Gentherm Incorporated (THRM) Q1 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Gentherm 2015 first quarter conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Mason. Mr. Mason, you may now begin.

Thanks very much. Good morning and thank you for joining us for the Gentherm 2015 first quarter conference call. Before we start today's call, there are few items I would like to cover. In addition to disseminating through PR Newswire this morning's news release announcing Gentherm's results, an e-mail copy of the release was also sent to a number of conference call participants. If you need a copy of the news release, you may download a copy from either the Gentherm website at gentherm.com or the Allen & Caron website at www.allencaron.com. Additionally, a replay of the conference call will be available via a link provided on the Events page of the Investor Relations section at Gentherm's website. During this conference call, representatives of the company may make forward-looking statements within the meaning of federal securities laws. These statements reflect current views with respect to future events and financial performance and actual results may materially differ. Please see the company's SEC filings including the latest 10-K and subsequent reports for a discussion of various risks and uncertainties underlying such forward-looking statement. During the call the company may discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in the company's earnings release. On the call today from Gentherm, we have President and Chief Executive Officer, Dan Coker, Chief Financial Officer, Barry Steele and Chairman, Bud Marx. Management will provide a review of the results, after which there will be a question-and-answer period. I would now like to turn the call over to Dan. Good morning, Dan.

Good morning, Mike and thank you to everyone for joining us. Gentherm had a very good quarter for the first quarter of 2015. Barry is going to give you some details in a second, but we were very pleased that with all of the headwinds that we see in the world today that we were able to achieve $207 million quarter-end revenue and we made nearly $20 million on the bottom line. So we think this is a very exciting and good solid quarter. It's a continuation of several years worth of very good performance by our team. We are quite proud of everything that's been done and we will continue to try to push for our 2015 goals as stated in previous guidance. Right now, we are going to have Barry give us some details about how the quarter actually turned and then we are going to open the floor for discussion as we normally do. Barry?

Thank you, Dan. Welcome everybody. I would like to begin today with a format change announcement. For many years, including the 10 years I have been with Gentherm, we have always published our earnings announcement before the opening of the market and then spoke to investors several hours later in a call such as this today. Starting with our next quarter results release, we will be scheduling our call with investors to occur so that investors have an opportunity to hear management speak the market begins it trading session. We are most likely to make the announcement in an after-market session and schedule our call shortly thereafter. And important driver of this year's first quarter results is the impact of a significantly stronger dollar. We are a global company with operations in North America, Europe, Asia and are exposed to currency translation in a number of ways like many other global companies. In general, the stronger U.S. dollar has put some pressure on our reported product revenue, but has resulted in lower production and operating cost that have more than offset the unfavorable impact. Our earnings for the 2015 first quarter was $0.55 a share on a fully diluted basis. This represents an increase of $0.08, or 17% over the first quarter of 2014. This improvement comes from our continued product revenue growth but also is enhanced by the strong dollar impact I just mentioned. Our product revenues for the first quarter were $207 million which represented an increase of $13 million or 7% over the first quarter of 2014 product revenue. We achieved this despite the significant foreign currency translation headwind coming from our Euro denominated sales in Europe. In the first quarter, Euro-U.S. dollar exchange rate has been the same as the prior year first quarter, our revenue for the current quarter would have been $10 million higher and represented an increase of nearly 12% over the prior year period. Similarly had this exchange rate been the same as the 2014 fourth quarter, our product revenues would have been $5 million higher on a sequential quarter basis. This quarter, our gross margin was 32.2%. This compares with a gross margin percentage of 29.4% for the prior year period and 30.4% for the fourth quarter of 2014, the prior quarter. This represents an increase of 2.8% on a year-over-year basis and 1.8% sequentially. Just as a reminder, the amount during the 2014 fourth quarter included a one-time benefit associated with our warranty reserve totaling $3.7 million, offset partially by some one-time expenses in that same quarter totaling approximately $2.2 million. We didn't have these occur again in this period. Had these one-time items did not occurred, our gross margin would have been 29.6% in the fourth quarter of 2014. A number of favorable factors contributed to the increase, including a favorable impact coming from the stronger dollar, most notably against Ukraine hryvnia and the Mexican peso which accounted for about 1.8% of a year-over-year gross margin percentage increase. Other benefits included better coverage of fixed costs by higher product revenue and a shifting mix in products favoring climate control seats. Our operating expenses were $39.5 million during the first quarter, representing an increase of $7.5 million. Two-thirds of this increase come from two items, including the regular operating expenses of Gentherm Global Power Technologies, the newly acquired company that we acquired during the second quarter last year, which totaled $2.3 million and $2.7 million from our equity incentive plan a part of which is accounted for on a mark-to-market basis of Gentherm common stock, which increased significantly during this year's first quarter. Not including these items, the increase in operating expenses would have been $2.5 million or 7.8%. Much of this remaining increase reflects increased resources that are being directed to development of existing and new product and the related market activities of those new products which we expect will continue to support our product revenue growth target. Our fourth quarter adjusted EBITDA was $34.1 million, which was $1.6 million or 5% higher than that of the prior year period. Turing quickly to the balance sheet. Our cash totaling $79.6 million at the end of quarter, decreased by $6.1 million from the beginning of the year and our total debt is $85.8 million which also decreased by $5 million. These amounts, both decreased partially from the decline in the euro exchange rate, as we have some of our cash and some of our debt in the Euro. Additionally, $8.8 million in cash was provided by our operations but was more than offset by capital investments in our manufacturing capacity totaling $10 million. The positive operating cash generation was achieved despite investing approximately $17 million in additional working capital on a currency adjusted basis. We continue to have approximately $85 million in available borrowing capacity on our revolving credit line, giving us plenty of liquidity available for the future. Dan, before I turn it back over to you, I just wanted to reiterate the news that the next quarter earnings release will be issued after the market closes and we will be scheduling our call with investors later that same evening.

