Gentherm Inc

Greetings and welcome to the GenTerm Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce our host, Yejin Brentano, Corporate Development and IR. Thank you, ma'am. You may begin.

Thank you and good morning, everyone, and thanks for joining us today. GenThum's earnings results were released earlier this morning, and a copy of the release is available at GenThum.com. Additionally, a webcast replay of today's call will be available later today on the investor relations section of Jentham'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. And actual results may differ materially. we undertake no obligation to update them except as required by law. Please see JANTHEM'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 Elfmeyer 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 Mattel Anversa, 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 jensdom.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 am pleased with the continued strong execution of the Global Gen Therm team as we delivered another solid quarter of financial and operating results. While we have seen some stabilization in automotive production and signs of easing inflation, we continue to strengthen our operational execution and further improve productivity. For the second quarter, we achieved record revenue of $372 million growing 43% year over year. These outstanding results also included record quarterly organic revenue of over $300 million, the highest ever quarterly revenue for our climate-controlled seats and the highest ever quarterly revenue for steering wheel heaters in the company's history. Demand for our thermal comfort, massage, and lumbar solutions continues to accelerate. This momentum has carried into 2023. In the second quarter, we achieved a quarterly record of $670 million of new automotive business awards. Year-to-date, we have secured nearly $1.2 billion of new awards. Recall that in 2022, we secured record wins of $1.8 billion for the full year. With this extraordinary strength and new business wins, we're preparing to gear up to meet the production demands of our customers, along with creating a more optimal cost structure in our manufacturing footprint. And I'm pleased to announce that we are investing in two new manufacturing plants, one in Morocco and one in Monterrey, Mexico. The new factories will be ready for production in 2024. These new plans will not only allow us to meet the capacity requirements of our record levels of new business awards, but also support our plan to keep expanding gross margins. Turning back to our Q2 results, which Mateo will cover in more detail in a few minutes, our adjusted EBITDA margin rate improved 300 basis points year-over-year on a pro forma basis. We generated $34 million of cash flow from operations, repaid $16 million of debt, and repurchased $10 million of shares in the quarter. We have officially kicked off our Fit for Growth 2.0 program to execute our previously announced profitability improvement plan to reach high teens adjusted EBITDA margin rate by 2026. Specifically, we have identified several hundred initiatives to reduce product costs through value engineering, sourcing excellence, improve manufacturing productivity through automation, and implement lean best practices across our network. Additionally, the program will drive operating expense efficiency to leverage scale as we continue our growth path towards our target of over $2 billion by 2026. Now, turning to the automotive highlights on slide four. In the second quarter, we launched our automotive solutions on 20 different vehicles across 10 OEMs, including Ford, General Motors, Great Wall, Hyundai, and Toyota. We continue to see tremendous momentum for our CCS solutions. In the second quarter, our CCS solutions were launched on the Buick LaCrosse, Buick E4 EV, Chevrolet Blazer EV, Ford Mustang, Hyundai Verna, as well as several EV models of Great Wall vehicles in China, including the Tank 700, the plug-in hybrid Blue Mountain SUV, and Haval Xiaolong Max. Now, let me give you a quick update on ClimateSense. We are progressing well in preparing for the flawless launch of the two upcoming production programs with General Motors, And in addition, we continue to work on several development projects with OEMs around the world, including recent work with a few electric vehicle manufacturers. The demonstrations of range extension enabled by ClimateSense have also driven higher thermal content, higher take rates, and adoption on electric vehicles, which have resulted in a significant number of awards in the quarter. In addition to climate sense, our advanced engineering team continues to integrate thermal with lumbar and massage to create innovative full system solutions. The combination of heating and cooling the body with our proprietary pulsating massage is opening vast opportunities for health and wellness experiences, 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. Our Alfmeyer integration continues to deliver more value for our customers. We are now the clear market and technology leader in thermal and pneumatic lumbar and massage solutions. Our strong position as the largest independent provider is a powerful differentiator with our customers. We are actively engaged with OEMs and Pier 1 seat manufacturers in North America, Europe, and Asia to collaborate on breakthrough integrated comfort solutions. These solutions provide industry-leading comfort performance, reduced space requirements in the seat and the interior, less weight, and a significant improvement in seat assembly efficiency through reduced complexity. As a partner to over 25 seat manufacturers around the world, our scale and capabilities are unparalleled. As the leading innovator in this market, we can collaborate with our customers to create customized solutions and leverage GenTherm's scalable platform across multiple customers. Also, our engineers are simply the world experts in integration, as we work with nearly every car manufacturer and every seat maker and configuration. We believe our partnership model is a unique and sustainable competitive advantage.

