THRM - NASDAQ

Greetings, and welcome to the Gentherm First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Yijing 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 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 may discuss non-GAAP financial measures as defined by SEC Regulation G, including certain pro forma measures related to the Alfmeier 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 Eyler, President and Chief Executive Officer; and Matteo Anversa, Chief Financial Officer. During their comments, Phil and Matteo will be referring to a presentation deck that we have made available on our website at gentherm.com/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 Alfmeier 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 Alfmeier, 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 our first quarter. We won a 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 Alfmeier 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 4. In the first quarter, we launched our automotive solutions on 17 different vehicles across 9 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 XT 3, 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 ClimateSense growth. In addition to ClimateSense, 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 5, where you can see that in the first quarter, we secured $480 million of awards in automotive. Since the announcement of the Alfmeier 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 2 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 Alfmeier 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 CRV, 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 control 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 MK

Okay. Thank you, Phil. Let me turn to Slide 7 and focus on the items that most significantly impacted our first quarter results. For the quarter, our 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 Alfmeier 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 earnings 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. Lumbar 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 BMWs 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 plant in Europe. And Valve systems revenue decreased 9% on a pro forma basis due to lower production volume in China for VW, SGM and SAIC. Turning to Medical. Medical revenues increased approximately 13%, ex-FX, 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 Alfmeier acquisition, legacy Gentherm 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 noncash 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 cost to support new programs wins. Finally, adjusted diluted earnings per share in the quarter was $0.49 a share compared to $0.41 per share in the first quarter of last year. Our adjusted EPS calculation includes the impact of noncash 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 8. 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 [ph] 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 1.5x. Based on the trailing 12-month consolidated adjusted EBITDA ended March 31, we had approximately $266 million of availability in our line of credit and the total available liquidity as of March 31 was $433 million, up from $419 million at the end of December. Now let me turn to Slide 9 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 Alfmeier 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 billion 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 FX 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 million 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 demonstrates 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 Alfmeier 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. [Operator Instructions] Our first question comes from the line of Matt Koranda with ROTH MKM.

Hey guys, good morning.

Good morning, Matt.

On the bookings, good morning guys. On the bookings front, the $480 million, it sounded like a good amount of Alfmeier content may be in there. Just any breakdown on the balance between thermal comfort versus lumbar and massage?

Yes. 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 is additional potential in the pipeline for the additional combined content. Just curious if 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, it's -- yes, I would say we're -- we have quite a bit more interest than we had anticipated, especially from the more traditional Gentherm customer base that Alfmeier 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 traditional Alfmeier 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? Revenue up significantly, obviously, I think Alfmeier 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?

Yes. Sure Matt, good morning. Maybe the best way to do this is to talk about the legacy Gentherm business. So 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 the -- what legacy closed, excluding a little bit of an adjustment that we had due to the exit on the non-automotive electronics, the gross margin rate in legacy came at about 26.5%, which is a nice improvement year-over-year. A couple of key drivers, volume leverage is accounted for an expansion of about 250 basis points. We saw, as expected, freight costs 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 bps. So I think really great performance by the team. And again, we are 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. I noticed, you reiterated the guide for the full year, makes sense. Just any additional commentary on sort of the seasonality or cadence for the rest of the year here, is it's still expected to be sort of 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?

Sure. 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. The -- if I look at where we need to be in terms of the EBITDA rate, you really -- for the next three quarters, on average, the EBITDA rate needs to be about 12.9%, right, to hit the midpoint. And really, if you bridge from the 11.5% 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 points of margin expansion. Alfmeier is going to be in the 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 these are the increases that, for us, kick in on April 1. So that's how we bridge from the EBITDA that you've seen today -- we reported today towards the midpoint of guidance for the next of the year. I think overall, 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 the -- on the other side, the environment remains volatile, and we also have to do -- 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 on where the team came in, in the first quarter.

Okay. Super detailed and helpful. I'll leave it there guys, thank you.

Thank you, Matt.