Gentherm Incorporated (THRM) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Gentherm 2016 Third Quarter Results 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, Kevin Dougherty [ph], Investor Relations for Gentherm. Thank you, Mr. Dougherty. You may begin.

Thank you, operator and good morning everyone and thank you 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 Investors page of the Investor Relations section of Gentherm’s website. During this 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 discussions of various risk factors and uncertainties underlying such forward-looking statements. 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, we have Mr. Bud Marx, Chairman of the Board; Dan Coker, President and Chief Executive Officer; and Barry Steele, Chief Financial Officer. Management will provide a review of the results, after which there will be a Q&A period. I would now like to turn the call over to Dan. Dan?

Yes, good morning. Thank you, Kevin and good morning and thank you everyone for joining us today. We had a pretty solid quarter, not fantastic but good. And before we start, I would like to comment a couple of themes that have been in the news lately. The first is the auto industry is notoriously cyclical and those of you who have been watching in the news noticed last week that Ford Motor Company has made announcements that they are reducing production for the fourth quarter. This is a result of diminishing demand, particularly for some of their pickup trucks and SUVs. We have seen in the last 30 days a buildup of inventory in the North American marketplace. This is very significant for us, because the North American marketplace is where we generate around 50% of our revenue. So, as we look out into the future, we see a little bit of uncertainty in our core market, the auto industry on a global basis. In fact, Barry is going to give you some details in a minute, but several of the major auto markets have shown softening. We, as early as the second quarter, we saw continued signs of strength and there are economic underpinnings that would indicate that there is still strong consumer need for vehicles on a global basis, particularly here in North America. The average age of the fleet continues to be at all-time record highs, but the economic uncertainty and this case in the U.S. political uncertainty I think has put a damper on demand for autos. The auto cycle is typically 5 years in length and goes up and down with its own little cycles. We have seen a very robust recovery from the 2010 global economic and auto recession, where the volumes around the world drops to record low levels. As an example here in the U.S., run-rates went from somewhere around 17, 18 million units down to about 9 million units in a matter of months. We are not forecasting anything like that, but we do see a slowdown in the overall demand globally, specifically here in North America. Because of this, we have adjusted our outlook for next year to indicate instead of our normal 10% to 15% revenue growth, we are anticipating 5% to 10% revenue growth. So, that will be one of the things we are talking about today. We are going to make sure that people understood where we were with that. The second thing that’s important to mention I think is that the competitive landscape is always very aggressive in the auto industry. There have been a couple of things in the news lately talking about competitive aspects to products that are being introduced to compete with our core product, the climate control seat systems. We have seen many of these concepts in early this year, I think it was April or May, Magna released at one of their earnings conferences an indication that they were working on a heated and cooled seat design of their own design and that was a product that was anticipated to be coming out sometime in the next, I think they said 5 to 7 years, but it would certainly be 3 to 5 years away from the market. We are aware of this concept. It’s also something that’s very similar to a concept that is now being looked at by Lear Corporation and that has been developed by a company called Timtronics in Tucson, Arizona. These systems rely on thermal electrics for heating and cooling, but they use a completely different approach than our system that’s been in the marketplace for over 15 years. We focus on convective energy. They focus on conductive thermal energy. So, we see these systems. We know what they are. We are aware of them. We are also aware that there are challenges that have yet to be overcome to introduce these and get them ready for auto production, but we are aware of them and we see them in the marketplace and our product continues to evolve and improve and become more efficient on a daily basis. So, with all of that said, we want to make sure that we have an opportunity to get a lot of questions in and I know that Barry has a lot of details that he is dying to share with you. So, I would like to turn the call over now to Barry. And then after Barry speaks, we will open the floor for questions. Barry?

