Gentherm Inc

Greetings, and welcome to the GenTherm 2022 First Quarter Results 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. As a reminder, this conference is being recorded. I would now like to turn the call over to Yejing Brentano, Senior Vice President of Strategy, Corporate Development, and Investor Relations, Thank you. You may begin.

Thank you and good morning, everyone, and thanks for joining us today. Jentham's earnings results and the announcement of the agreement to acquire Altmeier's automotive business were released earlier this morning, and copies of the releases are available at jentham.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Jentham'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, and actual results may differ materially. We undertake no obligation to update them except as required by law. 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 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 Mateo 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, Yijing. Good morning, everyone, and thank you for joining us today. This morning, we announced that we have entered into a definitive agreement to acquire Alfmeyer's automotive business. We're very excited about this transaction as it will create the largest global supplier of thermal and pneumatic seating comfort for the automotive industry. This transaction will expand GenTherm's value proposition beyond thermal in comfort, health, wellness, and energy efficiency. Before getting into the details of what this acquisition means for Gentherm, let me first provide a little background on the business that we're acquiring on slide four. Alfmeyer, a private company headquartered in Treutlingen, Germany, is an innovative market leader of automotive lumbar and massage comfort solutions. They're also a leading provider of advanced valve systems technology, integrated electronics and software. Importantly, they are a leader in seat comfort and wellness innovation. with a 50-year-old culture of innovation that often puts them one generation ahead of the competition with respect to technology. This has resulted in a strong IP leadership position with more than 200 patents, including significant coverage for advanced shape memory alloy technology, or SMA. Alfmeyer pioneered the use of SMA valve and pump actuator technology for automotive seat comfort solutions, which delivers quiet, high speed pneumatic lumbar and massage performance. In addition to their leadership position in seat comfort solutions, Alfmeyer is a global leader in high complexity, high reliability valves for automotive fluid systems. Alfmeyer's industry leading capabilities in valve technology has led to the development of the next generation in intelligent pneumatic seat comfort called Pulse A. The proprietary Pulse A pneumatic system combines massage with high-frequency pulsation, which can stimulate muscles and alleviate pain and tension. With approximately 2,200 employees and operations in five countries, Alfmeyer's automotive business that we are acquiring generated €232 million in revenue last year. Moving on to slide five, let me talk briefly about the transaction itself and then discuss in more detail what it means for Gentherm. We will be acquiring the Seek Comfort Solutions and Fluid Valve Systems business of Alfmeyer for €177.5 million, subject to adjustments as set forth in the purchase agreement. We plan to fund this acquisition using a combination of current cash balances and our revolving credit facility. The transaction is expected to close in the third quarter of 2022 subject to regulatory approvals and other closing conditions. We're excited to offer more compelling and high-value solutions across complementary customer relationships, leveraging the combined technologies, teams, and capabilities. GenTherm sees an opportunity to integrate the highest performing comfort and wellness solutions in the most space-efficient manner, which is especially important for electric vehicles that demand compact, integrated designs. In addition to electric vehicles, the addition of the massage and lumbar business will further expand our value proposition from thermal to overall comfort and wellness for both the luxury and high volume vehicles. Alfmeyer has built a strong customer portfolio, especially with European OEMs. Some of the customers that we both serve are BMW, Volkswagen, Mercedes-Benz, Ford, and large electric vehicle manufacturer. Similar to GenTherm, the majority of Alfmeyer's business is directly sourced by OEMs. With this transaction, we expect to be able to expand Alfmeyer's market share by capitalizing on GenTherm's market-leading customer base, especially in North America and Asia. In addition to revenue synergies, we've identified significant cost savings opportunities through integration into our disciplined management system. one that has been proven over the past few years. We expect to achieve approximately $10 million in annual run rate savings. Alfmeyer's industry-leading expertise in air and liquid flow valve systems should also open additional growth opportunities for GenTherm's climate sense and battery performance solutions. The fluid valve business has a leading market position, attractive margins, and generates strong cash flow. Requiring minimal capital investment, the cash it generates can be used to invest in other growing opportunities for GenTherm. Bottom line, this transaction is well aligned with our mission to develop and deliver solutions that improve lives through comfort, health, wellness, and energy efficiency by creating the largest global supplier of thermal and pneumatic comfort for the automotive market. Before I discuss the first quarter results, I'd like to give you a brief update on the situation in Ukraine. Our primary concern remains the safety and welfare of our colleagues and their families. Although we've been working with our customers to transfer production of select products to other GenTherm facilities and to build redundant manufacturing and tooling capacity, we're doing all possible to maintain employment status for our colleagues. In addition, we paid a special bonus to all Ukrainian employees of our manufacturing facility in recognition of their current challenges. As part of our humanitarian efforts, we also launched an employee donation program for the World Central Kitchen and made matching company donations to provide meals to the local community and truckloads of essential supplies, including water, food, blankets, and other general