Gentherm Inc

Greetings and welcome to the GenTherm first quarter 2022, sorry, 2023 earnings 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 conference over to your hosts. Eugene Brentano, Senior Vice President of Strategy, Corporate Development, and Investor Relations for Gentherm. Thank you. You may begin.

Thank you, and good morning, everyone, and thanks for joining us today. Gentherm's earnings results were released earlier this morning, and a copy of the release is available at gentherm.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Gentherm'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 Jen Thurm'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, including certain pro forma measures related to the Altmaier acquisition. 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 Inversa, 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 gentherm.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. I'm quite proud of the GenTherm team for coming together, executing with focus, and delivering strong results in the first quarter. We delivered the highest quarterly revenue in company history, growing 36% year-over-year, or 39%, excluding the impact of foreign currency translation. Adjusting for FX and the Alfmeyer acquisition, automotive revenues increased 14% year-over-year in the first quarter, outperforming actual light vehicle production in our key markets by over 800 basis points. It was just a year ago that we announced our acquisition of Alfmeyer, which expanded GenTherm's value proposition beyond thermal within comfort, health, and wellness. Demand for our thermal comfort, massage, and lumbar solutions is accelerating, evidenced by our $480 million of new automotive business awards, a record for a first quarter. We want to break through integrated thermal comfort, lumbar, and massage system for Jaguar Land Rover EVs, We also won our first lumbar and massage award with General Motors on a future electric vehicle. The pace of these conquest awards is well ahead of our expectations following the Alfmeyer acquisition. On the profitability side, our margin performance improved year over year as a result of our cost improvement initiatives and our negotiation of appropriate cost recoveries from customers. On a pro forma basis, our adjusted EBITDA margin rate improved 230 basis points year over year. We generated $25 million of cash flow from operations and repurchased $10 million of shares in the quarter. Matteo will provide more details on our financial results in a few minutes. Now, turning to automotive highlights on slide four. In the first quarter, we launched our automotive solutions on 17 different vehicles across nine OEMs, including BMW, Ford, General Motors, Great Wall, Hyundai, and Mercedes-Benz. We continue to see momentum for our CCS solutions on both ICE and electric vehicles. In the first quarter, our CCS solutions were launched on the Cadillac XT3, Chevrolet Colorado, Chevrolet Silverado EV, Hyundai Genesis G80, Lincoln Nautilus, as well as several EV models of Great Wall vehicles in China. Now let me give you a quick update on ClimateSense. In addition to preparing for the flawless launch of the production programs with General Motors, we continue to work with other OEMs across multiple regions to highlight the critical design concept that we've implemented with ClimateSense. we've developed our solution as a scalable platform that can be incrementally integrated into today's EV architecture, or it could be unleashed for the next generation of heating and cooling visions for our OEM customers who are ready to more completely update the heating and cooling architecture. Our proprietary smart effectors, which can be installed on a modular building block platform, will allow customers to take advantage of a continuum of implementation based on their current EV migration and their product strategy. And this allows us to scale our content to support steady increases in energy efficiency and thermal performance. Let me give you a couple of examples of how some of our customers are taking advantage of our modular approach and have awarded us additional thermal effectors in the last few quarters. As a result of ongoing development projects, Honda will add our heated interior solutions including our electronic control units, to a number of their upcoming EV platforms. In addition, Stellantis is adding our intelligent neck conditioner to some of their PSA DS model vehicle lines. Awards like these are proof points that our scalable, modular approach is gaining momentum, and it is one of many important stepping stones toward our future climate sense