Now on to slide five, where we'll discuss our record awards.

While the pipeline of pneumatic opportunities remained very strong, the majority of the new awards secured in the second quarter were for thermal solutions, where we had a truly breakthrough quarter. We won CCS awards on the Chevrolet Silverado EV, GMC Sierra EV, Ford Explorer EV, Ford F-150 Lightning EV, Kia EV9, and the Subaru Forester. We continue to gain momentum in China. We won CCS awards for the Chevrolet Equinox EV, several Great Wall plug-in hybrid models, Honda CRV, and Lee Auto's electric MPV. Of special note, we won our second Climate Control Seat Award with the world's largest EV manufacturer by volume, BYD, for its popular Song EV. Importantly, we won a highly desirable and contested award with BMW. Our CCS solutions will be on the next generation electric and ICE X-Series SUVs, including the X5, X6, X7, and the IX5, IX6, and IX7. In fact, the new BMW X7 and IX7 will also feature GenTherm's active CCS solution. In the second quarter, we also received 11 steering wheel heater awards across seven OEMs. These included Bright Drop Vans from General Motors, Honda Ridgeline, Nissan Murano, and the Renault Megane. In addition, we won hands-on detection-enabled steering wheel heater awards for several Chang'an EV models in China. If you recall, we had an extremely strong pneumatic comfort wins in the first quarter, including breakthrough conquest wins with Jaguar Land Rover and General Motors. In the second quarter, we won a pneumatic lumbar award for the Audi A4. In addition, I'd like to congratulate our team in China for winning a combined thermal comfort lumbar and massage full system award for the Volkswagen Lamando EV. further validating the value proposition of the combined technologies of GenTherm and the acquired Altmyer. The momentum of pneumatic lumbar and massage awards is accelerating rapidly, and I am pleased to share that we just won in July our first lumbar and massage award with Stellantis on the Jeep Compass, Alfa Romeo Stelvio, Alfa Romeo Giulia, and Maserati Levante. This Conquest Award was enabled by GenTherm's strong customer relationships and Alfmeyer's industry-leading technologies. Let me remind you that we have already won six Conquest pneumatic lumbar and massage awards since the close of the acquisition, and we are well ahead of our revenue synergy plans. Now onto battery performance solutions. In the second quarter, we won an air cooling battery thermal management award for Hyundai across six electrified vehicle platforms. With this award, we will be cooling 80% of Hyundai's mild hybrid and plug-in hybrid vehicle batteries. So in summary, our record awards in the second quarter are strong proof points of our ability to grow market share through conquest wins as well as growing penetration of thermal and pneumatic comfort solutions. Now let's turn to slide six for a discussion of our medical business. As a result of continued financial pressures and muted capital spending at hospitals in the United States and a large one-time order by the United Nations in the second quarter of last year, we saw a reduction in medical revenue in the quarter. Given the change in purchasing behaviors in the medical device space post-COVID, we are working on bold moves to adapt our medical go-to-market model to leverage large partnerships, distribution, and white-label opportunities. Accordingly, I am pleased to announce that we are strengthening our partnership with Sourcemark Medical, a certified minority supplier headquartered in Nashville, Tennessee. to provide world-class patient warming solutions to the U.S. healthcare market. Sourcemark has a proven track record of driving growth by providing superior service and solutions to hospitals and medical providers. With this partnership, we expect to significantly increase our ability to win business with our patient warming solutions. With a successful integration of Dachen Medical, we continue to win new accounts and hospitals in China. In the second quarter, we added 24 new hospital accounts in China, replacing competition. And in the U.S., we added more units to the existing fleet of Blanketrol 3 systems at the Boston Children's Hospital to support expanded usage. In addition, we were awarded the Blanketrol 3 and Cool Kit business at Children's Healthcare of Atlanta. a brand new hospital. We are confident that these actions will help us accelerate our growth in the patient temperature management solutions. With that, I'll turn the call over to Matteo for a little more color on the financial results.

