Gentherm Inc

Greetings. Welcome to Gen Therm, Inc. fourth quarter and full year 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Eugenie Brittano. You may begin.

Thank you, and good morning, everyone. Thanks for joining us today. Jantham's earnings results were released earlier this morning, and a copy of the release is available at Jantham.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Jantham's website. During this call, we may make forward-looking statements within the meaning of federal security laws. 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 earnings release and its 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 the 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 Inversa, 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 jensen.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. 2020 was a year like no other, one that saw two polar opposite operating extremes for the company. In the first half of 2020, the global pandemic created significant hardship and challenges worldwide, which was then followed by a strong recovery of automotive demand in the second half. I'm proud of the global GenThurm team for their flexibility, dedication, and agility to swiftly pivot from preserving liquidity in the first half to delivering record results in the second half, all while maintaining the health and safety of our global team members. Our performance in the second half of the year confirms that our strategic plan to focus growth, realign our cost structure, and bring innovative solutions to market continues to deliver long-term shareholder returns. Now let's look at 2020 in a little more detail. Please turn to slide four. We finished 2020 with a record-breaking fourth quarter, generating the highest quarterly revenue and profitability in the history of the company. In automotive, we outperformed light vehicle production in our key markets by over 20 percentage points. Accomplishing these achievements in such a challenging environment clearly demonstrates strong operational execution across our enterprise. Looking back at the full year of 2020, light vehicle production declined 14% in North America, Europe, China, Japan, and Korea as a result of the pandemic. GenTherm's new launches in battery thermal management Hands-on detection enabled steering wheel heaters and other electronics, along with increasing take rates of climate and comfort solutions, enabled us to consistently outperform in automotive versus the key markets that we serve. Including the impact of foreign currency translation, our 6% decrease in full-year organic automotive revenue outperformed light vehicle production in our key markets by approximately 800 basis points. With a strong finish of $440 million in awards during the fourth quarter, we secured a total of $940 million in automotive awards in 2020. While the annual award level is lower than prior years and reflects limited opportunities as OEMs conservatively manage sourcing decisions, our strong win rate of over 90% positions us well for long-term growth. In medical, we achieved record annual revenue with double-digit year-over-year growth in 2020, driven by demand for our flagship products such as Blanketrol and Hemotherm, and the addition of Steeler blood-warming products to our portfolio. On the operations front, our global manufacturing and supply chain teams performed exceptionally well in 2020, first by swiftly responding to the negative effects of the pandemic in the first half of the year, and then shifting to meet the rebound in demand, increasing take rates and our new launches in the second half, while ensuring the safety of our employees at all times. On the cost front, we continued our disciplined approach to managing operating expenses. After adjusting for restructuring, acquisition, and divestiture expenses, we reduced operating expenses by 10% in 2020. Adjusted operating expense as a percentage of revenue improved 80 basis points from 2019 and 190 basis points from 2018. Despite the unprecedented challenges in 2020, we delivered $140 million in adjusted EBITDA, in line with the 2019 level. More importantly, we improved our total company adjusted EBITDA margin rate to 15.3% for the year, up over 60 basis points from 2019 and 190 basis points from 2018. Mateo will provide more details about our fourth quarter financial results, as well as some information on the tax asset valuation review that delayed our earnings announcement in a few minutes. Now turning to the automotive highlights on slide five. In the fourth quarter, we launched our automotive solutions on 19 different vehicles across 11 OEMs, including Audi, BMW, Ford, General Motors, Hyundai, and Volkswagen. We continue to see momentum for our CCS product, and launched on the Acura MDX, Ford F-150, Hyundai Tucson, and Hyundai Sonata. In order to best represent the breadth of all of our current and future product offerings, we recently renamed Battery Thermal Management, or BTM, product portfolio as Battery Performance Solutions, or BPS. One of the fastest growing segments of our Battery Performance Solutions portfolio is our cell connecting technologies. We have both a wire-based cell-connecting technology and our proprietary