year basis was exceptional and increased by 10 basis points year over year despite a 50 basis point increase in the margin effect of tariffs. The entire team at Gentex delivered solid results due to our focus on sales growth, cost discipline that led to margin stability, tariff offsets and tax efficiencies. This hard work combined with our disciplined approach to capital allocation led to a 5% increase in EPS for the quarter.
As we move into the fourth quarter, we are expecting to remain in a tough production environment due to ongoing issues in light vehicle production levels globally and the impact of the strike at GM. Overall, we remain optimistic that the growth of our core technologies will continue to provide growth rates above global vehicle production levels in 2020. As we execute the strategies we have put in place for next year, we believe they will deliver sales and margin performance throughout the year that when combined with the execution of our capital allocation strategy will continue to create value for our shareholders. In closing, we will be exhibiting at Nbaa from October 22 through the twenty four, at CEMA from November '8 and at CES from January '10. As always, please know that you are all welcome to come see us at these shows to experience our products and to see the progress we are making with our technology.
If you are interested in visiting us at any of these events, please feel free to contact Josh Oberski to schedule a time. Thank you for your time today, and we can now proceed to questions.
Speaker 0
Our first question comes from Chris Van Horn of B. Riley FBR. Your line is open.
Speaker 5
Good morning, guys, and congrats on another strong quarter.
Speaker 4
Thanks, Chris. Good morning.
Speaker 5
It seems like the lower guidance on this gross margins of roughly 50 basis points on the top line. Could you maybe break that out? Is it mainly due to the strike? Is it also some of the production estimate changes? And then how do you view maybe that GM production being made up, if at all, in the fourth quarter and maybe into 2020?
Speaker 2
Yes. I think if you look at the majority of that gap is driven by the lower sales on a year over year basis. So especially versus what we are forecasting coming into coming looking at Q4 before the strike happened. So the vast majority of that is due to the overall lower sales level. And then obviously, the mix change, given what we have at GM and the business that we have there, which is which does bolster gross margins.
Speaker 5
Okay. And the production from GM that was sort of lost due to the strike, do you see that being made up?
Speaker 3
IHS is really looking at probably making that up over most of 2020 based on what we've seen from IHS. They were running pretty full tilt, building into that strike. So we don't expect a ton of volume coming back in Q4, but maybe we'll get some luck and they'll be able to do that. But I think IHS is modeling recovery in 2020.
Speaker 5
Okay, great. Got it. And then how about volumes for Full Display Mirror? You had mentioned in the past 500,000 number. Any sort of commentary around that?
Speaker 2
Yes, we still believe even with the strike and GM being kind of our launch and one of our largest customers for that product that we'll still be above that number for the year.
Speaker 5
Okay. Got it. And then last one for me for now. On the aerospace side, 13,500,000 really strong number continues to kind of go up here. Do we think about that as kind of a run rate going forward?
Was there anything during the quarter that was a significant order or how do we think about that business right now?
Speaker 2
There was a little extra volume given the $7.77 launch. So it's kind of a system fill for that new launch. So that would probably that could be a little higher than the normalized run rate. The one thing that we do see is there are pretty there are some natural fluctuations in volumes throughout the year in the aerospace industry or at least on the Boeing business. So, I wouldn't necessarily try to model it flat, but I would say that there should be a slight step up both in the seven eighty seven production volumes as grown and they've gone to the longer version of the seven eighty seven, that's obviously more windows on that plane.
So that's helped. And then the launch of the seven seventy seven should help over time as well.
Speaker 5
Got it. Thanks again for the time guys.
Speaker 2
Thank you. Thank you.
Speaker 0
Our next question comes from John Murphy of Bank of America. Your line is open.
Speaker 6
Good morning guys. This is Aileen Smith on for John. First question, can you provide any more detail around the company specific product headwinds that you cited in the press release? It doesn't sound as if this is related to GM. So can you give any insight as to what's going on there or whether it's isolated to any one product or geography?
Speaker 3
Thanks, Aileen. Yes, this is the stuff we've been talking about for a couple of years now, really. The biggest impact, probably two thirds of that impact is related to the driver assist feature with Mobileye rolling off and continuing to cause headwinds. Another 100 basis points of that is really related to SmartBeam. And then last little bit is additional legacy features, compass and microphone that we've also talked about is kind of rolling off over the, or had a little bit of headwind on the compass side.
