Gentherm Inc

Greetings and welcome to GenTerm Third Quarter 2024 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 your host, Mr. Greg Blanchett, Senior Director, Investor Relations. Thank you, Mr. Blanchett. You may begin.

Thank you. 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 will make forward-looking statements within the meaning of federal securities laws. These 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 GenTherm'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 will also 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 and investor presentation. On the call with me today are Phil Eyler, President and Chief Executive Officer, and Melissa Clark, Executive Director of Global Financial Planning and Analysis. During Phil's comments, he will be referring to a presentation deck that we have made available on our website at gentherm.com slash events. After the prepared remarks, we'd be pleased to take your questions. Now, I'll turn the call over to Phil.

Thank you, Greg, and good morning, everyone. Thank you for joining our third quarter 2024 earnings call. I am very proud of the GenTherm team for their commitment and focus on delivering strong financial and operating results for the quarter. As you'll hear today, our continued focus on flexible and innovative solutions and strong customer relationships positions us well for long-term growth despite challenging market conditions. I want to start with a review of the three priorities we laid out for 2024 at the beginning of the year and how we're executing against each of these. Our first priority is to lead the industry with new automotive business awards. and executing on an unprecedented award backlog. Year to date, we have secured $1.8 billion of automotive new business awards with a win rate exceeding 80%. This keeps us on track for annual awards of over $2 billion for the second consecutive year. Our record awards are proof points that customers value our partnership model. We work with 50-plus car manufacturers and 30-plus seat makers across the globe. Our position as the largest independent provider of thermal and pneumatic solutions is a key differentiator with both our OEM and Tier 1 customers. We're executing on our backlog through dozens of new program launches, including pneumatics for the Volkswagen MQB platform, CCS solutions on the BMW 5 Series, our first ever CCS launch on the Toyota Camry, as well as our hands-on detection-enabled steering wheel heat solutions on multiple vehicle platforms. We're also launching content with new Chinese OEM customers such as Li Auto, where we launched our CCS solutions, our pneumatic solutions, and hands-on detection-enabled steering wheel heat solutions on multiple vehicle platforms. Second, Our fit for growth initiatives continue to drive improved financial performance with year-to-date adjusted EBITDA margin expansion of nearly 100 basis points, even as we experience lower production volumes than the prior year and significantly lower than S&P global production volume estimates at the beginning of 2024. This highlights our agility to react to fluctuating demand. And third, we're making significant progress delivering industry-leading proprietary innovations. For the first time in the third quarter, our ClimateSense software solution launched on a vehicle. We are demonstrating WellSense with several OEMs and conducting consumer clinics that continue to validate our thesis around consumers' interest and willingness to pay for WellSense. And finally, we have secured our first production awards for Pulse A with Hyundai and expect further awards very soon. We were also awarded Comfort Scale with General Motors. These innovative technologies continue to position us well for long-term growth. This execution is leading to continued outperformance versus market. Our automotive climate and comfort solutions revenues outperformed light vehicle production in our key markets by nearly 800 basis points in the third quarter. When we started the year, We set out these three strategic priorities, and as you can see, we are executing strongly against our plan in a challenging environment. Now turning to slide five for our third quarter automotive highlights. We launched our automotive solutions on 30 different vehicles across 11 OEMs, including BMW, BYD, Geely, General Motors, Toyota, and Volkswagen. I'm excited to announce our first ever launch of ClimateSense on the Cadillac Escalade IQ. Over the past three years, we have been working diligently with General Motors to develop and deliver this unique microclimate solution. Our ClimateSense feature is prominently displayed on the Cadillac website, highlighting the value it brings to this vehicle. I'm very proud of the team for bringing this innovative solution to market. We look forward to continuing our work with General Motors on ClimateSense for the Cadillac Celestic and applying our ClimateSense software to future architecture, General Motors, ICE, and electric vehicles. Our CCS solutions were launched on the Kia K4, Volkswagen Passat Pro, BYD's Yonghuang U9, Skoda Kodiak, VW Magotan, the BMW 5 Series in Asia, and the Audi A5. The Audi A5 is a great example of our expansive presence in the interior climate and comfort of the vehicle. On this vehicle, we launched our CCS heat and vent, our lumbar and massage comfort solutions, multifunction electronics, and steering wheel heater with hands-on detection. This is clear evidence of our market-leading position in both thermal and pneumatic comfort solutions. During the quarter, we launched steering wheel heaters on 20 vehicles, and 14 of these were with hands-on detection technology. Our lumbar and massage comfort solutions were launched on the Audi A5 and Q6 Sportback e-tron, BMW 1 Series, BMW X3, and Volkswagen Margoton. Another highlight of the quarter was the continued acceleration of lumbar and massage comfort solutions. We achieved record quarterly revenue for lumbar and massage, an increase of 46% XFX compared to the same period last year. Customer