thin-foil technology. In the third quarter of 2019, we launched our wire-based solution on the BMW Mini Electric, and that demand continues to exceed our original expectations. As discussed previously, we won our first cell-connecting award based on our proprietary thin-foil technology with a premium German OEM in the fourth quarter of 2019. I'm pleased now to share that this premium OEM is also BMW, which demonstrates the confidence in GenTherm by one of the technology leaders in automotive. Our R&D team developed this innovative mechanical structuring technology that offers significant design flexibility and some exciting opportunities for new applications. We will soon be offering some of these new applications to OEM customers. We continue to make great progress on Climate Sense. which, as you'll recall, is our software-driven microclimate platform using an algorithm based on thermal physiology. ClimateSense is a critical part of our long-term strategy. We are disrupting the current thermal solutions in vehicles by significantly reducing power consumption and increasing range in extreme temperatures, all while providing best-in-class passenger comfort. I'm pleased to announce that we have launched the third phase of the development project with BMW. In addition, GenTherm and Audi have completed phase one of an advanced climate sense development project for an electric vehicle. We've been working with an Asian OEM on a climate sense project since 2019, and I'm happy to share that this OEM is Honda. And we've just kicked off the second phase of our development project with them. Our phase three development project with General Motors continues to progress well. As we previously shared, Climate Sense delivered between 50 to 69% energy savings in cold weather testing and 34% energy savings in hot weather testing. Translating these savings to range extension, in the cold weather cycle, Climate Sense increases range by 33%, or approximately 50 miles. These results demonstrate that our Climate Sense offering is a unique solution for energy efficiency. as well as passenger comfort, and it represents a significant content increase opportunity for Gen Therm in EVs in the coming years. Now onto slide six, where you can see that we continue to win new business at a pace that sets a solid foundation for future growth. In the fourth quarter, we secured $440 million in new program awards across 12 different customers. This is a strong finish to a challenging year. I'm especially proud of our global team for winning over 90% of the opportunities available to us in 2020. We won multiple CCS awards, including platform wins with the Chevy CUV, Ford F-250 350, GM Hummer EV, Range Rover, Mazda CX-5, and the Volkswagen Cross Blue plug-in hybrid. We also received eight steering wheel awards across six OEMs, including the Chevrolet Colorado, GMC Acadia, Terrain, and Canyon, and the Maserati Great Calais. Gen3rd continues to expand our strong position with General Motors. In the fourth quarter, we were able to secure an additional nine new program awards for our climate-controlled seats, seat heaters, and steering wheel heaters for both North America and China. GM is one of our longest-standing customers and continues to be an exceptional partner, not only in growing the business together, but also in developing and adopting our new technologies. In addition to growing our business with long-standing customers, we've also secured additional steering wheel and seat heat awards with one of the largest global EV manufacturers. Moving to electronics. we achieved another milestone in the fourth quarter by winning an innovative steering wheel adjustment electronic control unit award with Audi. This is a further example of where we have established credibility with a technology-leading OEM. In addition, I'm pleased to share that we just won a next-generation multifunction electronic controller award with Ford. If you'll recall, our initial win with Ford combined GenTherm's climate control solution with memory seat functionality. which utilizes our proprietary intelligent positioning system technology. We now have added other functionalities, for example, to control the power running boards, helping Ford to further increase system efficiency and reduce costs. This module will be used in Ford and Lincoln vehicles produced in North America and China for both internal combustion and battery electric vehicles. More importantly, it's compatible with Ford's next generation advanced electrical architecture, which allows for more feature flexibility, connectivity, and personalization. This module, which also will have cybersecurity and over-the-air update features. I would like to congratulate our electronics team for continued innovation and expansion of our business with global OEMs. Our track record for strong win rates coupled with a healthy pipeline of RFQs position us well for continued growth in automotive. Moving to slide seven, I'd like to share some of the growth momentum we have in the EV space. Electrified vehicle production, including mild hybrid, full hybrid, and battery electric, is expected to grow from 13% of global production in 2020 to 60% in 2030, almost a five-fold