Thank you, Dan. Thanks, everyone for joining us today. Our revenue in the quarter grew by about 4% to $232.6 million, which was an increase of $8.8 million. This included $98 million or 5% in higher sales for our automotive segment and $14.9 million in new revenue from the company we acquired earlier this year, Cincinnati Sub-Zero or we like to call CSZ. These gains were partially offset by lower revenue for Global Power Technologies, or GPT, our remote power generation subsidiary that sells into the energy sector. GPT’s revenues were off by $16 million. This softness was caused by large project deferrals similar to the previous two quarters. It was more pronounced in this quarter due to the fact that a significant amount of GPT sales in 2015 came in the third quarter making for a very difficult comp. In the automotive segment, we had double-digit revenue increases in theaters, thermal heaters, but slower growth in our climate control seat products. As in the prior couple of quarters the impact of new program launches have been less significant than prior years due to a number of reasons. When we launched new programs, the amount of new revenue that we see can vary due to timing of the launch, success of the vehicle in the marketplace, fill at our customers, option application rates and our customer’s decisions on marketing and pricing of option packages. The 5% growth in our automotive segment continued to outpace that part of the automotive industry, where we have our greatest presence. Half of our revenue comes from the North American market, which according to IHS grew less than 2% during the quarter. Additionally, automotive production in Europe which represents about a quarter of our automotive revenue actually declined about 2%. Automotive production in Asia which was much higher at nearly 23% increase for the quarter, but this growth was mainly in China, a region which produces vehicles with much lower comfort and convenience content. Most of our revenue in Asia is the customers in Japan and Korea which also showed a decrease in production volumes. Our preliminary revenue forecast for 2017 indicate that we will continue to see high single-digit revenue increases, but the growth will not be from the same product sources. For example, CCS growth will experience some headwind as some of our customers, which in the past had only developed active heat and cool climate seats for their vehicles begin rebalancing their product offering between heated and cooled seats for their luxury cars versus lower priced heated and ventilated seats more appropriate for their mid range vehicles. Other existing products will then represent a more significant part of the growth such as the continued rapid increase in the heated steering wheel product, some recovery for GPT and some nice growth coming from CSZ’s medical business, where we are expecting benefits from some product improvements, new products and it goes from a change in our sales strategy that involves hiring a direct sales force to take the place of independent product reps. In addition to these benefits, during the fourth quarter of 2017, we will see some early revenues from some of our more advanced new products such as the thermoelectric based battery thermal management device or BTM as we call it. After 2017, new products will be the catalyst that boosts our growth back to double-digit range. We are making the investments in these new products today, which come in the form of capital expenditures to expand production capacity and spending on engineering and development resources. That brings me to our operating expenses, which totaled $49.3 million, which was again significantly higher than the prior year quarter, but about the same as the second quarter of this year. About half of the increase in operating expenses which totaled $11.8 million or 31% came from new operating expenses from the CSZ acquisition or about $5.4 million, most of this on the SG&A line. The rest of the increase comes in the form of investments or higher development costs for many new product initiatives. Some of which we have announced like the battery thermal management and electronics products, some of which we have not announced, also offer overdue improvements to our business systems. About $12 million of the total operating spending is attributable to these initiatives and activities. Just to be clear that’s not the interest in the prior year, but the current rate of spending for these investments whose benefits begin to hit the top line in 2018. The new business systems by the way include both the human resources information system which will help us grow and develop the talent of our team members and a new product life cycle management system which is needed to increase our product design and development capacity. Both systems will also drive improvements to our efficiency and productivity of these critical functions. The spending for these two infrastructure projects were about $1.3 million during the quarter. About half of this cost is for implementation and will increase during 2018, after which as the installations are completed the costs will then decrease. All of these investments will continue to be financed through our current operating resources. So far this year, we generated $71 million in operating cash flow, although we also spend about $50 million in capital expenditures. The capital expenditures have primarily been driven by capacity expansion for new manufacturing facilities and production equipment for some of the new products. At the end of the quarter, we had a very low level of net debt leverage with $150 million in cash and $142 million in outstanding debt. We also had $125 million in available borrowing capacity under our revolving credit facility, bringing our total available liquidity along with the cash to $258 million. That’s all I have Dan.

Alright. Barry, thank you for your usual comprehensive report. Operator, if it’s okay, I think we will open the floor for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Koranda with ROTH Capital Partners. Please proceed with your question.

Good morning Dan and Barry. Thanks for taking the questions.

Good morning Matt.

Just wanted to start off with the preliminary guidance for 2017, I am wondering if you could maybe discuss the sensitivities around 5% to 10% growth that you have guided, so I assume that you have won most of the platforms that you are going to win at this point in the automotive segments, are the x factors mainly take rates and then adoption on the program level within those platforms, just talk about the visibility that you have into that figure?

Yes. That’s exactly right. We have pretty much won all we are going to win for next year. The variabilities are exactly that, when the launch dates are – take rates occur and the success of these vehicles in the marketplace as Barry has pointed out. We have seen some experience during 2016. Early on in this year we saw some program deferrals and that’s another thing that hurts us in being able to pinpoint exactly what we think our revenues are going to be. Matt as you know, we are not exactly where you would call a SAAR company. We don’t really directly depend upon the number of vehicles being produced in the world. We are a comfort and convenience items that is usually targeted towards the high end and upper mid range vehicles. When these kind of stresses appear on the marketplace, a lot of our customers, the OEMs in particular on a global basis tend to react in a very conservative fashion that means they don’t push to rollout new vehicles. They don’t spend a lot of money adding new features to new platforms and they tend to be very shy about what they see in the future. We are seeing some of this right now from Ford Motor Company and GM as production schedules this week have been reduced for the fourth quarter and that’s an indication that demand is softening here in North America. So for us, that was enough of a trigger last week when we saw the production schedules coming from Ford and GM that we felt like we had to make sure that the market understood that 2016, 2017 are going to be bumpy years and that we are to make sure that everybody is aware of that. When we see schedules, we make sure we try to let you guys know what’s going on, so that’s why we reduced our guidance from our normal 10% to 15% revenue growth down to 5% to 10%.

