Gentherm Inc

Hello, and welcome to the GenTherm Inc. second quarter 2021 earnings conference call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Yijing Brentano, Investor Relations and Corporate Communications. Yijing, please go ahead.

Thank you and good morning, everyone, and thank you for joining us today. Jensen's earnings results were released earlier this morning, and a copy of the release is available at jensen.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Jensen's website. During this call, we may make forward-looking statements within the meaning of federal securities 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 Jensen'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 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 Anversa, Chief Financial Officer. During their comments, Phil and Mateo will be referring to a presentation deck that we have made available on our website at genthums.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, Eugene. Good morning, everyone, and thank you for joining us today. I'm pleased with the continued strong execution of the Gen 3 solid financial results in the second quarter. The automotive industry continues to face significant supply disruptions, including semiconductor shortages, escalating freight costs, and other inflationary factors. As a result, light vehicle production in our key markets in the quarter was 12% lower than we provided our 2021 guidance, 7% lower than what was expected three months ago, and 7% lower than the first quarter. delivered 96% organic revenue growth in automotive year-over-year in the second quarter, excluding the impact of foreign currency translation. This outperformed light vehicle production in our key markets by 60 percentage points. In addition, we continued our momentum on automotive awards, securing $400 million in awards from global OEMs with an 81% win rate in the second quarter. allowed us to reduce some operating expenses from first quarter levels to offset the near-term material cost challenges we're experiencing as a result of the supply disruptions. In addition, when comparing to where we were two years ago, operating expenses in the second quarter of 2021 were 10% lower than in the same period of 2019. To date, in spite of the significant supply chain headwinds, we delivered adjusted EBITDA margin rate of 17.2%, and we generated $64 million in free cash flow, the highest free cash flow level in the first half of any calendar year in company history. Mateo will provide more details on our financial results in a few minutes. Now let's turn to automotive highlights on slide four. In the second quarter, we launched our automotive solutions on 18 different vehicles across 10 OEMs including General Motors, Great Wall, Kia, Nissan, Rivian, Stellantis, and Volkswagen. We continue to see momentum for our CCS products and launched on the Chevy Volt, Great Wall Haval, Mercedes EQS, and the Rivian R1T. On the battery performance solutions front, the fastest growing product in our portfolio is our cell connecting technologies. We have both a wire-based cell connecting technology foil technology. Our R&D team applied an innovative mechanical structuring process that offers increased design flexibility and some exciting opportunities for new applications. Specifically, we're adding an embedded cell censoring circuit to our proprietary thin foil that can result in a higher overall safety of lithium ion battery packs. By knowing the battery's state of health, abnormalities inside the battery cells can be detected early. As a result of launching our proprietary thin-foil solution, I'm pleased to share that we won the German Innovation Award 2021 for our innovative cell-connecting board in the e-mobility technology category. This award recognizes our ultra-flat-foil conductors for significant reduction in manufacturing complexity, a simplified and very fast design process, our R&D team for continuing to expand Githerm's technology leadership. On the customer front, we were honored to be named a 2020 General Motors Supplier of the Year for the second consecutive year in recognition of our relentless dedication to delivering exceptional customer service and innovative solutions. The annual award highlights a very small percentage of global suppliers that distinguish themselves by exceeding GM's requirements in turn providing GM customers with innovative technologies and the highest quality in the automotive industry. In addition, we're proud to be honored again this year by Honda as a top North American supplier. This recognition reflects our commitment to developing innovative solutions for our customers and our team's dedication and commitment to quality, innovation, and operational excellence. I'd like to thank the GenTherm Global team for continuing to exceed customer expectations. Production Vehicle Award for ClimateSense Technology, our software-driven microclimate platform using an algorithm based on thermophysiology. As you might have already seen in yesterday's press release, this will be on a small volume, new 2024 model year