Gentherm Inc

Thank you for standing by. This is the conference operator. Welcome to the Gen10 Third Quarter Earnings Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star, then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Eugene Brentano, Investor Relations. Please go ahead.

Eugene Brentano Thank you, and good morning, everyone, and thank you for joining us today. GenThum's earnings results were released earlier this morning, and a copy of the release is available at GenThum.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of GenThum's website. During this call, we may make forward-looking statements within the meaning of federal securities law. Statements reflect our current views with respect to future events and financial performance. We undertake no obligation to update them, and actual results may differ materially. Please see Jentham's SEC filings, including the latest 10-K and subsequent reports, for discussions of our risk factors and other risks and uncertainties underlying such forward-looking statements. During the call, we may discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release or investor presentation. On the call with me today are Phil Eiler, President and Chief Executive Officer, and Mattel and Versa, Chief Financial Officer. During their comments, Phil and Mattel will be referring to a presentation deck that we have made available on our website at jentham.com slash events. After their prepared remarks, we will be pleased to take your questions. Now, I'd like to turn the call over to Phil.

Thank you, Yijing. Good morning, everyone, and thank you for joining us today. In the third quarter, the global pandemic continued to create challenges and uncertainties worldwide. However, the automotive industry has seen a recovery from the extremely low second quarter production level. Very proud of the global Gen10 team for the continued strong execution of our focused growth strategy while maintaining the health and safety of our team members. Let me start by sharing some of the key highlights of the quarter on slide four. In the third quarter, generated our highest quarterly revenue in two years, despite divesting all of the non-core businesses as part of the focus growth strategy. In automotive, we delivered the highest quarterly revenue in the history of the company, and we outperformed light vehicle production in our key markets by approximately 800 basis points. More importantly, new launches, higher take rate, and added content for vehicle, including electronics, battery thermal management, as well as climate and comfort solutions for second and third rows, positioned us to continue to outperform light vehicle production. Medical, we again delivered double-digit revenue growth. The momentum on the top line, along with our relentless focus on productivity, enabled us to achieve the highest quarterly gross margin and gross margin rate in three years, as well as record quarterly operating income and adjusted EBITDA in the company's history. On the award front, we secured approximately $80 million in automotive new business awards in the third quarter. This award level is lower than we anticipated, and it reflects the limited opportunities in the quarter as OEMs continued to conservatively manage sourcing decisions and thus pushed out the timing of several awards. That said, our RFQ pipeline remains strong into the upcoming quarters. On the operations front, Our global manufacturing and supply chain teams performed exceptionally by quickly pivoting to meet the increased demand from our customers, while still assuring safety of all of our employees. Even with the increased working capital needs in the quarter, we were able to generate $23 million in cash flow from operations. Importantly, our balance sheet remains strong, with total liquidity of nearly $450 million at quarter ends. Mateo will provide more details on our financial results in just a few moments. Now turning to automotive highlights on slide five. In the third quarter, we launched our automotive solutions on 29 different vehicles across 14 OEMs, including Daimler, FCA, Great Wall, Hyundai-Kia, and Volkswagen. We continued to see momentum for our CCS product and launched on the Buick Envision, Jeep Compass, Kia Sorento, and the Mercedes S-Class, our first CCS launch with Mercedes. In addition, our innovative combined steering wheel heat and hands-on detection sensor solution launched for Volkswagen. It's now available on an increasing number of nameplates, including the Golf 8, Tiguan El Coupe, Skoda Octavia, Karoq, and Kodiaq, as well as multiple vehicles manufactured by SEAT. The ramp-up of this solution has exceeded our expectations. On the technology front, our strong progress on ClimateSense development projects continues. Recall that in 2019, General Motors and GenTherm jointly presented our development project results at the Society of Automotive Engineers Thermal Management Systems Symposium. And these results were subsequently highlighted in a number of industry publications. I'm very pleased to announce that General Motors has decided to extend our partnership, and we've kicked off