Matt, I think I would just add to that that it’s not just the automotive business we have. We are counting on a little bit of recovery for GPT, although if you look at our range, there is some flexibility in that. And the – our medical business for Cincinnati Sub Zero, this a change we are making to put direct sales force in place, we are pretty sure that will have some good benefits fairly quickly. It will pause a little bit as the sales force will be actually on the payroll, but it will – we think that will have pretty good benefits. And there are some other things happening in that business that will show some growth in the near-term as well.

And that’s an extremely good point that Barry makes about global power. A lot of our sales issues this year, our revenue issues this year have been a direct result of the weakness in the oil and gas industry where our global power unit has been struggling. In fact as Barry pointed out in his comments, there was a $16 million quarter-to-quarter miss this year in terms of revenue. And that’s very significant in one quarter. And we are beginning to see new orders coming in for this division for 2017 and ’18. So we are beginning to see some strength in that area and that brings a little bit of confidence back if that area may be recovering slightly.

Okay, that’s helpful color guys. Just one more thing on 2017, Dan I think you mentioned there were some launch delays that happened earlier this year, does anything in the guidance for 2017 envision you guys picking up those delays or not picking up the delays, but essentially recovering those delays in 2017, are those factored into the 2017 guidance?

Yes. We believe that these programs should come back on, that’s what the customer is telling us. So right now and we have got those booked.

Got it, okay. And then I wanted to touch on the CCS growth rate, if we could for a second, it looks like roughly 2% year-over-year and I know you guys have kind of called out the shifts over towards heated and ventilated away from heated and cooled, is there anyway to break out or just qualitatively at least talk about the growth rates relative – the relative growth rates of heated and ventilated and heated and cooled within CCS?

Yes, that varies as we predicted in the last 5 years – actually maybe even 10 years, last 5 years for sure. There is a huge upside to the heated and ventilated business on a global basis and we see that is being a very strong driver for growth for us for the future. Heated and cooled is still we believe a very solid growth rate, but we believe that is going to be much more targeted towards the high end luxury market. And we believe that the heated and ventilated systems will be – become much more prevalent in the mid-range vehicles. So as Barry pointed out in his comments, many of our customers had been exclusive CCS products customers. And that product goes on not only their high end vehicles, but a lot of the mid-range vehicles. As we mentioned with economic pressure, a lot of those customers are now looking to rationalize the product offering and we believe that they will offer both heated and cooled and heated and ventilated systems. So looking forward, CCS growth will moderate and we believe that the heat vent systems will become much more prevalent and much more popular, particularly in that mid-range area where we see a lot of increased interest and strength. The car companies are beginning to accept the concepts that we have exposed for years that the seat is an excellent delivery point for thermal energy inside the cabin of the car to provide increased comfort for the seat occupants or car. The car companies are now beginning to work with us on concepts of being able to expand the use of heated and cooled and heated and ventilated systems as a part of the overall HVAC strategy, something that we have been calling for years the zonal heating and cooling and we believe that that has a lot of strength under it and in coming years not next year or the year after but in coming years, we think you are going to see a lot of activity where the seat system will be integrated with the HVAC system as well.

I would add to that, to say that there is a lower price system generally although sometimes the amount of content we get and tune off somewhat to a certain extent but we get similar margins, so our value add is similar and so we are able to command above the same nice margins in that business. The other thing is that we talked about – Dan talked about new technologies that other some of our customers are exploring. We have new technology, new ideas and new types of systems that we will be introducing in the future as well. So we’ve always worked on CCS and they better and we will continue to do that.

Okay helpful guys. Just a follow-up to that, I mean if CCS moderates overall but heated and ventilated is accelerating, I mean, is the natural conclusion here that heated and cool is going to be flat year-over-year in terms of growth on a go forward basis or how do we think about sort of just you know the relative growth there?