electric vehicle with a global automaker. We expect content per vehicle for this particular EV to be significantly higher than vehicles with our traditional climate comfort solution. This is truly an important milestone in our long-term strategy, demonstrating the potential our technology has to address the growing needs of the electric vehicle market. With the introduction of ClimateSense, we are disrupting the current thermal solutions in vehicles by significantly reducing power consumption and increasing range, all while providing best-in-class passenger comfort. In the second quarter, we continued our business award momentum from the last couple of shared $400 million in new program awards across 11 different OEM customers. I'm proud of our global team for continuing to win over 80% of the opportunities available to us. We won multiple CCS awards, including platform wins with the Ford Expedition, Great Wall Haval F7, Lincoln Navigator, and the Hyundai Grandeur, which includes the CCS Active Solutions. We received 15 steering wheel heater awards across four OEMs, including multiple Cadillac SUV electric vehicles, the Chevy Tahoe, Chevy Traverse, and Hummer EV. Importantly, we won a combined steering wheel heat and hands-on detection sensor award for Audi, including the A4, A5, A6, A8, and Q5. This comes on the heels of seat heater awards on the same Audi vehicles that we announced last quarter. On the battery performance solutions front, we continue to make progress in expanding our business, winning an air cooling battery thermal management award for the key test portage. Now let's turn to slide six for a discussion of our medical business. The pandemic continues to create challenges for our medical business with COVID-19 restrictions and reduced hospital access for our sales force, especially in Canada, Europe, and Latin America. That said, hospital access is improving in the U.S. In the second quarter, we won a three-year patient warming contract with Premier that also includes ASOPAD and warm air filtered flow products. Premier is one of the largest group purchasing organizations in the United States. This award opens the door for us to potentially increase our patient temperature management market share. On the R&D front, we launched Blanketrol Cool Repeat, in the U.S. during the second quarter, further enhancing Blanketrol's functionality. CoolRepeat is an accessory to the Blanketrol equipment. This device allows the patient temperature data from the Blanketrol to be displayed on the patient monitor. Here, the data can then be imported into their medical record. We expect this to have a significant impact on nursing efficiency. and securing another $400 million of new awards from automakers around the world, including our first-ever production award for climate sense. Despite the headwinds in the global supply chain, we generated the highest level of quarterly cash flow from operations since 2018. While the supply disruptions will remain challenging in the near term, the momentum in new awards, winning coveted supplier awards from General Motors and Honda, coupled with a disciplined approach to cost management, positioned us well to continue to deliver over the long term. 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 turn to slide seven to focus on the items that most significantly impacted our second quarter results. So for the quarter, product revenues increased by 96%, compared to the same period of last year, primarily due to the negative impact of the COVID-19 pandemic in last year's second quarter. If we adjust for the impact of FX, our overall product revenue increased by 87%. Starting with the automotive segment, revenue was $255 million, more than double the revenue we recorded last year. In adjusting for foreign currency translation, automotive revenue increased by 96%, driven by higher volumes, as a result of the negative impact of COVID-19 in the prior year period. 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 36% over the prior year. As Phil mentioned earlier, we outperformed light vehicle production by 60 percentage points, partially due to geographical gains. Of even more relevance, when compared to the second quarter of 2019, automotive revenues increased 8%, excluding the impact of effects. And in comparison, light vehicle production decreased nearly 15% from the second quarter of 2019 to the second quarter of 2021 in our key markets. All the automotive power lines increased significantly year over year, and as COVID negatively impacted all the power lines last year, I will just highlight a couple of important factors besides the COVID recovery that contributed to the revenue growth. CCS revenues increased due to higher volumes and take rates with Hyundai and Kia, trucks and SUVs for both Ford and General Motors, Mercedes S-Class, Mazda, and several Stellantis models. CTTA's revenue increased due to higher volumes with BMW, Ford, General Motors, Mercedes, and Volkswagen. Cable heaters' volume increased primarily as a result of the hands-on detection-enabled heaters with several VW models. Cable's