a third phase of the advanced development project. Our growing portfolio of development projects with OEMs in North America, Europe, and Asia demonstrates that our climate sense offering is a compelling solution for passenger comfort and energy efficiency in future vehicles. Lastly, I'm pleased to announce that GenTherm was named a top North American supplier by Honda. one of only 41 suppliers out of a total of 735. I'm proud of our team for winning the top North American supplier for our excellence in value. This recognition reflects our commitment to developing innovative solutions and our team's dedication and commitment to quality, innovation, and operational excellence. Now onto slide six. where you can see that in the third quarter, we secured approximately $80 million in new program awards across six different customers. Even though automotive production rebounded in the third quarter, OEMs remained cautious and have shifted out the timing for awarding a number of projects. Nonetheless, we're in the middle of several RFQs that we expect will lead to significant awards in the upcoming quarters. In the third quarter, we won multiple CCS awards including platform wins with BMW X5 in China and PSA. Of note, this is our first CCS award with the French OEM PSA in China. In addition, we received multiple steering wheel heater awards from FCA, as well as an additional award from one of the largest electric vehicle manufacturers. On the battery thermal management front, we continue to make progress in expanding our business. winning air cooling awards with both Hyundai and Kia. Moreover, we partnered with OEMs such as General Motors, Great Wall, Hyundai, and Kia to drive significant take rate increases in products like CCS, seat heaters, and steering wheel heaters. For example, our revenue from Great Wall doubled in the third quarter as compared to the prior year period. The majority of the growth resulted from our China team's efforts to drive incremental CCS, take rate, on the popular of all Hover H6 and H7 SUVs. New and follow-on climate and comfort awards, new technology launches, increased content per vehicle, as well as strong take rate increases demonstrate the continued momentum we have in automotive. Now let's turn to slide seven for a discussion of our medical business. In the third quarter, we continue to see double-digit revenue growth. growing 17% year-over-year. I'm pleased to share that approximately one-third of this growth is driven by incremental sales of Stihler blood-warming products, proving the growth synergy we expected from this acquisition. In addition, with light control and hemotherm, equipment demand continued to grow in international markets, including Spain, Brazil, and Hong Kong. Although we saw some recovery in elective procedures, We believe it could be some time to return to normalized levels. Finally, I'm excited to report that we achieved an important milestone in our medical business recently. We received 510 clearance from the FDA and have added the AstoPAD patient warming system to our product portfolio in the United States. This system can be utilized in all surgical procedures and helps prevent and treat hypothermia in patients throughout the perioperative germ. The introduction of the AstoPAD patient warming system demonstrates our deep understanding of human thermophysiology and how we're able to leverage technology from our automotive business to provide advancements in patient temperature management in our medical business. Our unique carbon fiber resistive heating technology was originally designed for comfort, warmth, reliability, and safety, in automotive passenger thermal management. This technology is ideal for the operating room and anywhere in a hospital when medical professionals need quiet, comfortable, and reliable warming to help prevent and treat hypothermia in a surgical patient. Now, before I close, let me remind you of our four pillars of the focus growth strategy on slide eight. One, accelerate core automotive climate and comfort growth. Two, introduce our innovative microclimate solution, ClimateSense. Three, drive battery thermal management. And four, expand patient thermal solutions. All of this is enabled by our electronics and software systems. We're very pleased to see significant progress on each of these pillars, and more importantly, the growth generated by our focused growth strategy. Now let me summarize on slide nine. Our results in the third quarter demonstrate the continued successful execution of our strategic plan to focus growth, realign our cost structure, and bring innovative solutions to market. This record performance is attributable to our global team and their dedication and agility to successfully deliver on our commitments to our customers during these unprecedented times. While there's still certainly near-term uncertainty in the macroeconomic environment, Our improving operating performance, expanding technology leadership, and strong balance sheet give us confidence in delivering long-term shareholder returns. With that, I'll turn the call over to Matteo for a little more color on the financial results.