growth. In addition to climate sense, Our advanced engineering team is making great strides in creating full system solutions that integrate thermal with lumbar and massage. The combination of heating and cooling the body with pulsating massage is opening vast opportunities for health and wellness treatments. Also, alertness enhancements and physical recovery in the car. We are perfectly positioned to be a major player in the software-defined vehicle of the future. by integrating our proprietary software and algorithms. Now, on to slide five, where you can see that in the first quarter, we secured $480 million of awards in automotive. Since the announcement of the Alfmeyer acquisition, our customers have resoundingly expressed support and excitement to see GenTherm further expand its value proposition beyond thermal to include pneumatic lumbar and massage solutions. and the pipeline of opportunities for the combined company remains very strong. As I mentioned earlier, we won several awards for pneumatic comfort leveraging GenTherm's strong customer relationships. Specifically, I'd like to share two breakthrough conquest wins in the first quarter. First, I'm pleased to share that we won a combined thermal comfort, lumbar, and massage full system award with Jaguar Land Rover for their new Jaguar BEVs. This is also our first-ever pneumatic comfort award with JLR as a result of the combined company. Second, we won our first lumbar and massage award with General Motors for one of their upcoming electric vehicles. This win is a testament to the synergies of the Alfmeyer acquisition, highlighting the strong partnership and trust by our largest customer. With agility, speed, and creativity, we developed a solution for every challenge and broke in with General Motors through extremely formidable competition. I'm also pleased to note that we won multiple CCS awards in the quarter. In addition to the Jaguar Land Rover EV platform that I mentioned earlier, we won CCS awards for the Great Wall ORA, Honda CR-V, Subaru Legacy and Outback, and an extension of General Motors' multi-vehicle full-size trucks and large SUV platforms. Of special note, we won a Conquest Climate-Controlled Seat Award for BYD, the world's largest EV manufacturer by volume. This is our first award with BYD, and it's a proof point that our track record of innovation, quality, and execution is a key competitive advantage. In the first quarter, we also received 16 steering wheel heater awards across 10 OEMs. These included the Audi Q6 e-tron, Lincoln MKZ, as well as multiple models from Honda, Nissan, and Volkswagen. In addition, we won a hands-on detection-enabled steering wheel heater award for Geely. Our teams continue to transform our product lines to create value for electric vehicle applications. I am pleased to share that we won a follow-on high-voltage cable award for hydrogen fuel cell electric semi trucks in the first quarter. In addition, we won a battery sensor harness award for the start-stop system for future hybrid models of Audi. Finally, I'd like to share a couple of recent wins in battery performance solutions. Mercedes-Benz awarded us a new 48-volt battery heating business based on our proprietary thin-foil mechanical structuring process. We were also awarded a significant extension of our 48-volt thermal electric-based battery thermal management solution for Mercedes-Benz. 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 six for a discussion of our medical business. Medical revenue in the first quarter grew 13% XFX year over year, primarily driven by our acquisition of Dachin Medical. While hospitals in the U.S. continue to face financial pressures and are carefully managing their capital spending, we saw a rebound in elective surgeries with the China reopening. In the first quarter, we gained 35 new major hospital accounts in China. I'm also pleased to share that we won a Key Blanketrol Award at Select Medical in Mechanicsburg, Pennsylvania. Select Medical is a group of post-acute hospitals that partner with medical centers across the United States. They are adding new locations and have selected Blanketrol as their hypo-hyperthermia device of choice. In addition, we were awarded patient warming business with warm air and filtered flow systems at the University of Cincinnati Medical Center, replacing competitor products. Our win was not only driven by our clinically preferred solution, but also our ability to consistently supply consumable blankets to our customers while the competition had supply chain issues. Now with that, I'll turn the call over to Matteo for a little more color on the financial results.