Thank you, Phil. Let me turn to slide seven and focus on the most significant items in our second quarter results. So for the quarter, product revenues increased by 43% compared to the same period of last year, including the contribution from the acquisitions. If we adjust for the impact of acquisitions and effects, our overall product revenue increased by 18%. Starting with the automotive segment, automotive revenues were $362 million, reflecting a 45% increase compared to the prior year period. Adjusting for the $65 million contribution from Alfmeyer and foreign currency translation, automotive revenues increased by 19%, and this compares to an 18% increase in the actual light vehicle production in our key markets of North America, Europe, China, Japan, and Korea. We outperformed the light vehicle production volume by over 100 basis points. Excluding the non-automotive electronics business, which we are in the process of phasing out, and last year's one-time benefit from spot biorecoveries, we outperformed production volume by nearly 400 basis points in the quarter, over 600 basis points year-to-date. We saw significant growth in the majority of our product lines, and more specifically, Steering wheel heaters revenue increased by 35% compared to the prior year period due to higher demand and production volume on multiple GM platforms and a major global EV OEM, as well as increased content on VW as a result of our hands-on detection-enabled steering wheel heater. CCS revenue increased by 26% due to higher production volume of GM trucks and SUVs, as well as higher take rate on several models with Honda Ikea, JLR, Honda, BMW, and Ford. Lumbar and massage revenue increased 20% on a pro forma basis due to the ramp up of several platforms on BMW, Mercedes, and VW, as well as higher production volume with a major global EV OEM. CTT revenue increased by 19%, due to higher production volume of trucks and SUVs at GM, increased take rate with Ford, as well as increased content on the Kia Telluride as a result of the second row adoption. BPS revenue increased 12%. due to higher volume with Mercedes, General Motors, and the start of production of our proprietary thin-foil self-connecting board on the BMW 7 Series plug-in hybrid. Cable revenues increased 5% due to higher sales with VW, Hyundai, Kia, and Ford. Valve Systems revenue increased 3% on a performer basis due to higher production volume in China. and electronics revenue decreased 9% due to the phase-out of non-automotive electronics. Turning to medical, medical revenues decreased 7%, primarily as a result of lower demand in the U.S. and Asia, as well as the large one-time order in the prior period in Europe, the field mentioned earlier. Moving to adjusted EBITDA, Adjusted EBITDA in the quarter was $42.4 million, up from $24.8 million in the prior year period and $26.1 million in the prior year pro forma. The adjusted EBITDA rate in the second quarter was 11.4%, and this compares to 8.2% in the year-ago period on a comparable pro forma basis. The 320 basis points year-over-year improvement was driven by fixed cost leverage on higher sales volume, inflationary customer price adjustments, productivity at the factories, and lower freight costs. 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 Chinese RMB 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 13% over the 9.5% recorded in the prior year quarter on a comparable basis, corresponding to a 350 basis point improvement year-over-year. Operating expenses were $83.7 million in the quarter compared to $51.6 million in the prior year period. If we adjust for acquisition, integration, restructuring costs, as well as non-cash stock compensation expenses and the non-cash goodwill impairment in both periods, operating expenses were $58.6 million up from $44.1 million in the second quarter of last year. The year-over-year increase of approximately $40 million was primarily driven by the additional expenses from the acquired businesses as well as higher compensation expenses and lower reimbursement of R&D costs on an organic basis. It is worth noting that adjusted operating expense as a percentage of revenue improved 100 basis points year-over-year. Now, during the second quarter, medical did not perform in line with the forecasted results, driven primarily by slower-than-anticipated revenue growth both in the core business and in DACHEN. As a result, an indicator of impairment was identified and an interim quantitative assessment was performed. And the results of this assessment indicated that the carrying value of the reporting unit exceeded the fair value. As we outlined in the press release earlier this morning, we recorded a non-cash goodwill impairment charge in our medical business of 19.5 million or 52 cents per share after tax to align the reporting unit's book value with its fair value. Excluding the impact of this non-cash goodwill impairment charge, our adjusted effective tax rate in the quarter was approximately 32% in line with the prior quarter. And finally, adjusted diluted earnings per share in the quarter was 58 cents per share compared to 25 cents per share in the second quarter of last year. Now moving to the balance sheet on slide eight, our cash position at the end of the quarter was approximately 169 million. During the quarter, we reduced our net debt to $49 million from $68 million at the end of March, primarily due to strong cash generation from operating activities. As a result, our net leverage ratio was 0.3 at the end of the second quarter, down from 0.5 at the end of March, and well below our target of 1.5 times. Based on the trading 12-month, Consolidated adjusted EBITDA ended June 30th. We had approximately $283 million of remaining availability on our line of credit. And the total available liquidity as of June 30 was $451 million, up from $433 million at the end of March. 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 of Alfmeyer since the beginning of the year. We are maintaining 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 the effects remains at the current levels, and light vehicle production in our relevant market grows at a mid-single-digit rate in 2023 versus 2022. The midpoint of our guidance implies a growth rate of 11% on a pro forma basis, and we continue to expect adjusted EBITDA margin rate to be in the range of 11.5% to 13.5% for 2023. We still expect our adjusted full-year effective tax rate, excluding the impact of the goodwill impairment, to be in the range of 28% to 32%, and capital expenditures to be on the lower end of the guided range of $60 million to $70 million. So with that, I will turn the call back to Phil.