All right. Thank you very much, Barry, for that detailed report. I really don't have anything else to add this quarter. I think the results speak very well for themselves. So we would like to open the floor for questions. So, Kristin, would you please queue up the questions for us?

[Operator Instructions]. Our first question comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your question.

Hi, Dan. Hi, Barry. Congrats on the quarter. So the first question I had was on the revenue growth. You reported first quarter revenue growth of 7% and you are targeting 10% to 15% for the full year. So maybe can you help us with, like how to think about the cadence going forward in the different quarters, because obviously you are going to see some fluctuation here in the revenue growth? But is it like a similar 2Q before you see the launches coming in and helping get a step up in 3Q? how should we really think about the cadence here?

Certainly. Good morning, Samik. What we have said in the past about this year, which is still true, we saw that the first half of the year would be a little bit lighter than the second half. We believe that we are still on track and we believe that we will continue our guidance based on what we know today at the end of the first quarter. So we see a stronger second half because of some new product introductions that are coming in and we see that the operations should be better in the in the back half the year. So we are not break it out by quarter, but for the year we still today feel comfortable by stating that we are going to continue our guidance.

Okay. That's great. And then on the gross margin, I know Barry touched upon a couple of factors that were benefiting gross margins here including maybe currency was one, but operationally, given that you had a sequential improvement in the gross margin here compared to 4Q, operationally what do you think was really getting better? And if currencies stay where they are, is there anything that we should keep in mind that will really make you not hit that 32% number gross margin for the full year?

We are actually pretty comfortable that we are targeting the 30% number. It goes a little bit above and below in each quarter. There are variables that we cannot foresee but we are very confident right now based on where we are that the 30% target that we have and have stated is real, realistic and attainable.

Okay. And maybe my last question here. On the GPT business, you did revenues of $7.5 million in 1Q. Now again for that business, is that a good run rate for the next few quarters? Or are we going to see like a ramp up in that business as we go through the quarters?

You are definitely going to see a ramp up as we go through the future quarters. The first quarter was a little bit light due to some internal procedures that we took to help smooth out the order systems and we believe that we are going to have a very good second quarter and the second half of the year is going to be strong for them as well.

Okay. Good and sorry, just a follow-up here. On the new facilities --

Samik, you only get five questions per quarter now. Come on, Samik, just hog the line.

So just last on here on new facilities that you are investing in, are there any sort of drag yet on gross margins?

Not really, no.

Okay. Great. Thank you.

All right. Thanks a lot.

Thank you. Our next question comes from the line of Matt Koranda with Roth Capital. Please proceed with your question.

Good morning, Dan and Barry. Thanks for taking my questions. Just wanted to start out with gross margins here. I wanted to try this from a different angle. So you guys, I think in the release, had talked about being comfortable with gross margins in the 30% range. I just wanted to clarify with you, you guys in the past have talked about gross margins being more in the 28% to 30% range. I mean is that incrementally better? Are you guys adjusting your gross margin guidance upward to some degree with that language?

What you heard to say in the past and I still think that's true, is that we have been targeting 28% to 30%. We have hit 28% to 30% fairly consistently the past few quarters and we feel like we see a 30% target as being kind of a realistic goal right now. So that's not really a big change over what we have been saying, but if you look at what's happened in the last three quarters, we are pretty much there.