Okay, thank you, Phil, and thank you to everyone joining the call today. So let me start on slide 10 and focus on the items that most significantly impacted our quarter results. For the quarter, product revenues increased by 8 percent compared to the same period of last year. And if we adjust for the impact of effects and divested assets, our overall product revenue also increased by approximately 8 percent. Starting with automotive, automotive segment revenue was a quarterly record of almost 250 million, a 9.4 percent increase compared to the prior year period. Adjusting for foreign currency translation, automotive revenue increased by approximately 8%. In comparison, according to IHS latest data, light vehicle production for our key markets of North America, Europe, China, Japan, and Korea was essentially flat compared to the prior year quarter. As a result, we outperformed light vehicle production by approximately 800 basis points. We saw strength in virtually all of the automotive product lines, and more specifically, steering wheel heaters revenue increased by 35% compared to the third quarter of last year as a result of the newly launched hands-on detection-enabled heaters with Volkswagen that Phil just mentioned. BTM revenues increased 34% as a result of the new self-connecting board solution that we launched in the new e-mini, as well as strength of our BTM products with FCA, primarily the battery heating solution for LG Chem. Electronics revenue increased 23% due to the memory seat module program with Ford and the recovery of the RV market. CCS revenues increased 10%, primarily due to higher volumes with Hyundai Kia, General Motors, and Daimler. These increases were partially offset by decreases in automotive cables and other automotives. If we move to the industrial segment, revenue decreased 17 percent due to the disposition of the GPT business, which occurred in October 1, 2019. Conversely, we saw continuous strength in our medical business, where revenues increased more than 17 percent year-over-year, primarily due to the higher demand of the Steeler resistive blood-warming products, as well as growth in hemotherm and blanket rose sales. If we move to gross margin, gross margin rate for the third quarter was 31.8 percent, the highest rate in the past three years, and this compares to 31.1 percent in the year-ago period. The 70 basis point increase was driven by labor productivity including the fixed cost leverage due to the volume increase, as well as supplier cost reductions and positive mix. And these were partially offset by annual customer price reductions and wage inflation. Moving to operating expenses, which were 44.1 million in the quarter compared to 54.4 million in the prior year period, the current year amount included 0.3 million of restructuring charges And this compares to last year's third quarter when we incurred approximately $8.7 million of restructuring charges, primarily related to our footprint realignment project that we announced in September 2019. If we adjust for the restructuring charges in both periods, operating expenses were $43.8 million down from $45.7 million in the third quarter of 2019. The year-over-year improvement of 4% was primarily driven by the impact of the divestiture of GPT, lower SG&A due to decreased headcount, reduced travel costs, as well as lower consulting and R&D costs. These positive effects were partially offset by incentive compensation adjustment. Now, please keep in mind that the reduced operating expenses are also a result of reduced travel, trade shows, and other activities which will resume once the COVID restrictions are lifted. Adjusted EBITDA of 50.1 million, the highest in the company's history, increased more than 9 million, or 23%, from the prior year period. In addition, the adjusted EBITDA rate of 19.3% improved 230 basis points. Finally, adjusted EPS in the quarter was 91 cents per share, compared to 68 cents per share in the third quarter of last year. And our tax rate in the quarter was approximately 28.5 percent, in line with our expected range of 27 to 29 percent. Now, moving to the balance sheet on slide 11, our cash position at the end of the quarter was approximately 230 million, including 2.5 million of restricted cash coming from the disposition of the CSE Industrial Chamber's business. Our cash position in the quarter increased by $70 million from the end of the second quarter, primarily as a result of the $23 million of cash generated from operating activities. Net debt decreased by $22 million from negative $9 million last quarter to negative $31 million at the end of the third quarter, and total debt stood at approximately 195 million. Similar to last quarter, as of September 30th, we were in a net cash position as cash on hand exceeded the gross debt. And as a result, our net leverage ratio was negative 0.24. Based on the trading 12-month consolidated adjusted EBITDA and at September 30th, we had approximately 221 million of remaining availability on our line of credit, up from 159 million at the end of the second quarter. And total available liquidity at the end of the third quarter was 448 million, up from 369 million at the end of last quarter. As you're aware, we withdrew our guidance for 2020 in late March due to the uncertainty of the macroeconomic environment However, while we are not providing specific guidance based on current customer demand and assuming no significant market changes due to the resurgence of COVID, we're expecting fourth quarter product revenues to be in the range of 240 to 260 million, reflecting our typical fourth quarter seasonality and launch timing. As a result, We expect gross margin rate to decrease in the fourth quarter as compared to the third. And in addition, we expect higher operating expenses in the fourth quarter, primarily due to the timing effects of R&D project spend. In conclusion, our global team delivered strong financial results in the third quarter, including a number of company records, all under unprecedented and extremely difficult circumstances. While the macroeconomic environment remains uncertain, the results that we achieved in the third quarter are strong proof points of the positive impact of the focused growth strategy on our financial results. And with that, I'll turn the call back to the operator to begin the Q&A session.