Thanks, Matteo. Now let me summarize. I'm proud of the Global GenTherm team for continued strong momentum in winning awards, delivering record revenue, and expanding profitability. In the second quarter, we secured a record $670 million in new automotive business awards, bringing us to nearly $1.2 billion in the first half. Leveraging Altmyer's industry-leading technologies and GenTherm's strong customer relationships, we have won six Conquest pneumatic lumbar and massage awards since the close of the acquisition, including a breakthrough award from Stellantis in July. We're investing in two new manufacturing plants and implementing our Fit for Growth 2.0 initiatives to deliver high teens adjusted EBITDA margin rate by 2026. The momentum on revenue and awards, combined with the steps we're taking to optimize our footprint and cost structure, will drive GenTherm's flywheel of profitable growth. With that, I'll turn the call back to the operator to begin the Q&A session.

Thank you. We will now be conducting a question and answer session. If you would 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 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. Our first question comes from Ryan Segal with Craig Holland Capital Group. Please go ahead.

Good morning, guys. Thanks for taking our questions. Good morning, Ryan. Maybe we'll just start with medical and then we'll move over to auto. But given the challenges there, does it make sense to operate that business given kind of post-COVID changes and given it's becoming increasingly small relative to the auto business with Elfmeyer and all the traction you have there?

Well, we think so.

We certainly continue just to link it back to the automotive business. Remember, one of the huge value propositions for us is that through our medical business, we develop strong skills in the science of thermophysiology, which ties right back to our climate sense development. So those synergies back to automotive are getting stronger and stronger. No doubt that, at least for the moment, the med device industry, especially related to hospitals' financial struggles, is stressed. And that's what we've been dealing with for the last several quarters. But we really believe we have a plan to grow that business and to make it accretive for the company. And one of the adaptions that we're making, that we're working on making right now is to kind of pivot, especially in North America market, to partnering with some of the large players that can open up the doors in the hospitals for us to move our product, which has been very difficult post-COVID. And one of those we announced was the partnership with Sourcemark. I've been personally involved with that team at Sourcemark and You know, they have very established relationships with the GPOs and the hospitals, and I think that's going to accelerate our growth. We have great product. Our teams in automotive and medical are collaborating very well. So, you know, I still feel pretty good about our roadmap.

Good. Then we'll move over to Otto. A couple questions there. So congrats on the Breakthrough Lumbar Massage Award with Stellantis. Curious what model year or when that starts will start to impact the financials and the shipments start there. And then secondly, how much additional opportunity do you think there is to expand beyond those initial models?