But it's really the same story that we've been talking about all year. And then with the drop in the North American production throughout the year, it's kind of exacerbated itself a little bit.
Speaker 6
Great. That's helpful. And second question, can you walk us through your operational response to the GM strike? Specifically, at what week into the strike did you get adjustments to purchase orders? And were you able to build inventory at all through the strike to avoid taking production downtime?
Or did your production go down nearly one for one with GM?
Speaker 2
No. So, well, two things. When the strike happened immediately, we continued to ship for a few days versus when the strike occurred. So, the impact to our Q3 was a little less, but it will be a little bit more. And that's what we're modeling in Q4 is that because we know the strike started, but then we continue to ship for a few days in Q3, we're expecting that once GM comes back online, there will be another few days where we won't need to ship because they already have the inventory that we shipped in Q3.
So that's why we're modeling a little larger impact in Q4 than what was in Q3 plus the total number of days down in Q4 is obviously higher. Sorry, Aileen, you asked the second part of that question?
Speaker 6
No, the second part of the question was just, were you taking production down nearly one for one month?
Speaker 2
Yes, no. Sorry. Yes, we had not we did not have to take our production down. If you look at the growth in the third quarter, we still grew 4% on growth with other customers and the other parts of the business. So we didn't have any like temporary layoffs or sending workers home for lack of work because we are quite busy in the quarter despite the issues with GM.
Speaker 6
Okay, great. And last question, can you describe how your teams are managing what's been a constant erosion in intra quarter production schedules? We're now about a year or over a year into this deteriorating trend. So is it just a function of being conservative in your internal production assumptions versus what you're seeing in terms of customer releases?
Speaker 3
Yes. I think it's an ongoing battle. We continue to build our schedules on a weekly basis based on our releases. Fortunately for us, we have had growth throughout the year. So it has stemmed down a little bit of if you look at our CapEx, it has lightened from if you go back eighteen months, kind of slowed down some of that need for capacity growth on a longer term basis, but we continue to be in a tight labor market.
And so our teams are fully staffed and working over at around 80% to 100% of capacity already. So it's been we just had to shift and be flexible about what we're building. And we've been accustomed to that being in the automotive industry for a long time. So it's just continuing to keep a close eye on order changes and if there are magnitude increases and our teams have done a fantastic job of managing through that.
Speaker 2
And I think, Alain, if you look at what one of the biggest concerns you have is obviously not being able to keep up with order changes. So you're spot on. I mean, there's a lot of chaos that occurs when these type of changes are happening. Given what we build in our approach, we are able to carry a little extra inventory. So we try to model out what we think is going to be needed, build ahead a little bit just to make sure we can support our customers.
Speaker 6
Great. That's very helpful. Thanks for taking my questions.
Speaker 2
Thank you. Thank you.
Speaker 0
Our next question comes from James Picariello of KeyBanc Capital Markets. Your line is open.
Speaker 7
Hey, good morning guys.
Speaker 2
Good morning.
Speaker 7
So just going back to the GM strike impact, I mean, we just do the really simple math of 7,500,000.0 a week for the year, I mean, that would annualize GM as a customer close to 20% of total sales. So yes, I mean, it's my understanding that GM was less than 10% last year. So just wondering if you could help bridge that.
Speaker 2
Sure. If you look at the 7,000,000 to $8,000,000 so the $7,500,000 midpoint there, we know that's a little higher than a full annualized run rate because of the launch of GM vehicles in the back half, especially the launch of some of the new trucks and SUVs. So we know they tend to run a little richer product mix when those new vehicles are launching. And for us, that higher ASP is really driven by our full display mirror launches with GM. And so when you look at if you look at on an overall basis, what GM was last year on a percent of sale versus the model going forward, they are going to have an uptick in their overall percentage of our total business, given the number of vehicles we're shipping FDM on currently for GM.
Speaker 3
Yes. If you follow what we've talked about publicly, right around half of our nameplates of the full display mirror are with General Motors. So that's why the impact in Q3 and Q4 was
Speaker 2
pretty severe, pretty noticeable.