increase. GenTherm's current and future technologies will play an important role in extending the range of electric vehicles and, of course, delighting passengers with thermal comfort. Currently, we're working on 106 programs with 30 OEMs. Customers are looking to GenTherm not only for thermal comfort solutions like seat heaters, climate-controlled seats, and steering wheel heaters, but also for battery performance solutions, such as our PACE award-winning battery thermal management solution and proprietary thin-foil cell connecting and heating solutions. In addition, we're providing customers with innovative thermal ECUs and multifunction ECUs. In total for 2020, we won 32 program awards on different EV platforms, and this accounted for over 40% of our total award dollar value for the year. Looking ahead, our ClimateSense solution provides significant opportunities for future growth through the addition of our proprietary software, increased thermal content, and significant range extension. To date, we've completed seven development projects, and we're working on four more with OEMs in North America, Europe, and Asia. More electric vehicle manufacturers are now leveraging our solutions to enhance comfort while significantly improving energy efficiency and range. Now let's turn to slide eight for a discussion of our medical business. As I mentioned a few moments ago, we delivered record annual revenue in medical in 2020 with 17% year-over-year growth. The pandemic created heightened demand, especially in the first half of the year, for some of our products that play a critical role in helping to fight COVID-19. On the other hand, hospitals are delaying capital purchases due to the financial hardships created by halted or reduced electric procedures. This headwind caused a short-term impact in the fourth quarter. Nonetheless, we expanded our warm air and filtered flow patient warming systems across multiple large hospital networks including Einstein Health in Philadelphia and Pinnacle Health in Harrisburg, Pennsylvania. Despite delays in elective surgeries, we saw a tailwind in consumables that are used with blank control. In addition, we continue to make progress on innovation programs leveraging thermophysiology synergies between our medical and automotive businesses. Now let's turn to slide nine and look back at the year we just completed. I'd like to highlight a few of our accomplishments in 2020. On the customer front, we continue to exceed customer expectations. We earned the coveted Supplier Quality Excellence Award from General Motors for several of our manufacturing facilities. And for the first time in Gen Therm history, we were named a General Motors Supplier of the Year, representing the top 1% of GM's supply base. In addition, Gen Therm was named the top North American supplier by Honda, one of only 41 suppliers out of a total 735. Despite the slowdown in OEM sourcing activities in 2020, we secured several strategic awards in the year. We won our largest single vehicle production climate controlled seat award in the company's history for the global BMW 5 Series. We won a strategic CCS award for Hyundai Genesis EV platforms, and we became the exclusive provider of all CCS solutions for the Genesis brand. We also won 23 program awards from our largest customer, General Motors. With below freezing temperatures affecting hundreds of millions of people in the lower 48 states over the last few weeks, drivers and passengers are increasingly relying on our solutions for comfort while on the road. We've seen significant increase in the adoption and take rate of our products across multiple customers. We continue to add content to both ICE and electric vehicles. We successfully ramped our innovative combined steering wheel heat and hands-on detection sensor solution for Volkswagen. We won our first electronic air cooling award for infotainment and head-up displays with Mercedes for their entire future lineup of BEVs. In battery performance solutions, we won our first thin-foil cell connecting award with BMW and increased production of the battery heating solution for the Jeep Renegade and Jeep Compass. On the innovation front, our global R&D team continued to expand our technology leadership even in these challenging times. Now let me summarize. Our financial results in 2020 demonstrate the continued successful execution of our strategic plan to focus growth realign our cost structure, and bring innovative solutions to market. I'd like to thank our global team for delivering another record-setting quarter in revenue and adjusted EBITDA. I'm very proud of the agility, hard work, and commitment of the talented global Gen Therm team to overcome challenges in the market, deliver on our strategy, and improve profitability in an unprecedented year. While there is still near-term uncertainty in the macroeconomic environment, we're entering 2021 with strong momentum. This, combined with our relentless focus on operational excellence, technology leadership, and strong cash flow generation, positions the company well for profitable long-term growth. And now with that, I'll turn the call over to Matteo for a little more color on the financial results and our 2021 guidance.