revenue increased due to higher volumes with Bosch and other Tier 1 BPS revenues increased as a result of Diamond's rollout of our PACE award-winning thermoelectric solution on the C-class, as well as the continued success of the BMW Mini cell connector. And electronics revenue increased due to higher volume with Ford's memory seat module solution, as well as the strength in the RV. If we move to the medical segment, Revenues decreased approximately 7% compared to the prior year period. And let me remind you that last year's second quarter benefited from the extremely strong bracket of sales to help with temperature management of COVID patients. If we look at the second quarter of 2019 as a pre-COVID comparison, medical revenues increased by 10% in the second quarter of 2021 compared to 2019. And revenues also increased 19% sequentially compared to the first quarter of 2021. If we move to gross margin, gross margin rate for the second quarter was 29.8%. This compares to 19.6% in the year-ago period. The 10 percentage point increase was driven by fixed cost leverage due to the higher volume, labor productivity at the factory, and positive effects, primarily due to the appreciation of the euro compared to the U.S. dollar. These were partially offset by the negative impact of industry-wide supply chain disruptions, annual customer price reductions, as well as wage and material cost inflation. We estimate that the impact of the supply chain disruption in the quarter resulted in approximately 29 million lost revenue per cent and $4 million in higher cost of goods sold due to higher material costs and increased premium freight. Moving to operating expenses, which were $47.5 million in the quarter compared to $36.6 million in the prior year period. The 2021 second quarter amount included $2.1 million of restructuring charges, and this compares to last year's second quarter when we had a credit of $0.6 million due to a reduction in the estimate of previously recognized employee separation costs. If we adjust for restructuring and acquisition expenses in both periods, operating expenses were $44.6 million up from $37.2 million in the second quarter of 2020. The year-over-year increase of approximately 20% was primarily driven by the reversal of the temporary austerity measures taken last year to mitigate the impact of the COVID pandemic, a one-time incentive compensation adjustment that occurred in the prior period as a result of the COVID impact on the company's financial results, and higher R&D expenses partially offset by higher R&D. Adjusted EBITDA in the quarter was $44 million, compared to break-even in the prior year period. Finally, adjusted diluted earnings per share in the quarter was 85 cents a share, compared to a loss of 30 cents a share in the second quarter of last year. Our effective tax rate was 18.8%, in line with the first quarter. Now, moving to the balance sheet on slide 8, our cash position at the end of the quarter was $187 million, up sequentially from $171 million in the prior quarter. The increase of $16 million was the result of $34 million in free cash flow generation, partially offset by a repayment of the revolver. The $34 million free cash flow generation in the second quarter compares to $17 million in the prior year period, and the $17 million year-over-year increase was driven by higher cash flow from operating activities, partially offset by higher capital expenditures. Net debt decreased sequentially by $29 million, and total debt stood at $48 million. We closed the second quarter in a net cash position of $139 million. Based on the trading 12-month consolidated adjusted EBITDA ended June 30th, we had $432 million of remaining availability on our line of credit, up from $419 million at the end of the first quarter. The total available liquidity as of June 30th was $618 million, up from $590 million at the end of March. Now let me turn to slide nine for the 2021 guidance. Let me start by saying that the semiconductor-related customer volume reductions continue to be extremely volatile and create significant near-term challenges. Based on our performance in the first half of 2021 and then an updated light vehicle production forecast, we are updating the guidance range we provided at the beginning of the year. We are now expecting product revenues to be in the range of 1.11 to 1.7 $17 billion based on the current forecast of customer orders and production outlook for the balance of 2021 and the effects remaining at the current level. This is based on the best information that we currently have from our customers and suppliers. The midpoint of our guidance implies an organic growth rate of 22%. Additionally, We now expect adjusted EBITDA margin rate to be in the range of 17 to 18%, and our effective tax rate for 2021 to be between 20 and 22%. We continue to expect capital expenditures to be in the range of 50 to 60 million. With that, let me turn the call back to the operator to begin the Q&A session.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Matt Caranda from Roth Capital Partners. Your line is now live.