Yeah, it was a huge win. I believe it's model 26 that it would launch. But, you know, anytime you win a first platform with a new customer, it's your opportunity to prove yourself and to scale across other platforms within the customer. So certainly that's the way we are viewing this, and our job now is to go execute in a world-class way.

And then on all the new CCS EV awards, a lot of the trucks, SUVs with your core customers, good to see that expansion. Curious, is that heat cool, heat vent? Curious if the content kind of going into EVs if it's higher or lower than kind of other core CCS platforms with those OEMs. And then I'll maybe stop there. Then one more.

Yeah, I mean, first of all, we are so excited about the win rate of CCS.

And I think it shows by some of the announcements that we're making on which vehicles. The content is high. The take rates are high. you know, clearly showing that our technology is going to make a difference for EV manufacturers. And as we called out, the many, many collaborations and partnerships that we've done on climate sense have really opened the door for us to show the value of not only climate sense, but CCS in terms of power consumption savings and range extension. So we're really excited about that. You know, We announced the specific CCS active product on the X7 and IX7. But for the most part, we're still seeing ventilated CCS as the primary technology.

Great. Well, last one for me, just on the industry production. So even if you adjust for the various, you know, FX and Elfmeyer and the one-time kind of spot purchases last year. I mean, 400 BIFs of outperformance. You guys had been trending quite a bit better than that. You've had award kind of book to bill a lot higher in the past several years. I guess curious if there's anything else in the quarter to call out because it was a little bit of a decel.

Yeah, yeah. We kind of look at it as 400 basis points of outperformance year-to-date 600. And essentially... You know, most things happened as expected. The one thing that was an anomaly was related to a couple of Japanese OEM customers. We have a FAT2 that had some pretty significant production downtime for various reasons. And then there's a couple of vehicles that are ICE sedans that last year we had some pretty, you know, pretty high content that they're changing out those vehicles. So it's a little bit of a timing issue. We expect all that to normalize. And and expect to continue our outperformance trends.

Thanks, Phil. Good luck, guys. Thank you.

Our next question comes from Glenn Chin with Keyport Research Partners. Please go ahead.

Good morning, folks. Thank you.

Hello. Give me a couple more follow-up A couple follow-up questions on bookings. So you mentioned that you've had six Conquest, Pneumatic, and Lumber awards since the acquisition. I don't recall the exact wording in the press release, but it seems to allude that they were revenue synergistic, meaning that they would have been less likely to happen with Alfmeyer on its own. Can you confirm that? Is my reading of that wording correct?

Yes. I think you stated it perfectly.

Okay. Okay, very good. And I think you said that the majority of the bookings were thermal comfort winds versus pneumatic. Can you give us the split between the two this quarter as well as last quarter?

No, we haven't been splitting that, but definitely this quarter was the majority thermal, and we're actually really excited about that because the pipeline of pneumatic awards is really strong. We pointed out that the Stellantis win was in July, so it was outside of the quarter. A lot of opportunities in the back half on the pneumatic side as well, but the confidence I have on our thermal business and the partnership model that we've created is very high. We are the largest independent supplier in the space. We can work with any OEM, any tier one seat manufacturer, and I think that is really picking up momentum.

Yeah, good to hear. And just a clarification on the breakthrough nature of the Stellantis windfill. So is that to say that they were not an Alfmeyer and pneumatic customer prior to this?

That's right. They've never, never supplied Philanthus in pneumatics. Yeah.

Yeah. Okay. Very good. And, um, can you just talk to us about your win rate? Has it been, uh, I know it's been elevated. Has it moved up or down significantly?

Continues to be very strong.

I think you can look at a lot of the nameplates that were winning, and many of those are head-to-head competitive wins.

So it's a very strong win rate.

Yep. Seems to run the gamut. Okay. And then last question. So one of your competitors this morning in their earnings release, in their press release, it seems like they're attempting to encroach upon Climate Census turf. They say that they've agreed with... VALIO to explore integration of HVAC and radiant panel technologies with air thermal comfort seating technologies to optimize, this is a quote, occupying comfort and user experience by extending EV range. Anything you can tell us about VALIO's capabilities there?

I wasn't aware that they had Yeah, sure.