Thank you, Phil, and thank you to everyone joining the call today. Before I discuss the details of our fourth quarter financial results, I would like to provide a little bit more information about our review of the valuation of certain tax assets. During the 2020 year-end close process, we determined that certain deferred tax assets were not properly evaluated for realizability in 2019. After a thorough investigation and review of historical company records, we identified that in the fourth quarter of 2019, we overstated income tax expenses and understated net income by approximately $11.4 million due to an understatement of deferred tax assets. We have now revised the fourth quarter and full year 2019 financials, and that is reflected in the tables contained in the earnings release that we issued this morning. The revision had no cash impact, and did not change our reported adjusted EBITDA figures. Now let me move to slide 10 and focus on the items that most significantly impacted our fourth quarter results. For the quarter, product revenues increased by 25% compared to the same period of last year. If we adjust for the impact of effects, our overall product revenue increased by approximately 22%. Starting with the automotive segment, revenue was a quarterly record of approximately 280 million, corresponding to a 27% increase compared to the prior year period. Adjusting for foreign currency translation, automotive revenue increased by approximately 23%. In comparison, according to IHS latest data, light vehicle production for our key markets of North America, Europe, China, Japan, and Korea increased by approximately 3% over the prior year quarter. And as Phil mentioned earlier, we outperformed light vehicle production by over 20 percentage points. We saw strength in virtually all of the product lines in automotive, and more specifically, BPS revenues increased 71% as a result of the launch of the new Mercedes S-Class strength of our electric battery thermal management products with FCA, and the new self-connecting board solution launched on the new e-mini. Steering wheel heaters revenue increased by 68% compared to the fourth quarter of last year. As a result, the newly launched hands-on detection-enabled heaters with VW. Electronics revenue increased almost 30%, due to the memory seat module program with Ford, and higher revenue from other automotive products, as well as the recovery of the RV market. CCS revenues increased 28% to a company record of $113 million due to higher volumes with Hyundai-Kia, General Motors, and Daimler, as well as new launches and higher take rates. Sea Teeters revenue increased by 19%, primarily due to higher volumes with GM trucks and SUVs, as well as new launches with the VW group. Cable revenues increased 6% due to higher volume with Samsung, Bosch, and other Tier 1s. And these increases were partially offset by decreases in other automotive. If we move to the medical segment, revenue decreased 9% due to the reduction in demand primarily of blanket roll equipment and hemoterm products as a result of the negative impact of the COVID-19 pandemic on elective surgeries. Despite the negative impact of COVID in the fourth quarter, medical revenues increased by approximately 17% in 2020 compared to 2019. Now, if we move to gross margin, Gross margin rate for the quarter was 32.1%, and this compares to 28.5% in the year-ago period. The 360 basis point increase was driven by labor productivity and other cost reductions at the factories, positive effects primarily due to the appreciation of the euro compared to the U.S. dollar, fixed cost leverage due to the higher volume, and supplier cost reductions. These were partially offset by annual customer price reductions, wage inflation, and higher freight costs. Moving to operating expenses, which were $50.8 million in the quarter compared to $43.6 million in the prior year period. Current year fourth quarter amount included $2.4 million of restructuring charges and approximately $1.2 million of acquisition and divestiture expenses. This compares to last year's fourth quarter when we incurred approximately $1.1 million of restructuring charges. If we adjust for restructuring, acquisition, and divestiture expenses in both periods, operating expenses were $47.2 million up from $42.6 million in the fourth quarter of 2019. The year-over-year increase of approximately 11% was primarily driven by the impact of mark-to-market adjustments in cash sales stock appreciation rights as a result of the appreciation of general stock price, as well as lower R&D income due to project timing. These were partially offset by lower incentive compensation, as well as reduced travel, trade shows, and other costs due to the pandemic. Sequentially, adjusted operating expenses increased by approximately $3.4 million compared to the third quarter of 2020. The primary driver of this increase was the impact of the mark-to-market adjustment that I mentioned earlier, partially offset by higher R&D income and lower incentive compensation. Adjusted EBITDA of $57 million was the highest in the company's history and increased by approximately $23 million or 66% from the prior year period. Additionally, the adjusted EBITDA rate of 19.7% improved 480 basis points. Finally, adjusted diluted EPS in the quarter was $1.16 a share compared to $0.99 per share in the fourth quarter of last year. Our tax rate in the quarter was approximately 16% and 27% through the full year 2020. However, after adjusting for the effect of the settlement and closure of multi-year international tax audits that occurred in the second quarter, our tax rate for 2020 was approximately 23%. Our tax rate was lower than our expected range of 27% to 29% due to the cumulative impact in 2020 from the conclusion of the review of the deferred tax assets that I mentioned earlier. Now, moving to the balance sheet on slide 11, our cash position at the end of the quarter was approximately $268 million. Our cash position in the quarter increased by $39 million from the end of the third quarter, primarily as a result of the cash generated from operating activities. Additionally, we generated $93 million in free cash flow in 2020, on par with the company record in 2019. Net debt decreased sequentially by $45 million, and total debt stood at approximately $192 million. We closed 2020 in a net cash position, as cash on hand exceeded the gross debt, and as a result, our net leverage ratio was negative Based on the trading 12-month consolidated adjusted EBITDA ended December 31st, we had approximately $289 million of remaining availability on our line of credit, up from $221 million at the end of the third quarter. The total available liquidity as of December 31st was $557 million, up from $448 million at the end of the third quarter. As the macroeconomic environment improved over the last few months, we repaid approximately $80 million of the $186 million outstanding balance on our revolving credit facility in January. This allows us to reduce interest costs while maintaining ample cash on hand in case of worsening economic conditions due to the COVID resurgence. As of the end of January, cash on hand was approximately $190 million. Now let's turn to slide 12 for the 2021 guidance. We are expecting product revenues to be in the range of $1.05 to $1.13 billion, assuming FX remains at the current level, and light vehicle production in our relevant market grows at low things rate in 2021 versus 2020, which is in line with the latest IHS forecast. We expect to have an effects benefit of approximately 200 basis points in 2021 versus 2020 at the current exchange rates. Therefore, the midpoint of our guidance implies an organic growth rate of 17%. Additionally, we expect our medical business to grow at a slower pace than automotive as a result of the continued negative impact of COVID on elective surgeries. Our guidance also factors in the impact to GenTerm based on our current understanding of anticipated reduced OEM production due to the semiconductor shortage in the first half of 2021. In terms of profitability, we expect adjusted EBITDA rate to be in the range of 17% to 19%, and we do expect to invest more in R&D to support our new technology launches and reverse some of the austerity measures that we implemented in 2020. Capital expenditures are expected to increase compared to 2020 and to be in the range of 50 to 60 million. We estimate our tax rate to be in the range of 22 to 24 percent, assuming no significant changes to current tax regulations. Now, before I turn the call back to the operator, I want to echo Phil's comment about the GenTerm team. I am very proud of our team's ability to execute and deliver record performance in such a turbulent year. When we launched our focused growth strategy in June of 2018, we set our goal to achieve high teams EBITDA margins in 2021. The automotive production outlook has deteriorated significantly since then. However, We believe that our focus on operational execution and cost improvement will enable us to meet our profitability goal established in 2018 in spite of the lower revenues. And with that, let's turn the call back to the operator to begin the Q&A session.