Thank you, sir. We will now begin the question and answer session. To join the question queue, you may press start then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. Our first question is from Gary Prestatino with Barrington Research. Please go ahead.

Good morning, everyone. Hi, Gary. Hi, Gary.

Hi. Phil, you often have said in prior calls what percentage of, I guess, these RFQs that you're winning. Are you still winning things in the high 80%, 90% range that you're trying to get in the fold?

Yeah, Gary, it was a good quarter. We were above 80% in the quarter.

Okay, above 80%. Okay, good. And then in terms of... some of this pushback on, you know, you see the model rollouts or new awards. Do you feel that in Q4 you're going to see a plethora of decisions made on things that were pushed out in Q3, or could this even dribble into 2021?

Well, yeah, I think we're feeling pretty good about Q4. Again, there's still some uncertainty there, but Based on what we see right now, we see a pretty good path to likely achieving a little bit higher in the second half than in the first half. That should give you a little bit of a feeling for what we expect in Q4, but I will say this. The pipeline going forward is still really strong.

So the pipeline's pretty ebullient? Yeah. Okay, that's good to hear. And then just in terms of of what's going on with the battery thermal management products and all that. Could you give us some idea of, you know, how many actual models, at least on the EV side, that you guys participate in for these battery thermal management products?

I don't have the number of specific models, but just to give you a sense, certainly if you look at our electric BTM, we're on all of Daimler's 48-volt mild hybrid systems, and also have a few platforms with Jeep on that program. And then in terms of the resistive heat using our innovative thin-foil technology, that just launched on the Jeep Renegade and Compass. And, you know, we've got some upcoming programs using that similar technology for cell connecting. Unfortunately, we haven't been able to announce those platforms. And then if you look at air cooling, there are, I would say, over a dozen programs, just to estimate. But that one's rolling out pretty prevalently in terms of air cooling. So good momentum there. And then, you know, thinking about EVs, just to expand on that, beyond – Just the VTM, of course, our climate and comfort products, whether it's CCS, C-Key, or steering wheel, are really rolling out significantly on EVs.

Okay. And then just lastly, and I'll let somebody else get in, on the OpEx side, in a normalized environment, Matteo, where you're doing traveling and trade shows, would that OpEx as a percentage of sales increase? maybe tick up one to 200 basis points versus where it was this quarter. I mean, it was about 17% of sales now. You know, do those, some of these categories that you're of expenses, how much would they raise that number? I'm just trying to get an idea with all that you've done, what would be a good run rate as a percentage of sales for OpEx?

Yeah. So I think, you know, Gary, the way I would look at it, A couple of things I would say more. Let me start with the longer term first, and then I maybe bring you back a little bit on the fourth quarter and what we're seeing more short term. So longer term, you know, our target remains to have OPEX as a percent of sales between 15% and 17% as we outlined back in the Investors Day back in June 18. So that's the number that we are shooting for. More short term targets. regarding the fourth quarter. So I would expect the OPEX in the fourth quarter to increase sequentially compared to the third by, say, a couple of million. And this is really primarily driven by timing of R&D expenses. As a result of the fact that we have resumed some of the suspended OPEX primarily on the R&D side, as a result of the improved market condition, that's what I would expect for the fourth quarter. And then, you know, one last comment I would make, I think, overall around the profitability that the team was able to deliver in the third quarter, I would say that I think what we achieved, you know, the 31.8% gross margin, DBI rate above 19% is really a proof point of the the profitability that we can accomplish as a company as we see, start to see improved revenue, and we continue to focus on sourcing excellence, driving productivity at the factories, and obviously tight expense management.