Okay. Great. And then the 30% gross margins, is that commentary for the full year 2015? Or are you guys are talking on a quarterly run rate?

We are really focusing on a quarterly run rate, but we don't really look at it that way. We don't sit down and say, okay, the second quarter has got to be 30.1%, the third quarter is going to be 29.8%. We are trying to get everybody to understand that gross margins shift quarterly. We are looking for an average of something in that 30% range and I think that's going to happen and we have seen it pretty reliably lately. And I think that the teams have worked very hard to keep our cost in line and get our business to a situation where our model generates the 30% gross. I think we are okay with that. And I think we are comfortable with that.

Okay. Great. That's helpful. And then on Europe, the commentary in your release sounded really good. It sounded like you were saying Europe is showing very good signs of strength. I was wondering just to get your thoughts on how the European recovery in new vehicle registrations is impacting your sell-in into European customers on your existing platforms? What do production rates look like and especially if you could just comment on April and maybe the last couple of months prior as well?

Well, we are very encouraged by the economic activity in Europe, is a general statement. The automotive industry is beginning to solidify and we see that in increased activity in the first quarter in our European business. It is somewhat clouded or exceeded actually by the currency exchange rate valuation issues, but we do see in future bookings that the business is getting stronger and we expect 2015 to be a good year for our European operations. It should also be noted that part of our European revenues are actually booked and billed in dollars. So not all of our business in Europe is in Euro. So we have a little bit less of an impact of the Euro-Dollar exchange rate than some companies do. But we do see the business activity, the shipping activity in the units and activities in the marketplaces being increasing in the first quarter and we see it in the second quarter and we believe it's going to continue for the rest of the year.

Great. One more from me here on acquisitions. What are you seeing in the pipeline currently? Could you characterize the nature of some of the opportunities that are out there in terms of end markets that you may be able to address? Just wanted to get your latest thoughts on the potential size or timing of an acquisition as well? It would be helpful. Thank you.

Okay. Well, we are always interested in finding new opportunities. We do try to keep our eyes open for anything that has to do with a new technology, some new process or some new market that we want to access. There is nothing that we have to report or announce right now, but we do have -- our teams are looking and we are evaluating a couple of different ideas that we think would be beneficial to the company of Gentherm and to our shareholders.

All right. I will jump back in queue, guys. Thanks.

All right. Thanks, Matt.

Thank you. Our next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your question.

Thank you for taking my question. Dan, you had mentioned a pick up in the revenue cadence in the back half of the year and your wording was new product launches. Is that in fact a new product? Or is it just new programs?

It's programs, primarily.

Okay. Would you anticipate any new products generating revenue this year that are not at the moment?

Not really. Nothing that would be significant for sure. I think you have heard from all of the things that we were going to see. We are beginning to generate revenue from our new cold storage box. We have got some pretty exciting new programs, actually the Ford Mustang launched in the early part of this year and that's generated what, Barry, $ million or $5 million?

$4 million.

$4 million, $5 million in revenue by itself. So we have a couple of really nice new programs coming on stream that we are pretty excited about those.

Great. Directionally, operating expenses, would you anticipate them to grow at the rate of revenue growth or not as fast or flat? Or how should we think about that directionally?

Directionally, I would say that for right now, you are going to see them grow fairly close to the numbers that you see today, but as we accelerate growth in the future, you are going to see us grow our operating expenses at a lesser degree than you will see the revenues grow.

Okay. Thank you.

All right. Thanks, Steve.

Thank you. Our next question comes from the line of Gary Prestopino with Barrington Research. Please proceed with your question.

Yes. Good morning. Most of them have been answered, but just getting back to that operating expense issue. Would you expect that the SG&A expenses are going to be running at close to over 12% of revenues as they were on this quarter? Was there anything maybe of one-time nature dealing with, I think, you were talking about your stock plan or whatever that impacted that?

Gary, the stock plan added expense to this quarter over the prior year by $2.7 million, driven largely by the increase in the stock price itself from 12/31 to March 31. If that would happen again, we will probably see that expense again. If it doesn't, then we wouldn't necessarily see as all of it. It's still amortized at the higher value. So it wouldn't necessarily go down specifically, but we might not see the same ramp up as we did in this quarter.

Okay. So it's going to be based on the stock price, right?

That's correct. But if we mark-to-market a small portion or about third, rather, of our stock compensation.

Okay. And then in terms of the tax rate, I believe you had said that the tax rate when we had the Q4 call, would be about between 27% and 28% or 26% to 28%, somewhere around there. And it looks like the tax rate was down precipitously year-over-year, not precipitously, but it wasn't at that 26% to 28% range. So what -- go ahead.