And at this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. And our first question is from Matt Karanda with Roth Capital Partners.

Please proceed with your question. Hey, guys. Good morning and thanks. The 90% win rate is encouraging. What does the funnel of new opportunities look like in 2021, given we're back to sort of a more normal-ish level of operating scenarios for most OEMs? Any way to quantify that? And then also, just what do some of these climate-sensitive Phase 3 development projects drop into commercial bookings. It sounds like you guys give some good color on completing a number of them and then working on four more. How long after completion do you get a commercial booking on an OEM program for Climate Sense?

Good morning, Matt. I'll start with your question on the awards. Certainly 2021 is looking to be a healthy amount better be a better year. So it's a little hard to say exactly how much, but pretty optimistic. Definitely OEMs are getting much more aggressive in terms of awarding suppliers for the new launches coming. On the climate-sense side, yeah, we're really excited about the progress. As you know, as we announced, we have two projects that are in phase three now. And, you know, clearly That's a pretty big commitment by those OEMs, and we're pretty optimistic that we're getting closer to the potential for a production award. So we'll definitely be keeping you posted as that progresses. But as these move to Phase III, they continue to get much more focused on potential vehicles that could go into production in the not-so-distant future.

Okay, got it. And then just on the outlook, maybe a little bit of help just on the cadence of revenue growth during the year. I mean, it sounds like, just given the semi-shortage, that you guys would take that into the guidance. And so maybe we should expect a little bit of a lower growth rate early in the year. But then, obviously, we have easy comps from last year. So just a little bit of help on how you guys expect the year to progress from a the midpoint of the outlook, maybe.

Hi, Matt. Good morning. So, yes, I think overall I would expect the first half revenue to be slightly lower than what we're going to experience in the second half, and that's primarily due to the semiconductor shortage.