Speaker 3
And we've had a lot of strength in outside mirrors and they are high level of HomeLink. So when you put the content per vehicle up against other OEMs, it's stacked up right up there.
Speaker 7
Got it. And how many weeks for the strike are you baking in for the fourth quarter?
Speaker 2
Basically, what we modeled in was four full weeks in October.
Speaker 7
Yes. Got it. Okay. And then just on the sustained strength in the domestic exterior mirror shipments. I mean, I just and also we're also seeing a pickup now internationally in the quarters.
So just wondering, I thought maybe the rough estimate was as you lap the last year's share gain win domestically that the exterior mirrors would be up maybe mid to high single digits. But clearly, was sustained strength in the growth rate. So can you just kind of talk about what drove that and what your expectation is in the fourth quarter?
Speaker 2
I think when you yes, when you look at it, it definitely was higher than we expected for the quarter in terms of that percentage growth in outside mirrors. When we model going forward though, and remember a lot of that was driven by some takeover business and some OEM issues where they were struggling with deliveries from another supplier. So one of the things that we are focused on was making sure we supported those customers and those deliveries. As you move forward, we wouldn't expect those growth rates to continue at those levels. We think those are much more moderated in 2020.
Speaker 7
Okay. And if I could just sneak one small one. You mentioned in the release the some legal and professional fees tied to a new technology that you acquired. Can you just speak to that real quick?
Speaker 2
Yes. It was something that we've been interested in for a while. I prefer not to mention what the exact technology is. It's actually a phased acquisition that will take a period of a couple of years before that will play out completely. But it's definitely a materials play and something that the company has been interested in a long time.
We think it is longer term, five to ten years out, something that's very interesting to us and could help enable a lot of the products that we're working on.
Speaker 7
Thanks a lot guys.
Speaker 2
Thank you.
Speaker 7
Thanks, James.
Speaker 0
Our next question comes from Ryan Brinkman of JPMorgan. Your line is open.
Speaker 8
Hi, great. Thanks for taking my question. I think that the mid October IHS forecast update assumed that the GM UAW workers would return to their jobs on November 1, which was probably a prudent assumption when they made that forecast. And you just mentioned that you assume four weeks of stoppage in October. Although shortly after their forecast was released is when GM and the union reached their tentative agreement.
So what is your current as of today thought process as to when those workers do return to their jobs maybe mid next week or so? And if that's the case, then could there be some upside to the softer 4Q outlook that you released today? Yes. So we're so two factors there. One of
Speaker 2
them, yes, would assume that's what we were kind of predicting based on the announcement yesterday. And then looking at our information, we would have guessed that they'll hopefully be back to work sometime mid or late next week. But remember, because in Q3 when the strike occurred, GM continued to release parts from supply base. We shipped for a few days even though the strike was already underway in September. We're expecting that it'll take a couple of days after they're back to work before they start accepting shipments again from the supply base.
So that would put us kind of in the next week, maybe the beginning of the following week before we believe we'll be shipping with GM again.
Speaker 8
Okay. That's helpful. Thanks. And then just lastly, I wanted to ask about there's been so many developments potential developments on the China trade and tariff front just in the last couple of months here. How are you viewing the current, was it roughly 110 or so basis point headwind relative to tariffs?
How do you think that's going to evolve as we move into next year?
Speaker 3
That's a great question. We keep our supply chain teams do a great job of staying on top of that. Obviously, whenever, Trump tweets that there's a trade deal, on the surface, we follow-up and then, it looks like on the back end, they're still modeling potential increases. We have List three scheduled to increase in January up to 30%. There's List 4A, which our guys call the Christmas list that's potentially out there, but has been delayed.
We're as Steve talked about on his previous calls, we are evaluating all of our options as it relates to international trade. As we also alluded to, our exports to China are starting to become as big of an impact as our imports of raw materials coming in from China. So we're forming our strategy currently and glad to be sharing that. If things continue to escalate, hopefully obviously, we would hope that this would all get settled out and we'd have reduced costs. But we are certainly being impacted as you saw in the quarter, that 110 basis points that will continue to ramp up further in 2020 if nothing changes.
Yes.