demand for our pneumatic solutions remains strong, and we expect this to drive continued long-term growth for GenTherm. On to slide six to discuss our awards. In the quarter, we secured a third-quarter record $600 million of automotive new business awards, a key indicator that demand for our products remains strong. For thermal solutions, we won several CCS awards in the third quarter, including several Hyundai vehicles, the Toyota RAV4, Audi Q5, a Great Wall vehicle, the Haval Dargo, a six-seat model in China for one of the largest global EV manufacturers, and the Honda CR-V. And we continue to innovate our CCS solutions. Our CCS award with Great Wall is for our CCS Compact Vent solution. To remind you, CCS Compact Vent is our proprietary modular system which combines a quieter, more compact blower with a novel air distribution module. It provides cost savings to our OEM customers while also generating a better end user experience through improved airflow with less noise. We expect continued customer demand for this innovative and integrated solution. As another example of CCS innovation, we're introducing a new low profile quiet blower that helps our OEM customers significantly improve in vehicle acoustics and noise performance. This was awarded by a large global EV manufacturer for its new six-seat model in China. This award also includes CCS for the rear seats, which demonstrates the growing consumer demand for entire vehicle thermal content. We believe this increased content per vehicle will be a key growth driver for us over time. As the market dynamics in China continue to evolve, we have made great progress over the last few years in diversifying our customer base through our proactive effort to grow our business with carefully selected Chinese domestic OEMs such as BYD, Li Auto, Huawei, Geely, Great Wall, and Xiaopeng. And I'm excited to announce we recently won breakthrough awards with two new Chinese OEMs, Leap Motor and Xiaomi's Mi Auto, both new customers for GenTherm. For Mi Auto, we will provide our thermal solutions, CCS heat and vent, as well as steering wheel heaters with hands-on detection solutions. And for Leap Motor, we were awarded thermal and pneumatic content, including CCS heat and vent and pneumatic lumbar and massage comfort solutions. The award with Leap Motor is our 10th new Global Conquest Customer Award for pneumatic massage and lumbar business. Awards like these will support our continued growth in China. Further, on thermal awards, as we brought our ClimateSense solution to customers, we've demonstrated the EV range extension and superior thermal comfort. This has led to an increase in in-vehicle thermal content, also higher take rates and adoption rates for our thermal solutions. And in particular, we have seen growing interest in interior heated surface solutions. In the third quarter, we won another interior heated surface solution award with Honda on the Honda Pilot EV. Heated automotive interior systems is a growing market that we expect will provide additional growth opportunities for us, as well as increased content per vehicle. We're well positioned to benefit from this development with our unique solutions. For steering wheel heaters, we received 13 awards across eight OEMs, And eight of these awards include hands-on detection functionality, including awards for General Motors full-size truck and large SUV platforms. This steering wheel heater award on the General Motors full-size truck platform caps off a nearly complete sweep of all interior thermal and pneumatic comfort solutions for the General Motors full-size truck platform. This leads me to slide seven. I'm excited to share more about our first Comfort Scale Award, which we secured during the third quarter. To remind you, Comfort Scale is our patented, next-generation, integrated thermal and lumbar massage hardware system. It can be integrated with any foam and with any seat. And it's adaptable for all OEMs and all Tier 1s. It's scalable from an entry-level lumbar and heat system all the way to a high-end Pulse A massage and CCS system. Comfort Scale is expected to drive significant performance improvement for our customers, as well as meaningful reduction in complexity, labor cost, and logistics for the OEMs and seat manufacturers, which is becoming an increasingly more important focus point due to rising costs. For these reasons, along with our outstanding relationship with General Motors, we were able to secure our first Comfort Scale award on the full-size truck platform, including the Chevrolet Silverado and GMC Sierra. GenTherm is well positioned for future comfort scale awards, which we believe is a win-win for OEMs and GenTherm due to improved performance and reduced costs while continuing to increase our content per vehicle over time. I'm extremely proud of the team and the speed at which they brought this new innovation to market. Now moving to the next page for a discussion of our medical business. Our decision to modify our go-to-market business model to leverage large partnerships, distribution channels, and white label opportunities continues to drive improved financial results. In the third quarter, the medical team delivered double-digit revenue growth year over year, led by strong execution and market share gains in patient warming products across Europe, and strong sales of our flagship Blanketrol product in the U.S., thanks in part to our deployment on several U.S. Navy military vessels, including the USS Theodore Roosevelt, USS Somerset, USS New Orleans, and USS America. We're excited about the momentum we are creating with our patient temperature management solutions for the medical industry and the added scientific credibility this gives us with our automotive customers. And now I want to turn to slide nine for more color on the financial results. For the quarter, product revenues increased by 1.5% compared to the same period last year. If we adjust for the impact of foreign exchange, our overall product revenue increased by 1%. Revenues from our