Okay, and then just last one for me, and I'll jump back into you, but any call-outs on specific projects or plan expansion activity that's embedded in CAPEX? I noticed it stepped up quite a bit from the last couple of years. Is there just some catch-up embedded in there, or are there any specific things you can call out within that CAPEX budget for the year?

Sure. So you're right. You know, we had only about 17 million of CAPEX in 2020. and the number was particularly lower due to the fact that we implemented some austerity measures in the middle of COVID. So the 50 to 60 million dollar guidance for 2021 assumes a pickup in terms of CAPEX due to some of the delayed projects that we had out of 2020. Overall, you know, I would say if you look at the total 50 to 60 million, about 60% of that amount is growth and 40% is maintenance. And the growth is going to really be around, you know, fulfilling some of the capital expenditures required in the project that we won in the last, you know, 18 to 24 months.

That's the way I would look at it.

Okay, great. Thanks. I'll jump back to you guys. Thank you.

And our next question is from Ryan Sigdahl with Craig Allen Capital Group. Please proceed with your question.

Good morning, guys. Thanks for taking our question. Hey, Ryan. How are you, Ryan? Just want to dive. I know you said second half is a little stronger than first half, but is it fair to assume kind of sequential growth throughout the year, given the chip shortage is probably stronger here in Q1, that Q2 is bigger than Q1, et cetera?

Yes, that's what I would expect.

Good. And then just to follow up on climate sense seems to be continuing to make good traction there. And I know just going to ask kind of first commercial award when we can expect that, but how many development projects, any indication from, especially thinking BMW and GM, you're on the third development projects with them. Are we getting close or do you think this could go fourth, fifth, who knows how long after that?

It's a little hard to tell because one of the, One of the challenges the OEMs are – I wouldn't say challenge, but one of the parts of the project is that there's a pretty significant architecture change in new vehicles, clearly implementing our system, which has got a lot of different elements and components in the new controller and software go into that, but there's also an adjustment of the HVAC architecture. to get closer.

Good. Just on the balance sheet, continuing to generate nice free cash flow, keeps getting better now in a nice net cash position. What are the allocation priorities? Comfortable with the debt, plan to pay some of that down, but how do you think about the growing cash on the balance sheet?

Yeah, I think we're clearly, number one, focused on security and liquidity and what we still think is time so that's that's our first priority but outside of that we're you know we're definitely in a good position to keep our eyes out for both organic and inorganic investment opportunities to grow the business so that that's a key area and of course as you know we we got approval for the potential of more share buybacks should the opportunity arise if it makes sense and we'll areas of focus.

Great. Thanks, guys. I'll hop back in the queue. Good luck.

Thank you. Thanks. And our next question is from Ryan Brinkman with JP Morgan. Please proceed with your question.

Hi. Thank you. I thought it was interesting you mentioned your strong relationship with General Motors, including the multiple CCS and CETA awards in 4Q. and how they've been sort of quick to embrace your new technologies. I remember the work you did with them regarding, you remember the greenhouse gas credits coming from the CCS use. And I was just wondering if you think that this might be, General Motors, a natural customer for your future ClimateSense product, just given the relationship there, but also because of their recent announcement, they intend to be 100% battery electric by 2035. you know, are there any trends you can call out with regard, I know you're limited to what you can say, but are there any trends you can call out with regard to, you know, your discussions or your development phase projects in terms of, you know, which geographies or maybe which vehicle segments, and I'm maybe most interested in which, you know, propulsion types that automakers are considering for using ClimateSense?

That's a great question. Thanks, Brian. No, I think the EV space, just to answer your last question first, we're getting a lot of interest on the EV side with climate. That's the most interest we can get. I mean, the value proposition of range extension in extreme temperatures is really compelling. So that's the number one driver. Certainly, our system has an increase. get a two-for-one benefit there. Talking about GM, it's a great relationship we have. We're very focused on delivering value proposition for them. We're in all of their EVs going forward that are coming to launch with our CCS products and other steering wheel and heat products. As we talked about We've been doing this for a couple years now, and we're on phase three, and, you know, obviously it's something that they're taking very seriously to be that far along. So, you know, we continue to put a lot of resources into GM. Pretty excited.