Okay. Thank you for your answers. Sure.

Our next question is from Matt Coranda with Rose Capital. Please go ahead.

Hey, guys. Good morning. Just wanted to clarify one of Phil's answers to Gary's question. It sounded like you said second-half bookings could be higher than the first half, and I guess that would suggest that you'd be well north of $300 million in bookings potentially in the fourth quarter. So just wanted to get some color on that and whether there are, I guess, just some large programs that are out there for bid at the moment and why the confidence that we get those booked.

Yeah, we have a pretty significant pipeline, as I mentioned, of RFQs that are in motion. And it's really about, you know, how this decision timing pans out. So the number you just said is right. Obviously, if you do the math and put it north of the first half, that would make sense. Still some uncertainty in the decision-making timing, but we think there's a path to get that done. And certainly I would think about it broader as the next couple quarters, two, three quarters look really strong.

Great. And the mix of items kind of in the near-term pipeline, is that more weighted towards CCS, Phil, or is that sort of battery thermal management and steering wheel heaters? What's the sort of the mix composition of what's out for bid versus maybe compare and contrast versus where we're at in terms of current revenue run rate and mix?

It's a good mix, and we typically don't break out the specific mix, but definitely lots of CCS activity, good electronics activity, actually. There's some decent opportunities there, and certainly BTM there as well. So it really covers just about everything we're doing.

Great. Okay. And then a question on the guidance in 4Q. I think well understood that we see the typical sequential decrease just given holiday shutdown schedules and whatnot. And so it makes sense that you see a sequential decrease in gross margins. But maybe could we talk a little bit about incremental gross margin year over year, any reason that we can't achieve sort of the solid 40% incremental margins that you did in 3Q? Sure. maybe talk a little bit about the mix that's coming in 4Q and help us kind of triangulate around that to get to the right level of gross margin for 4Q.

Sure. Matt, it's Matteo. So, you know, I would say that I think what we have seen, even if you look at what we experienced between the, you know, second and third quarter, in general our incremental gross margin over the incremental revenue is tends to be between 40% and 45%. It was a little higher, on the higher side of the range in the third quarter. So I think that's a good number to use. And obviously, as we indicated in the revenue projection that we gave in the prepared remarks, this implies revenue in the fourth quarter that is going to be slightly below what we experienced in the third. So I would expect as a result of that to have some decremental margin on the decremental revenue around 40%. So that's one thing that we are seeing in the fourth quarter. I would also add another, you know, item that we are forecasting. We are expecting to have a little higher price reductions to selected customers in the fourth quarter compared to the third in conjunction with some, you know, bigger wars that we're working through that Phil just alluded to. So that's also an impact that we are seeing in the fourth quarter compared to the third.

Great. Very helpful on that front. And then just one more from me. Balance sheet obviously in great shape here and just wondering preliminary thoughts and sort of reinstating the buyback and how we're thinking about deploying capital on a go-forward basis just given the health of the balance sheet.

Sure. So I think, you know, one thing that we continue to, you know, monitor extremely carefully is how the macroeconomic environment reacts to the, you know, latest changes sharp increase in COVID cases both in Europe and the United States. That's the first thing we are looking at. But overall, I think I would say in terms of capital allocation strategy, I think these are the top priorities that we have. First and foremost, we want to maintain the company safe and secure so liquidity comes first. Second, we want to continue to allocate proper amount of capital to continue to grow the company both organically and also inorganically, so towards M&A. And then third, the shared buybacks. So that's the way I would think about at least how we are thinking about it right now.