supplies to those in need. At this time, we have not experienced any material impact to our production capacity, revenue, or costs. The situation in Ukraine continues to be fluid, and we are monitoring the situation closely. Now onto the quarter. In Q1, we faced the most significant challenges to maintain our supply of semiconductors that we have experienced to date. Our manufacturing and supply chain teams worked around the clock to minimize the impact of global semiconductor shortages along with the many other challenges resulting from volatile customer demand, escalating freight costs, and material cost inflation. I'm proud of the team for remaining focused on execution and continuing to deliver for our customers and stakeholders. In fact, in February, we were recognized by Forbes magazine as one of America's best midsize companies. Matteo will provide more detail about our first quarter financial results in a few minutes. Now turning to automotive highlights on slide six. In the first quarter, we launched our automotive solutions on 12 different vehicles across nine OEMs, including Ford, General Motors, Mazda, Mercedes-Benz, and Renault. We continue to see momentum for our CCS product on both ICE and electric vehicles. In the first quarter, our CCS solutions were launched on the Cadillac Lyric EV, Honda NP1 and NS1 electric SUVs, Maserati Levantino, Mazda CX50, as well as the Mercedes-Benz SL class. In addition, we continue to make great progress on our proprietary ClimateSense, our software-driven microclimate platform using an algorithm based on thermophysiology. ClimateSense is a critical part of our long-term strategy and continues to gain interest from global OEMs. I'm pleased to announce that we have launched a new development project with a fourth OEM in Europe. In cold weather testing, we've achieved energy savings results in line with other development projects exceeding customer expectations. We continue to optimize the value proposition for electric vehicles by significantly reducing power consumption and increasing range in extreme temperatures, all while providing best-in-class passenger comfort. Now onto slide seven, where you can see that in the first quarter, we secured over $170 million in new program awards across 10 different customers. The award level is lower than prior quarters, mainly as a result of lower quoting activity and delayed awards. The pipeline of opportunities remains strong for the remainder of the year. We won multiple CCS awards, including platform wins with the Acura ADX and Honda Prologue through the Honda General Motors EV Partnership. In addition, the Audi Q5 Cadillac Optique EV, Hyundai Genesis GV70, Hyundai Kona, Volkswagen Cross Blue, as well as several Volkswagen vehicle platforms in China, including Magatan, Passat, Sajita, and Tiguan. Of important note, we won a CCS award for the Chevrolet Silverado EV in the first quarter. This is on the heels of winning the Hummer EV pickup, Ford F-150 Lightning EV, and Rivian R1T awards. We're capturing significant share in the all-electric truck market with our CCS solution. In the first quarter, we also received five steering wheel heater awards across four OEMs, including the Mercedes MSL platform vehicles, Nissan Juke, Toyota C-HR, and Prius. In addition, we won a hands-on detection-enabled steering heater award for Roe V RX9, SAIC's new flagship SUV. Our teams continue to transform our product lines to create value for the electric vehicle applications. I'm pleased to share that we won a high voltage cable award for hydrogen fuel cell electric semi trucks in the first quarter. While our cable business has been traditionally concentrated on internal combustion vehicles, we've introduced high voltage cable solutions for plug-in hybrid platforms across Jaguar and Land Rover, on the full electric Rivian R1T and R1S trucks, and now for the hydrogen fuel cell heavy duty trucks. As we continue to bring innovative solutions to our customers, GenTherm is well positioned to significantly increase content per vehicle as electric vehicles expand in the market. Now let's turn to slide eight for discussion of our medical business. Medical's revenue grew 9% XFX in the quarter year over year. While elective surgeries are coming back with the ease of COVID-19 restrictions, hospitals are navigating supply chain issues as many medical supplies are on backorder. In addition, hospitals are managing higher costs as a result of higher wages for travel nurses due to the nursing shortage, as well as increased prices from many suppliers. Higher operating costs for hospitals have also put a strain on new capital spending. During the quarter, one of the market leaders for fluid warming was not able to supply to their customers. Gentherm was able to step in and provide Astotherm and Astoflow, our fluid warming solutions, to the University of California San Diego and Scripps Health, also in San Diego. We continue to see solid demand for our flagship product, Blanketrol, in the U.S. Our liquid-based patient thermal management solution was selected by several large U.S. hospital systems. including the Cleveland Clinic, Seattle's Children's Hospital, and Norton Healthcare in Louisville, Kentucky. Now let me summarize. Our financial results in the first quarter reflect the significant headwinds created by the supply chain disruptions, both in terms of lost revenue and higher cost of goods sold. That said, we still believe there is significant pent-up demand that will need to be met once the extraordinary supply chain constraints are resolved. I'd like to thank our global team for working tirelessly to overcome challenges in the market and deliver to our customers. While uncertainty remains about where production rates will be for the next few quarters, we remain focused on bringing differentiated thermal management solutions across both the automotive and medical markets. Our portfolio of innovative solutions, along with the addition of pneumatic comfort solutions following the completion of the acquisition of Alfmeyer, are expected to significantly increase Gen Therm's content per vehicle over time. In the near term, we believe that inflationary pressures will remain for some time. We will continue to focus on execution and remain aggressive on cost management while continuing to collaborate with our customers for reasonable inflationary cost recovery in order to deliver profitable long-term growth. With that, I'll turn the call over to Matteo for a little more color on the financial results.