Hey, guys. Good morning. Thanks for taking the questions. Just wondered if you could start off by talking about the bookings environment. The $400 million awards look pretty solid for the quarter, and I did notice quite a few steering wheel heaters that were called out. So I just wanted to see maybe if you could break out by category what the $400 million in awards look like between maybe steering wheel heaters and CCS.

Good morning, Matt. Yeah, we don't really usually break out the awards. nice pickup and certainly quite happy about the performance that we were able to achieve in the quarter in terms of win rates and still looking to execute throughout the rest of the year. Steering wheel wise we do see the period, so I think that kind of shapes up what it's looking like.

Okay, that's helpful, Phil. Thank you. And then on the climate sense win, congrats, first of all, and I wanted to see, is it safe to say that that win is likely with one of the Phase 3 customers that you guys had talked about in prior calls? And then on the content for vehicle on that one – I know you said significantly higher than CCS, but is there any way to quantify that just a bit more? I would assume typically I've thought of Climate Sense as multiples of typical CCS award, but any way to maybe drill down a little bit on that one and quantify it a bit more?

Yeah, what we've said is about all we'll share just due to confidentiality. but a great chance to prove out the technology, get it on the road, and we're very excited about the milestone. In terms of content, it's definitely several multiples, or at least a few multiples above the current climate and comfort solutions, and I would say kind of in line with what we've said in the past.

Okay, that makes sense. And then just a couple on the outlook, maybe Matteo can handle a couple of these, but noticed, I mean, the growth outlook for the second half that you're implying, I think is somewhere in kind of the mid high single digits. Just wanted to see if maybe you could help split between 3Q and 4Q, just given supply chain disruptions and tightness. Any help there would be helpful.

Yeah. So let me, Matt, good morning. Let me, start by reiterating some of the messages that we highlighted in our prepared remarks, primarily the fact that the situation continues to be extremely fluid and things are changing regularly. So this is really based on the best information that we have from our customers and our suppliers. We are seeing, what we are projecting is basically a slightly improvement of the current supply chain situation toward the back end of the year. And in terms of when you do the sequential comparison, second half versus first half, you're getting exactly to the kind of mid-single-digit growth in the second half versus the first half. It's a little lighter than what maybe IHS is saying, but this is really based on the best information that we have. the challenges that we have seen today will continue for quite some time. So that's kind of how we profile the second half of the year.

Okay, and then just last one from me. The EBITDA margin outlook, I guess, was trimmed by 50 bps at the midpoint. And just wanted to see, I mean, how much of that 50 is supply chain related versus other items that may have been trimmed?

It's all of it, quite frankly. You've seen what we said the impact was in the second quarter. If I just take the first half, just on higher cost of goods sold in terms of higher premium freight, spot buys, raw material, cost pressure, primarily copper, we are amounting about $7 million of gross margin impact here today. We are not expecting things, as I said before, to dramatically improve in the second half. So that's pretty much the key driver here.

Okay. I'll jump back into you guys. Thank you.

Thanks, Matt. Thanks, Matt.

Thank you. As a reminder, that's star one to be placed into question queue. Our next question is coming from Ryan Signall from Craig Hallam. Your line is now live.

Great. Good morning, guys. Congrats on the nice results. First Climate Sense Award. Just want to dig in on Climate Sense, that award a little bit. Within the $400 million of auto awards you announced, is that award in there? And then secondly, any sort of R&D, SG&A, CapEx considerations related to the ramp of that award in the next couple years?

It is in the overall number, yes. huge priority.

And then you mentioned small volume. Is this a small volume platform or is this only going to be spec'd in on certain trims or packages for a specific vehicle?

It's a small volume platform.

Got it. So you're on every vehicle within that platform?

That's our expectation.

Got it. And then Just going back to kind of the IHS kind of sequential first half or second half, I mean significant outperformance in the quarter relative to industry production, but a little lighter in the back half. Is that just a timing difference between therm and kind of IHS production, or was there something, I guess, specific that drove that 60% outperformance in the quarter and then maybe slightly weaker in the back half relative to IHS production?

So let me talk maybe first about the outperformance in the quarter. I think when you compare us to IHS, we definitely benefited, as I mentioned in my prepared remarks, from the geographical mix, as we are a much heavier weight in North America. Then the impact of new launches and higher take rates, as we mentioned, Hyundai, Mercedes, GM, VW, BPS, still perform extremely well in terms of revenue in the quarter as we continue to see growth with BMW in the Daimler application that I mentioned earlier. And then HOD, the hands-on detection device with BMW, really positively impacting the steering wheel here. And also China, then, I would also add, had a nice growth for us. If you look at, you will see it when we publish the queue tomorrow, But our China revenue as a percentage of the total now is almost 13% during the second quarter, which is the highest we've had in quite some time. So these are, I would say, the key drivers for the second quarter of performance. As far as the second half, as I mentioned before to Matt, this is really based on the information that we are receiving from our customers and suppliers, and that's what drives our profiles.