Great. And as a follow-up, maybe, Phil, could you talk a little bit about the M&A pipeline and how we're thinking about how that may be shaping up as we go forward here? Are we in sort of a target-rich environment? or are multiples sort of relatively stretched at the moment, just kind of given where the overall capital markets are?

Target rich might be a little strong, but there's definitely activity, and it's an area, as I pointed out in the last quarter, we really focused the first section of our focus growth strategy was getting our house in order and getting the discipline in place when it comes to productivity and cost management and divestitures, et cetera. And I think we've passed that hurdle. It's a never-ending journey, but I think we make good progress there. So definitely our eyes are out for potential acquisitions that fit our focus growth strategy. And I think that's an important point that we'll be looking for, you know, expanding content in a vehicle that ties to our strategy, digital regional plays, and, of course, medical. Those are, I would say, the four areas that we're looking into, and certainly we've got more resources pursuing that at the moment.

Great. Very helpful, guys. I'll turn it back to you. Thanks, Matt. Thanks, Matt.

Once again, if you have a question, please press star then 1 on your telephone. Our next question is from Ryan with Craig Howland Capital Group. Please go ahead.

Good morning. Two questions for me. So auto production forecasts are expected to be flattish to up sequentially Q4 versus Q3. Your revenue guidance implies a sequential decline. Any color there, I guess, on the puts and takes.

Sure, sure. Yeah, I think a couple key areas. One is that we've got some launch changes that occur in the fourth quarter, especially one example is the Ford F-150. That's going through a changeover, fairly big revenue product for us. We're going to see a little decline there. We also saw a little bit of upside in the Q3 period related to launches. We're launching a lot of new programs, both on core business, BTM, you know, steering wheel heater product that is, by the way, we're really excited about that product. I haven't had a chance to highlight that, but with Volkswagen, we've launched a platform that not only heats the steering wheel, but is also used as a key sensor for hands-on detection, and Volkswagen is rolling this out across their lineup. So we're really excited to expand our technology offering, and I think that positions us well long-term for growth with steering wheel business. Then on top of that, you've got shutdowns, the typical factory shutdowns that would occur in the December timeline. And as a Tier 2 supplier, you typically see that a little bit earlier. So those are the, I would say, the three big effects.

Good. And second one for me, you mentioned kind of climate sense, third phase of a development project with GM. Good to see. Also working on a BMW. So curious how that one is going. And then if you're any closer to any other development projects. And then secondly, any thoughts on timing of when these development projects, how many of those phases you need before you could potentially see a commercial award?

Sure. Yeah, I think, well, first of all, we have several development contracts underway right now, really in all regions. So obviously with GM, BMW, we have another OEM in Europe that we're working with, and then also in Asia. So we've got our hands full with development contracts. And in terms of the process to award, obviously this is a pretty significant architectural change in the car. It's always a little bit longer process. we think this GM extension or next phase is a great indicator of how this thing is going to progress. Essentially, as the development contracts roll forward, you get into deeper and deeper levels of validating that the solution is viable in the vehicle. So we're really excited that we've been able to continue to show the kind of results that lead to ongoing development. Now, Timeline-wise, you know, we're definitely looking at, you know, I would say 2023 and beyond would be the earliest SOP. And clearly we're hoping, you know, in the not-too-distant future to have some opportunities to announce awards.

Great. Thanks, guys. That's it for me. Thank you. Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Phil Eiler for closing remarks.

Great. Thanks, everyone, for joining our call today. I really want to, again, express my gratitude to the Global Gen Therm team, who have so impressively managed through the challenges of this pandemic. I especially want to highlight our manufacturing team. They've truly performed incredibly. I'm extremely proud of our team's relentless focus on operational execution, innovation, and cost improvement in order to deliver on the commitments to all of our stakeholders. Despite the uncertainties in the macroeconomic environment, our strong liquidity, our relentless focus on productivity enable us to continue to deliver significant long-term shareholder value. We certainly appreciate your interest and your support and look forward to keeping you apprised of our progress. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.