Speaker 2
We would expect a slight increase in 2020 versus what we've encountered so far in 2019 based off what's in place right now. The important part to notice there, if you look at the dollar amounts, our purchasing and logistics teams have done a great job of offsetting a lot of those. The tariff annualized tariff run rate would be much higher if hadn't made a lot of the changes we've made from the supply side. We continue to look at that. And I would say, modeling 2020, we're modeling just slightly over that 110 basis points of headwind for next year.
Speaker 8
Okay. Very helpful. Thank you.
Speaker 2
Thank you.
Speaker 0
Our next question comes from David Kelley of Jefferies. Your line is open.
Speaker 1
Hey, good morning guys. Thanks for taking my questions.
Speaker 3
Hi, David. Just wondering if
Speaker 9
you can provide some more color on the elevated OpEx in the quarter. I think you referenced product development and some launches. Were there any specific callouts in Q3? And do you expect that to normalize going forward? Yes.
Speaker 3
I think if you look at the breakdown, half to two thirds of that is wage related because of all the launch activity we have going on. We talked about full display mirrors. We have another eight launching or seven launching in Q4. Next year is a busy year. So I mean, we are staffed for that build, but we're focused on new technologies.
And so there's been a focus on building that out. But like we called out in the press release, to avoid some of these tariffs, that is not that does come at a cost. So our business development teams, some of our leadership teams have been traveling to our suppliers in some of those cases. So there's costs elevated there. Some of the smaller things that we didn't talk about really were we are having elevated freight costs that we've had all year.
So those we didn't call out in the press release, but all those things are kind of additive. But the biggest piece is supporting the engineering development activities that we have going on now and to support growth in the future.
Speaker 9
Okay, great. Thank you. And then maybe to switch gears a bit and maybe another market outlook question. Your 2020 guidance here is unchanged. Can you talk about what you're seeing in Europe currently?
I mean, clearly, are a number of moving parts. Just thinking about regulations coming down the pipe next year that although don't directly impact you guys. But just from a customer relationship standpoint, any thoughts on kind of the changing production outlook as it relates to your European exposure?
Speaker 2
Yes, absolutely. If you look at, we do very well, with our European customers. So it's something that we watch very closely. Probably the most concerning part about the forecast, our IHS updates has been that a lot of the German OEMs are showing some weakness in their production both in 2020 and beyond. And so we keep an eye on that.
When we look at all those IHS updates, we still believe we'll be in that 3% to 8% range next year. So it's obviously a little concerning. You hate to see your customer struggle, but it's one of the things that we watch very carefully and keep our eye on. But as of right now, we haven't seen anything that would imply that we need to change our guidance for 2020.
Speaker 9
Okay, got it. Thank you. Appreciate you taking my questions.
Speaker 0
Thank you.
Speaker 2
Appreciate that. Thank you.
Speaker 0
Our next question comes from David Whiston of Morningstar. Your line is open.
Speaker 10
Thanks. Good morning, guys.
Speaker 3
Good morning, David.
Speaker 10
The press release, you called out some purchasing cost reductions being better than expected. Are you able to speak a little more specifically, how you went about getting that?
Speaker 3
Yes. Thanks, David. That's a great question. If you remember, when we talked about 2019 in the beginning of the year, IHS was still running pretty strong growth. And so there was a lot of constraints on the passive electronics.
With the slowdown, we got a little bit of help from that. But we also tasked the teams to go back to work, with the suppliers and they delivered. So that's been a positive benefit for us on a lot of the different commodities. And then the last piece is we some of our precious metal costs that we talked about were not as much of a headwind as what we had initially projected. So all in all, that's really the driver of all the better purchasing cost reductions.
Speaker 10
And you mentioned going upstream to suppliers. Is that purely a price discussion? Or are there other ways you guys can help your costs out without having to try and squeeze them on price?
Speaker 3
Yes. So I mean, the way that we approach this with all of our suppliers is we work to have a relationship. And knowing that we grow, that we go on a journey with them to say that if you're going to come along for this ride, we have expectations, but we'll promise you that we'll provide you volume and growth and ability to have that growth with us. And so we've had a different focus over the last eighteen months to really engage with them on a different level.