automotive climate and comfort solutions increased by 3.3% compared to the same period last year, adjusting for foreign currency translation and the one-time benefits from recoveries in both periods. Actual light vehicle production in our key markets of North America, Europe, China, Japan, and Korea decreased approximately 4.5% year over year, resulting in a revenue outperformance of nearly 800 basis points. It's worth noting that excluding Asia, our outperformance would have been approximately 14 percentage points. While the production environment remains challenging to forecast, We continue to expect strong revenue growth over market over time. Driving revenue growth in the third quarter was our pneumatic lumbar and massage comfort solutions and our steering wheel heaters. Revenues from lumbar and massage increased by 46% XFX due to the ramp up of the Volkswagen MQB platform, several models with Ford, and increased volumes with a large global EV manufacturer. Steering wheel heaters revenue increased 11% XFX due to the start of production of the LiAuto L6 and ramp up volumes with BMW, General Motors, and Mercedes. The remainder of our automotive revenue that was not related to automotive climate and comfort solutions decreased as expected. This is due to our previously announced plan to phase out certain non-automotive electronics and battery performance solutions products. and our strategic decision to begin pruning lower growth, lower margin programs in our cable business. The results for the third quarter demonstrate our ability to grow revenue even in a declining production environment. Turning to medical, revenues increased 10% XFX. The medical team improved profitability sequentially for the second consecutive quarter as a result of the new go-to-market strategy I discussed earlier. Now moving to adjusted EBITDA, in the quarter we achieved $48.1 million. The adjusted EBITDA margin rate for the third quarter was 12.9% compared to 13% in the third quarter of last year. The adjusted EBITDA margin rate was relatively flat year over year. We expanded margins through our continued Fit for Growth initiatives, including supplier cost reductions and value engineering activities. This was, however, offset by headwinds from the startup costs from our new plants in Mexico and Morocco. While the one-time costs associated with opening the new facilities are near-term headwinds, these plants will play a significant role in our fit-for-growth margin expansion over time. Operating expenses were $62.5 million in the quarter, relatively flat compared to the prior year. Finally, adjusted diluted earnings per share in the quarter were 0.75 cents per share compared to 64 cents per share in the third quarter of last year. The year-to-date effective tax rate was 25%. Moving to the balance sheet on slide 10, our cash position at the end of the quarter was approximately $150 million, and our net debt stood at $71 million, a decrease of $27 million from the prior quarter. We generated $46 million of cash flow from operating activities, which was deployed to $20 million of capital expenditures and $20 million of share repurchases. And we have repurchased more than $130 million of shares since the beginning of 2023. In line with our capital allocation strategy, we opportunistically repurchase shares given our strong belief in the value of our business. Our net leverage ratio was 0.4 at the end of the third quarter. And based on the trailing 12-month consolidated adjusted EBITDA ended September 30th, we had $278 million of remaining availability on our line of credit. Total available liquidity as of September 30th was $428 million. Now, let me turn to slide 11 for our 2024 guidance. Based on our results for the first nine months of 2024, including lower third quarter revenue than we expected, and our outlook for the fourth quarter, we are updating our 2024 full-year guidance. Due to continuing deterioration of light vehicle production in our relevant markets, which began accelerating in September, as well as supply chain inventory adjustments, especially by our Tier 1 customers as they adjust to lower demand from OEMs, We are now expecting revenue between $1.45 and $1.47 billion. This assumes light vehicle production in our relevant markets decreasing at a low to mid single digit rate for full year 2024 versus 2023, as well as mid single digit decline in the fourth quarter of 2024, lower than S&P Global Mobility's mid-October forecast. This is based on the latest information we have from our customers and our expectations of near-term conditions. This also assumes a Euro to US dollar exchange rate of 1.08 for the remainder of the year. Despite the market declines, we expect our fourth quarter automotive climate and comfort solutions revenues to outpace production in our relevant markets at a similar level as the third quarter. Even in the midst of the challenging production and revenue headwinds, we continue to execute on our Fit for Growth initiatives, which we expect will help us deliver an adjusted EBITDA margin rate near the midpoint of our original provided range of 12.5% to 13.5%. Our full-year effective tax rate and capital expenditures guidance remain unchanged. Now, wrapping up with a summary of our progress on our 2024 priorities. We are winning record awards and executing on new launches. We've expanded our EBITDA margin by nearly 100 basis points year to date, while light vehicle production is down over that same period of time. The demand for our new innovative solutions is accelerating. This is driven by consumers' growing demand for interior climate and comfort experiences. and OEM's response to increased vehicle adoption, content per vehicle, and applying higher take rates. As a result, this continues to position us well for long-term growth. I'm proud of the team's achievements year-to-date, which clearly demonstrates significant progress towards our key priorities as we look to finish the year strong. And with that, I'll turn the call back to the operator to begin the Q&A session.