I think in general, we see directly the headwinds of plant shutdowns. It's definitely still happening, definitely in front of us, and I think that's what's informing it.

Great. Then just switching over to capital allocation, the balance sheet continues to get stronger and grow cash there, generating a lot of free cash flow. Any change in priorities? And then, I guess, secondly, how do you feel about kind of stock buybacks versus the M&A pipeline?

Yeah, I mean, priorities still remain the same. The first priority is still to manage liquidity to protect for any potential volatility in the economy. We still aren't completely out of the woods, so we're still being mindful of that. Second priority for us is inorganic growth. level than we have in the last few years and we think that provides a good opportunity for us to accelerate our focus growth strategy along the pillars that we have identified strategically and then definitely share buybacks as we deem falling into the right range of price and timing we would look at that along with our normal CapEx expansion needed for new business

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

Thank you. Our next question is coming from Ryan Brinkman from J.P. Morgan. Your line is now live.

Hi. Thanks for taking my question. Just wanted to follow up on what you're seeing relative to the semiconductor shortage situation in the second quarter. I think there's a lot of call for ease and impact on customer production, but also the insight into when the customers are going down, if you're getting any more heads up, and then relative to your own procurement of electronic components, if they're more available or if you're seeing any less inflationary pressure?

I didn't catch the very first part of the question, but I think I got the gist of it. Just talking about the situation with demand related to semiconductor shortages first, we're still seeing significant pressure in the short term. All you have to do is read the news. In the last several weeks, there's still been several plant shutdowns. And based on the information we're receiving from our customers, still see some headwinds. No doubt about that. And it's a very, as Mateo mentioned, it's very fluid. This is not something that anyone can predict. Because as opposed to immediate cancellations. Now, of course, we're hopeful some of that comes back with the significant demand in the marketplace. And we are seeing some signs of some easing in the back half of the year than the last few months of the year. So that's positive. But again, we'll have to wait and see how that pans out. When it comes to our supply of semiconductors, definitely still facing challenges. We have a SWAT team to freight to get material in, increase prices to buy on the open market instead of through our suppliers, and that hasn't slowed down a whole lot. So we still see the headwinds with that. Your last point on inflation, I'll let Matteo talk about the inflationary pressures.

Yeah, so Ryan, in terms of if I dissect the inflationary pressure and the impact on the quarters, just for example, The $4 million that I mentioned earlier in terms of impact and cost of the sold, you have about a million which is comprised of higher premium freight and then lost productivity due to the abrupt shutdowns that Phil just mentioned. And then you have about a couple of million dollars coming from the spot buyers in the open market of semiconductor type of products. And then the remaining million is raw material inflation and primarily copper. We are not expecting any significant improvement of these kind of dynamics happening in the second half of the year. So I think, to Phil's point, we are very proud of what the team was able to accomplish in the first half of the year by delivering still like a 30% gross margin rate in spite of all these challenges. But I think these challenges, you know, we are expecting these to stay for quite some time.

Okay, great. Thanks. And are you able to say whether the Climate Sense Award is in conjunction with Lear, with whom I know you had partnered on a go-to-market strategy? And then separate from that, are you able to say whether the customer motivation, do you think, was, you know, driven more by the energy efficiency savings, as highlighted in the press release, or a desire to increase creature comfort, for example, via neck conditioning, et cetera, or maybe both, such as you might expect in a luxury vehicle?

We can't give any more details around who we're partnering with or any customer details. But in terms of the motivation, it was a combination. will certainly be a big part of the solution.

Very helpful. Thank you.

Thank you, Brian. Thanks, Ryan.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Phil for any further closing comments.

Sure. Thanks, everyone, for joining our call today. As I consistently shared with you in the past, we remain laser-focused on operational execution, innovation, and cash flow generation. I'm extremely proud of our team's agility, flexibility, and dedication to deliver on our commitments to all of our stakeholders in spite of the significant challenges we face in the supply chain. While we expect continued industry headwinds in the remainder of the year, the momentum in new awards along with expanding demand for our new technologies and our continued focus on productivity really position us well to deliver significant long-term shareholder value. We appreciate your interest and support and look forward to keeping you apprised of our progress.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.