Speaker 2
When I think internally, one of the things that's really helped us is we invest a lot into our process development and industrial engineering applications. What that's allowed us to do is help offset some of those precious metal costs by reducing our usage. In other words, being more efficient with the process of how we do it. And there's been a lot of inventions that have taken place that have allowed that to occur given the precious metal increases that we've seen. The team has been working on this for a couple of years now and some of those really hit home this year and that's definitely helped our cost basis significantly.
Speaker 10
Okay. Thanks. That's helpful. Shifting gears over to EVs, in terms of things like programs like the Bolt and you're going to have a lot more BEVs coming to market from a lot of your customers going forward. Is there any major challenge in integrating your mirror into a BEV compared to internal combustion vehicle?
Or is it actually even easier?
Speaker 4
No, there's not any major challenges. I think from a it's a standard still got a 12 volt area section that we would be utilizing, like many other components. And so from a standard mirror integration, that would be very simple and common to a
Speaker 2
standard combustion engine. I think what's interesting about a battery electric vehicle that most people don't think about though is when you talk about a vehicle having to package batteries, it does reduce the cabin changes in order to hit the efficiencies they're looking for in the range. Typically, the roof lines come down, where the seats are move up, it does tend to shrink like rear windows and the design of the vehicle, which makes some of our newer technology maybe even more applicable on a bev vehicle than what it would be on a traditional ICE.
Speaker 10
Okay. And last question on just an update on how difficult or easier is it compared to a few years ago to get software engineering talent to come out to Western Michigan versus choosing to go to California or the East Coast?
Speaker 4
Yes. I think that's going to forever be a challenge. I mean, I can't say that we have an issue right now. The team has been doing a great job in the recruiting process. We've changed how we've gone through and the method and the types of people that we're bringing in to do software.
Always will be a challenge from in competition with other companies as well as the West Coast. But right now, we're doing really well sustaining and hiring and adding additional heads as are needed.
Speaker 10
Okay. Thanks guys.
Speaker 3
Great. Thanks, Our
Speaker 0
next question comes from Peter Cabos of Broad Bay Capital. Your line is open.
Speaker 11
Hi guys. Thanks for taking my question. With respect to the 2020 guidance of plus 3% to plus 8%, so it looks like in 2019, you had something like a 9,000,000 or so headwind from the GM strike in the third quarter and you're talking about a $30,000,000 headwind in the fourth quarter. And it also sounds like that volume probably comes back in 2020. So if I look at 2019 having a 40,000,000 or so headwind from the strike and 2020 having a $40,000,000 tailwind, that's a nice kind of percentage growth rate change you'll have next year.
So my question is like you're not really changing your 2020 guidance. So like if the strike hadn't happened, would you have had to lower your 2020 outlook? Or why shouldn't your 2020 outlook from a growth rate perspective be higher now than it was when you kind of gave that guidance in the third quarter? Thanks.
Speaker 2
Yes. No, we wouldn't have had to change our guidance if it weren't if you look at just the strike issue by itself, what I would say is you have two kind of offsetting trends happening. Number one is sales pushing from 2019. Some of the sales pushing from 2019 and 2020, our historical experience with issues like this is that not 100% of those sales don't come back the following year. It's in other words, like some of what's been missed by GM will probably just be fall out permanently.
And that's really just based off how consumers consume and it's the fact that if the GM vehicle weren't available, they may have purchased something else or wait or move on. The other part of it though, it's really what been the offsetting portion for our 2020 is the drop in IHS guidance globally. And if you look at that, I mean, you're talking the last few months, especially, I think it's somewhere in the neighborhood of 3,000,000 or 4,000,000 vehicles that have come out of the global vehicle production estimates for 2020 in the last three to four months. And so that forecast has been changing pretty drastically. And so those would be the kind of the offsets, right?
So you would see some push out of 2019 into 2020 sales, which is a positive, and then you'd see a little bit of a reduction from the estimates dropping in global light vehicle production.
Speaker 11
Thanks very much.
Speaker 2
Thank you.
Speaker 3
Thanks, Peter.
Speaker 0
There are no further questions. I'd to turn the call back over to Josh Zabersky for any further remarks.
Speaker 1
Thank you. As Steve mentioned, we have a handful of analysts coming to visit our booths during CEMA and CES. And if anyone is interested in attending, please let me know. Thank you for your time and questions. This concludes our call.
Have a great weekend.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.