Well, I think the best thing for me to do is talk about our strategy and go-to-market model with ClimateSense. First of all, as you know, we've developed our own ClimateSense software and algorithm that can control the microclimate of every position in the vehicle. And that is done by integrating our software with any HVAC controller on the market. And we've developed our software that has an easy API, one platform that can be integrated with any HVAC system. I think it's really important, and we've obviously worked with almost every OEM around the world, and it's important to understand the dynamics of HVAC as it stands today. OEMs, by and large, develop in-house their own HVAC controls and their own HVAC algorithms and software. Our climate sense integrates with the OEMs developed software and algorithms. They also architect their own HVAC systems for the most part and basically purchase the individual modules and components, you know, create that integrated system in the car. So our model has been to work directly with the OEMs And I believe that's the right model for us. It's paid off so far. So that's kind of where we're at. We have all of our own proprietary thermal effectors, including radiant panels in-house. So I think we're really well positioned. That said, we're, as OEMs desire, we're happy to work with anybody. We can partner with anybody. And that's been our model, that kind of open partnership model.

And we're excited about that moving forward.

And I know in the past, Phil, you've talked a lot about the software component of the ClimateSend system. Is it fair to say that is the, I don't know, for lack of a better term, the secret sauce, so to speak?

Definitely. Definitely. I mean, well, we certainly believe we have next generation innovation on all of our devices. But the ClimateSense software is, it's the heart of ClimateSense. And it can be, it can be employed on a full system, you know, where you have all the components in the vehicle, plus you're controlling, you know, the interface with the HVAC software. But it can also, as you'll recall, we've also set up more scalable model where we've integrated the climate sense software into smart devices. So essentially the smart CCS or the smart heat, smart net conditioning, smart gradient panels, those can all on their own integrate with an HVAC control architecture. So we have really ability to scale climate sense in any way that helps an OEM. I think that's really, you know, that's really been appreciated by the OEMs and we expect to see continued momentum.

Yeah. And can you clarify, Phil, is the software in Klamath's patent protected?

Yes.

Okay. Very good. That's it for me. Thanks very much.

Thank you, Glenn.

Our next question comes from Matt Corenda with Roth MKN. Please go ahead.

Hey, guys. Good morning, and thanks for getting me into the queue. So just a few have been answered, but I wanted to kind of focus in on the outlook for the year that you guys provided. So there's, I think, a decent amount of outperformance versus industry production implied in the second half outlook. So just wondering if you could maybe call out, is there a pickup intake rate or just vehicle mix that you're seeing in the releases that you've got from customers that you can call out to give us a little bit more confidence in the back half numbers?

Sure. New launches is going to be one of the heavy drivers for us. We've got a lot of those queued up for the second half. We expect some recovery. We talked about the Japanese OEMs, those we don't see persisting in the second half. And those are the primary drivers. And we have clear visibility with our releases.

So that's what created the forecast.

Okay, fair enough. And then on the margins or the back half, I think you've got to be kind of north of 13% to hit the midpoint of your EBITDA margin guide. So maybe, Matteo, if you could bridge us from the first half performance, which I think was in the mid-11s into that kind of mid-13% range. How do we get there? What are the big elements and levers of improvement? Maybe, I mean, whether you want to do that via some of the buckets that you called out in gross margin in the release or, you know, core gen-therm margins versus Altmeier. I'll let you take your pick on that.

Yeah, sure. I'll do it both ways. So, you're right. The first half was about 11.5%. We need, in order to hit the midpoint, we need the second half to come in at about 13.5%. So you have a 200 basis point lift sequentially. And there are really three drivers. One is volume. So that would give us, as we are expecting revenue in the second half to be a little higher than the first half, will give us a lift of about 100 basis point. The second aspect is Alfmeier. Alfmeyer has been running in the first half of the year at the low single-digit EBITDA rate. We're expecting to hit mid-single-digit by the end of the year, so you're going to have a lift on the Alfmeyer rate. And that's fundamentally driven by further acceleration on the price recoveries, where Alfmeyer has been a little bit behind compared to the legacy general business. So that's about 40 bps of expansion, sequentially. The rest will come through sourcing savings. As you know, most of the sourcing savings, particularly around rebates, tend to come later in the year, as well as a little bit of a further improvement in productivity of the plants in the legacy gentleman business. So that's the walk. One, I think, important thing to note, particularly as it pertains to the revenue, is that the current outlook that we provided this morning does not assume any impact of a potential UAW strike, which clearly isn't known right now.