It's 25%. It's looking like, based on our estimates and how our profitability falls by various countries, it is a little less than we had thought in terms of a percentage rate. So that's what we are seeing right now for this year is about 25%.

So we use the 25% tax rate?

Yes.

Okay. All right. And then I was going to ask about the newer products like the cool bin storage, you already addressed those. What about the armrest products? Are they out in the market now?

Yes. The heated interior products are in the market on a couple of platforms and are doing nicely.

And then what are you still developing there? You are still developing the mats on the cars and some other things?

We are developing lots of things, most of which our customers will not allow us to talk about, but when they are introduced to the market, you will recognize our signature.

Okay. All right. Thank you.

Thanks, Gary.

[Operator Instructions].

Don't encourage them, Kristin.

Our next question comes from the line of Chris Van Horn with FBR Capital Markets. Please proceed with your question.

Good morning. Thanks for taking my call.

Good morning.

Could you talk a little bit about the GPT business and what kind of product line is driving that ramp up in revenues that you foresee in the back half of the year?

Sure. Well, the business is basically generating power where power is not available. The thing that we see in our bookings going forward are the full product line for a general GPT, we call it the GPT. So we see a resurgence that kind of begins in the second quarter and kind of rolls through the full year. We are pretty happy with how 2015 looks. We have set some lofty goals for our team and they are working very hard to deliver on those goals. So we are pretty sure that we are going to see some pretty good results.

Got it. And if I think about the margins within that business, is that generally in line with where you are and where the firm is today? Or do they lay a little bit higher? How do I think about that?

The margins at GPT?

Correct. Yes.

Yes. The margins there are more akin to a high-grade industrial technology provider, much higher than the automotive world.

Okay. Got it. And then could you just comment on, you mentioned last quarter that President's Day was kind of the start of the mattress season. Could you just comment a little bit on what you are seeing in that market? And if there were any revenues during the quarter?

The revenues during the quarter were very light but we do see kind of a pickup in the second half of the year for the bedding business. Our partner has kind of rededicated and refocused themselves on where we are heading in the bed market. They have developed some very nice point-of-purchase materials. We have changed the bed format a bit at the end of last year and that new bed is now in production. We have also introduced into some new markets within Mattress Firm system the product. They are running a very nice TV commercial ad that focuses on the heated and cool bed as a strong exclusive feature available at Mat Firm. So I am very confident that things are going be looking very good in the second half of this year.

Okay. Good to know. And then one last question if you don't mind. Could you talk a little bit about rear seat penetration in terms of heating or heating and cooled and what you are seeing in the marketplace?

What we are seeing in the marketplace that the rear seats are beginning to get more attention. We are certainly seeing a proliferation of heating in a broader group of vehicles. And we have seen a fairly good penetration of heating and cooling systems in backseats of the high-end cars in particular. As a special note, the Asian markets adapted the rear seat conditioning for heating and cooling much more rapidly in the high-end vehicles because the owners of the vehicles tend to sit in the rear of the car. But we do see that trend continuing where climatizing the seats in the rear is becoming more and more a norm as opposed to a rarity.

Got it. Thanks for taking the call and congrats on the quarter.

[Operator Instructions]. There are no further questions at this time. I would like to turn the floor back over to management for closing remarks.

All right. Well, thank you very much, Kristin. I would like to thank everybody for attending and thank everyone for their usual probing questions. This is always a great exercise for Barry and I to experience each quarter. We get to hear what you are looking for . We were very pleased with the results of the first quarter and we believe that the second quarter and the second half of the year are going to continue to be very good for Gentherm. We want to again thank all of our associates worldwide, of which there are now more than 10,000 of us working to the advantage of Gentherm. We also want to thank all of our vendors and all of our partners that help us deliver this technology to our customers and we think that the outlook for 2015 is going to be very positive for the company. And I think that the economies that we serve around the world are going to continue to be strong. So we would like to end this call with a little bit of housekeeping to remind everybody that we have already told you that we are going to change the format of how we release our earnings press release and 8-K and then how we schedule our call. So Barry, once again, why don't you remind everybody how this is going to go next quarter.

Thank you, Dan. We very much look forward to hearing from all of you in late July, a day much like today, only after 5 o'clock. We will release our earnings after the market closes and we plan talking to you immediately thereafter at a date to be determined.

And that will be published at least one week ahead of time and everybody will have a chance and opportunity to sign in. So again we thank everybody for attending and we ask you to join us in late July to hear how the second quarter wound up. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.