Okay, that's helpful. Thanks. Yeah, I'm sort of hearing that, you know, maybe luxury battery electric vehicles could be a good first place to start with climate sense. I wanted to check in also on the 2021 outlook just in the context of, you know, the semiconductor shortage issue, which, you know, the guidance looks unchanged versus the pre-announcement on February 18 versus other suppliers have kind of been coming in a little bit softer maybe. You know, I see you were looking for growth in your markets in the low teens versus IHS, which is I think looking for plus 13.4%. Just curious if you see your assumption for low teens, if that's driven by any different view versus IHS, if you're using the IHS numbers, if you see the customers you serve in the regions in which you operate being maybe more or less impacted than the global total. And then just given that you do have your own in-house electronics business, which also serves external customers and I don't know to what extent you're purchasing semiconductors and that's what's scarce or if there's other electrical components maybe that are being impacted also, you know, just if you have any direct exposure there to, you know, difficulty sourcing components or if it's more just, you know, the indirect impact of lower customer production. And if you do have any kind of direct exposure, you know, what you're doing to kind of limit that or what risk you might see there.

I'll answer your last question first. On the direct side, definitely it's an impact to us. We do source semiconductors for several of our products, and that's ICs, microcontrollers, and motor drivers are the three most predominant ones that we are struggling with. So far, we've been able to get through it with some expedites and a lot of freight. We seem to be in pretty good shape at the moment. That could change at any time. Just as an example, we're expecting, I think, 3 million in expedited freights in Q1 around that. So I think that's definitely not been easy. Our team's done a great job. And I give some of our suppliers a lot of credit for helping us to get through it successfully so far. And then, of course, on the customer end, IHS numbers are built in as one factor, but the driver of it is the specific information we get from our customers. And the releases, obviously, I think for our situation, we're maybe a little bit better than some because the OEMs are really focusing on their higher margin vehicles, their vehicles where they have a higher mix of content, feature content, which keeps us a little bit more stable on those. Not that we're not seeing impact, but I think that's what's helping us stay just maybe a little bit higher.

Okay, very helpful. Thank you.

Thank you, Ryan. And just as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad. Our next question is from Scott Stember with CL King. Please proceed with your question.

Good morning, guys. Hi, Scott. Hi, Scott. Can you maybe talk about steering wheel heaters? Obviously, this is something in the past that was more of a – or considered more of a I don't know, commoditized type of item, but this seems like this is really starting to really take on some advanced technology. Maybe talk about that and some of the opportunities for additional growth. Sure. Well, I wouldn't call it a commoditized item at all. I think it's still a luxury feature. In fact, if you look at it from a take rate perspective, it's significantly lower than our CCS and neat side of things.

Now, obviously, the movement in the industry towards more ADAS content in vehicles has kind of picked up the need for hands-on detection integration in the steering wheel. So you're going to see that, I think, grow steadily, which is why we focused on integrating a sensor capability into our steering wheel heat product. And we're continuing to work on innovations around that. We're really focused on that so that we can provide an efficient solution for our OEMs. Certainly, we're very pleased with the growth, and we expect that growth to continue going forward, and we're going to continue to invest in making sure that we can add electronics and censoring and other technologies so our product can stand out amongst the competition.

And this last question on medical, it sounds like you expect growth in But how should we look at that from first half versus second half of the year, given some of the deferral trends that you guys are seeing?

Yeah, it's a tough space right now, to be honest with you, because of a couple reasons. So capital expenditures are down at hospitals. And then a third factor is salespeople aren't allowed to go visit hospitals and sell products. So when we're out there trying to sell our new product like AsoPad, which was just approved this year, it was pretty difficult to do that virtually. So I think those headwinds definitely are going to be steady in the first half. a little bit this year.

Got it. Thank you. Thank you, Scott.

And we have reached the end of the question and answer session, and I'll now turn the call over to President and CEO Phil Islands for closing remarks.

All right, great. Thanks, everyone, for joining our call today. As I've consistently shared in the past, we remain very focused on operational execution, innovation, and cash flow generation. I'm really proud of our team's ability to take swift operating action in light of the pandemic and the fluctuating global automotive production levels. And I'm very proud that we delivered record performance in the second half of 2020. Of course, we expect continued industry headwinds in 2021. That said, the momentum and new awards, along with expanding demand for our new technologies and continued focus on productivity, We appreciate your interest and support and look forward to, as always, keeping you apprised of our progress.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.