Okay, that's great and very clear on the breakouts there. Thanks, Matteo. And then I guess just the last one I wanted to address was that the plant expansion in Morocco and Mexico, maybe just speak to capabilities in their facilities, what that provides you, why the footprint expansion, and then just in terms of the, it sounded like you said you're going to be on the lower end of your CapEx guide. Does your CapEx outlook for this year incorporate costs from those new plants? And then maybe just if you could address total costs in terms of expansion there.

So let me maybe address the CapEx question first, and Phil, you can address the rest. So CapEx in the first half is about $14 million, which is about an even split between maintenance and growth. We are expecting the second half to be in the range of about $35-40 million, and that includes a little bit of CapEx for continuing to build in some contingency related to Ukraine, and then a $5-10 million growth CapEx related to the expansion that you just talked about. And then the rest is really primarily split between growth to fund the new programs that we want and a little bit of maintenance. So that's kind of what we're seeing on the CapEx.

Matt, I'll just talk about the plants. First of all, we've done an extensive search for the appropriate location and we're very excited about expanding our footprint in Morocco. and Monterey for multiple reasons. And what's really driving it, to be honest, is just growth. We've got our record awards. Within a couple of years, we're going to outstrip our manufacturing capacity around the world. We have to do it. There's no real choice. And the other side benefit to expanding in these locations is going to give us a lot more flexibility to optimize our footprint and how we manage our high labor content production in the most cost-effective way. So we believe not only is it going to allow us to reach the growth in front of us, but also to drive our gross margin improvement.

Okay, excellent. I'll leave it there, guys. Appreciate it. Thanks, Matt. Thanks, Matt.

Our next question comes from Luke Young with Fired. Please go ahead.

Good morning. Thanks for taking the questions just for me this morning. Phil, for starters, I was just hoping you could discuss some of your puts and takes in terms of maintaining the sales guidance. I think you're now expecting mid-single digit production growth versus low single digit previously, but we also know there are some risks in the second half in terms of macro and whatnot. Just wondering what the offset is that's Leaving your guidance unchanged and then just low-end versus high-end, how you're thinking about that range of excitations sitting here mid-year on the top line?

Yeah, I mean, first of all, we do it bottoms-up, so we're looking at all the releases from our customers, the vehicle launches, the timing. It's a very precise process that we go through as we're putting it together. Of course, in some ways, by vehicle, we'll have to look at the S&P forecast that's provided. But frankly, this is a bottom-up bill, and this is what's leading to the overall plan.

Okay, fair enough. And then for my follow-up, just hoping bigger picture, you could expand on what you're seeing in the Chinese market more broadly right now, especially is animated by your bookings. We know there's some competing forces there, namely I'm thinking the desire by some Chinese OEMs to keep things in-house versus the drive to include

more tech and comfort features in the car which you can obviously help with just where do you see that pendulum today and reflected in the conversations that you've had this year with those customers thank you sure well you know obviously the rate at which evs are coming out in china's is very high and we i think that's pretty clear on our part by the announcements that we made And along with that, there's two things, two dynamics happening with the EVs in the space. Number one is it's very competitive to grab the attention of consumers. And so the OEMs are desiring to add more features to differentiate their offering. And obviously, thermal comfort, lumbar massage comfort are things that help OEMs differentiate. The other thing is that, you know, clearly we're doing the best we can, and I think a really good job of communicating the power consumption savings of our thermal products in the car. And I believe that's also having a good impact on the win rate. We have a very strong footprint in China, both from a product development side, sales side, customer customer management side, and, of course, production. So it's a very localized business model. China moves at an incredible pace, and you have to be there responding 24 hours a day, basically, to be successful. And I'm really proud of our team. We have just an awesome team in China that is competing hard and winning in that market.

I'll leave it there. Thank you. Thanks, Luke.

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