Okay, thank you, Phil. Let me turn to slide seven and focus on the items that most significantly impacted our first quarter results. For the quarter, product revenues increased by 36% compared to the same period of last year, including the contribution from the acquisitions. If we adjust for the impact of acquisitions and FX, our overall product revenue increased by 14%. Starting with the automotive segment, automotive revenues were $353 million, reflecting a 37% increase compared to the prior year period. Adjusting for the $66 million contribution from Alfmeyer and foreign currency translation, automotive revenue increased by 14%. And this compares to a 6% increase in the actual light vehicle production in our key markets of North America, Europe, China, Japan, and Korea. And as Phil just mentioned, we outperformed the light vehicle production volume by over 800 basis points. We have provided the detail on revenue growth by product category in our earning press release and associated materials that are available on our investor relations website. We saw significant growth on the majority of our product lines, and more specifically, steering wheel heaters revenue increased by 27% compared to the prior year period due to higher demand and production volume on multiple GM platforms, as well as higher production volume with a major global EV OEM. BPS revenue increased 15% due to higher volume with Mercedes, Jeep, and the start of production of our proprietary thin-foil self-connecting board on the BMW 7 Series plug-in hybrid. CCS revenue increased by 12% due to higher production volume of GM trucks and SUVs, as well as take rate increases on Mercedes, Stellantis, and Hyundai-Kia. Seat heater revenue increased by 10% due to higher production volume of trucks and SUVs at GM, Ford, and Stellantis. Lumber and massage solutions revenue increased 7% on a pro forma basis due to the ramp-up of several platforms on BMW, Mercedes, and VW, including the BMW's EQS EVs, as well as higher production volume with a major global EV OEM. Electronics revenue increased 1% due to higher sales of our multifunction electronic control units to Ford. Cable revenues decreased 8%, due to temporary labor availability issues in one of our plants in Europe, and valve systems revenue decreased 9% on a performer basis due to lower production volume in China for VW, SGM, and SAIC. Turning to medical, medical revenues increased approximately 13% XFX compared to the prior year period, primarily as a result of the Dacheng acquisition. Moving to adjusted EBITDA, adjusted EBITDA in the quarter was 41.5 million, up from 29.8 million in the prior year period, and 30.4 million in the prior year pro forma. The adjusted EBITDA rate for the first quarter was 11.4%, and this compares to 9.1% in the year-ago period on a comparable pro forma basis. The 230 basis points year-over-year increase was driven by fixed cost leverage on higher sales volume, lower freight costs, and positive price. These were partially offset by material and wage inflation and the negative impact of foreign exchange, primarily due to the appreciation of the U.S. dollar compared to the euro and the Korean won. it is worth noting that excluding the impact of the Alfmeyer acquisition, legacy gen-term adjusted EBITDA margin rate rose to 14% compared to 11% in the prior year quarter. Operating expenses were $63.5 million in the quarter compared to $49.9 million in the prior year period. If we adjust for acquisition, integration, and restructuring costs, as well as the non-cash stock compensation expenses in both periods. Operating expenses were $58.8 million, up from $43.9 million in the first quarter of last year. The year-over-year increase of approximately $15 million was primarily driven by additional expenses from the acquired businesses, as well as higher compensation expenses and increased R&D costs to support new program swings. Finally, adjusted diluted earnings per share in the quarter was 49 cents a share compared to 41 cents per share in the first quarter of last year. Our adjusted EPS calculation includes the impact of non-cash stock compensation expenses consistent with the prior year calculation. Our effective tax rate in the quarter was approximately 32%. on the high end of our guidance range due to the impact of a state tax audit settlement. Moving to the balance sheet on slide eight, our cash position at the end of the quarter was approximately $167 million, up from $154 million at the end of December 2022. We closed the quarter in a net debt position of $68 million compared to net debt of $81 million at the end of December. The reduction in net debt was primarily driven by approximately $25 million of cash generated from operating activities, partially offset by $6 million of capital expenditures and $10 million of share repurchases. As a result, our net leverage ratio was 0.47 at the end of the first quarter, well below our target of 1.5 times. Based on the trading 12-month consolidated adjusted EBITDA ended March 31st, we had approximately $266 million of availability in our line of credit, and the total available liquidity as of March 31st was $433 million up from 419 million at the end of December. Now, let me turn to slide nine for our 2023 guidance. As we did in the last earnings call, for comparison purposes, we included the actual results as reported for 2022, as well as the pro forma 2022 values if we had incorporated the results for the Alfmeyer since the beginning of the year. Based on our performance in the first quarter, We are reaffirming our 2023 guidance as discussed in the prior earnings call. For 2023, we are expecting revenue to be in the range of 1.45 to 1.55 billion, assuming a Euro to USD exchange rate of 1.05, and light vehicle production in our relevant market grows at a low single-digit rate in 2023 versus 2022. Adjusting for approximately 150 basis points of effects pressure year-over-year, the midpoint of our guidance implies an organic growth rate of 13%. Our guidance also assumes higher revenue in the second half compared to the first half as a result of new program launches. We continue to expect adjusted EBITDA margin rate to be in the range of 11.5% to 13.5% for 2023. And as we indicated in the last earnings call, due to the revenue cadence and the impact of contractual price downs, which we expect to offset in the second half of the year through incremental price recoveries, supplier cost improvements, and productivity actions, we expect the adjusted EBITDA margin rate to steadily improve throughout the year. We still expect our full-year effective tax rate to be in the range of 28% to 32%, and the capital expenditures to be in the range of 60 to 70 million. So with that, I'll turn the call back to Phil.

Thanks, Matteo. Now let me summarize. The results of the first quarter clearly demonstrate the significant and continued progress we're making against our long-term strategic initiatives. We delivered the highest quarterly revenue in company history and improved profitability year over year. We secured $480 million in new automotive business awards, the highest that we've ever secured in the first quarter. Our results also highlight how the Alfmeyer acquisition has accelerated our market penetration. And finally, our momentum in the first quarter demonstrates our unique positioning to capitalize on industry megatrends to create a flywheel of profitable growth. With that, I'll turn the call back to the operator to begin the Q&A session.

Thank you. If you'd like to ask a question, 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 the star keys. Our first question comes from the line of Matt Karanda with Roth MKM. Please proceed with your question.

Hey, guys. Good morning. Morning, Matt. Morning, guys. On the bookings front, the $480 million, it sounded like a good amount of Altmeier content maybe in there. Just any breakdown on the balance between thermal comfort versus lumbar and massage?

Yeah, I think both were stronger than normal. So very good performance. We're especially excited about the combined award with JLR, which was very sizable in total and was an exciting conquest win for us.

And it sounds like there's additional potential in the pipeline for the additional combined content. Just curious, maybe, Phil, if you could just give a little bit of color on sort of what's in the pipeline on a go-forward basis on that front.

Sure. Well, yes, I would say we have quite a bit more interest than we had anticipated, especially from the more traditional GenTherm customer base that Alfmeyer did not do business with prior to the acquisition. That's keeping us very busy, as you can see, with the big wins with JLR and with General Motors. But on top of that, the potential for new platforms with – With traditional Alfmeyer customers like BMW, Mercedes, Volkswagen, Audi, some really significant opportunities are rolling in there, too. So we're very busy with all of the opportunities rolling in. But at the same time, our win rate was very high on thermal business, and activity is starting to pick up. So we're excited about the pipeline leading into the rest of 2023. Okay, that's great to hear.

And then just for Matteo, maybe curious if you could just give a more detailed gross margin bridge in the first quarter. You know, revenue up significantly. Obviously, I think Altmeier may be a bit of a drag on the gross margin front, but just curious if you could maybe provide a more detailed breakout of the gross margin bridge on a year-over-year basis for us.

Yeah, sure, Matt. Good morning. Maybe the best way to do this is to talk about the legacy general business. So, I'm really pleased on where the profitability came in the first quarter. You have about, if you compare the 24% that we had in the first quarter of last year to what legacy closed, excluding a little bit of an adjustment that we had due to the exit on the nanomotive electronics. The growth margin rate in legacy came at about 26.5%, which is a nice improvement year over year. A couple of key drivers, volume leverage accounted for an expansion of about 250 basis points. We saw, as expected, freight cost coming down quite nicely. driven by a couple of reasons. Premium freight, primarily as a result of the improved environment compared to what we were facing last year, as well as a very good job by our team negotiating better freight rates for the regular freight. So freight accounted for about 180 basis points of margin expansion. The other real positive is price. which was actually positive in the first quarter, which as you know is very unusual for our business as we always have the negative impact of the annual price down that kick in in the first quarter. But the team did a fantastic job in continuing to drive the positive momentum on the cost recoveries with our customers. So that's about 80 basis points of margin expansion. And then on the negative side, you have the labor and material inflation, which accounted for about 140 bps negative, and FX was 120. So I think really great performance by the team. And again, we're starting to see, particularly on the legacy business, a nice pickup in profitability, and we feel pretty comfortable for the rest of the year.

Okay, excellent. And then just last one from me. You notice you reiterated the guide for the full year. Makes sense. Just any additional commentary on sort of the seasonality or cadence of the rest of the year here? Is it still expected to be sort of a build into the back half of the year on both revenue and EBITDA margin? I mean, you outperformed the EBITDA margin a little bit, I think, in the first quarter. But just any more commentary on sort of the shape of the year here?

Of course. So, yes, you're right, Matt. I think the first quarter came in probably slightly better than what we were expecting at the beginning of the year, which is good. If I look at where we need to be in terms of the EBITDA rate, for the next three quarters on average, the EBITDA rate needs to be about 12.9% to hit the midpoint. And really, if you bridge from the 11 and a half of today to the 12.9 for the remainder of the year, you really have a couple of things that we are expecting to happen. Number one is the volume, which is exactly what you said. The revenue cadence, we are confirming what we said a couple of months ago. We are expecting the second half to be higher than the first half, thanks to new product launches. So that's about 80 basis point of margin expansion. It's going to be in the, you know, mid-single-digit type of EBITDA rate for the remainder of the year. So that's about 100 bps of margin expansion. And then we have the usual timing on incremental price recoveries that the team will negotiate, as well as sourcing savings that tend to come in the latter part of the year. which also will drive another 70 basis points of margin expansion. And then you have a little bit of an investment on OPEX, primarily driven by the merit, so the salary increases that for us kick in on April 1st. So that's how we bridge from the EBITDA that you've seen today, we reported today, towards the midpoint of guidance for the rest of the year. I think, you know, overall, you know, our rationale here in terms of reconfirming the guidance On one side, we are very excited where the quarter came in. We have great momentum, particularly on the price recoveries. I think on the other side, the environment remains volatile, and we also have to continue to do some work to continue to improve the profitability of the company. So that's really our rationale to, for now, maintain the guidance that we gave a couple of months ago. But we are very pleased where the team came in in the first quarter.

super detailed and helpful. I'll leave it there, guys. Thank you.

Thank you, Matt. Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. We'll pause a moment to allow for any other questions. Thank you, ladies and gentlemen. This concludes our Q&A session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.