Well it’s easy to say that the heated and ventilated system growth will certainly outpace the CCS systems. There are situations where CCS that are currently on midrange vehicles will be replaced by heated and vent. So yes, there will be pressure on the CCS growth rates and some of that will be picked up by the heat vent systems. But there will be continued growth available in the future for us for heated and cool but a tremendous opportunity for heated and vent. This is one of the reasons that we acquired our partners at WBT. They were the world’s largest manufacturer of heating elements and the best manufacturing company that we could find in the world to help us build all of our products. We now have the best heater mat in the world and that coupled with our very specialized fans and blowers and air distribution system have allowed us to introduce in the last couple of years a very, very competitive heated and ventilated system that is specifically designed or vehicles where power is an issue, and the mid-range vehicles always have a difficult time with their power budget. The heated and cooled since draw quite a bit of electricity and that has to be generated at some place. Mid-range vehicles don’t have that type of electrical capacities and so having a heat vent solution is a very big advantage for us.

Got it, okay. Maybe there is one more on the CCS front, is there anything to sort of the idea that OEMs could potentially be decontenting vehicles on comfort items in favor of increased connectivity so you know are you hearing anything from your end customers that, look they’ve got a fixed dollar amount to spent and need to shift some of that spending toward more connectivity and telematics relative to some of the comfort items like the heated and cool seat. Is there something to that thesis at all?

I don’t really see or hear a lot of that type of conversation, in fact we actually see the opposite. A lot of people are asking us how we can get these types of products in future vehicles but I don’t think that’s really that type of budgetary type of decision. If there was any budgetary discussion, I think it’s focused on getting the mid-range vehicles, power budget and cost budget as Barry mentioned, the heated and ventilated seat systems are several dollars cheaper per unit than the heated and cool systems. So I don’t think it’s really driven by needing to spread the money to other areas and we don’t really have anybody looking to drop heated and cool at all but we do have people looking at adding heating vent systems.

Okay, alright. That’s helpful. Just last one for me on the – and you guys talked about Tempronics in the prepared remarks. But just wanted to, I mean the heart of the matter just seems to be that OEMs need to or really requiring you guys to kind of boot efficiency and lower cost here but in particular I am really curious as to what you guys are doing with future generations of both your heated and ventilated and heated and cool product to drive better efficiency are there step changes that we expect in the next iterations of your products that would enable you to sort of compete with the potentially lower cost solution if that lower cost solution ever does make it to the commercial phase?

Well the answer to that in a broad sense without sounding like Donald Trump is that you know, we have constantly, spectacular things coming. We got some really big things that we are working on. Barry alluded to the amount of spending that we’ve had. We are putting a lot of money in R&D. We always spent a lot of money on R&D because we are a technology company, that’s what we do. We are making our technologies better and we have some concepts and ideas that we are working on that we have not talked about that I believe will greatly enhance the attractiveness of the headed and cool seats in the marketplace and when those get introduced, they will be quite significant and I think – we will continue to prove that we are the leader in this segment and we are the technology leader by far. A lot of the things that are being looked at and talked about today have some serious packaging issues and frankly that we believe they have some serious cost issues that they have to deal with before they can even come to the marketplace. We have been in the market for 15 years. We are really good at doing this. We are very significant in terms of our strengths, in terms of packaging and we are very flexible in terms of what we – what space we need and what area we need in the seat to be able to perform well. A lot of the other ideas that you are hearing about in the market have yet to be able to be qualified to go into automotive OEM production. Many of these are cost challenges and are also very serious packaging challenges.

Okay. Just last follow-up that I have to ask in terms of you mentioned some of the new concepts that could potentially be very attractive and lower cost. Any sense for timing, can you put a timeframe on that?

You mean for us?

Yes, for you guys?

Well, I just quote Donald Trump. You quoted me wrong. I didn’t say they were lower cost. I said that what we are trying to do is to find better solutions and that includes better technology, easier packaging, more power and we are always concerned about cost. So, we believe that those products will be in the market in the next couple of years.

Matt, maybe I could say it in a different way. We do see ways to improve the product significantly without increasing the cost, a competitive advantage I would say to other things that are being shown in the marketplace today.

Obviously, Matt has used up his quota and moved out of line.

Thank you. Our next question comes from the line of Christopher Van Horn with FBR & Company. Please proceed with your question.

Good morning, guys and thanks for taking my call.

Good morning.

So, I just want to, I want to get into the heated seat and the heated steering wheel business because those were the highlights for us in terms of seeing the growth in the quarter. Is that a new platforms rolling out or higher takeaway rates of existing customers? Can you quantify maybe the split of what you are seeing in those two businesses?

Chris, it’s a combination of both. It has been a strong segment for us obviously but we are seeing this good strong take rates. I think, it probably has to do with, you know, how many vehicles these products actually cover it’s many, many more programs that you see in this space. So there is strong take rate [ph] and there is some penetration in the marketplace that we have been able to achieve and some more additions to rear seats and that sort of thing. Certainly heaters have been strong for quite some time and we see that continuing for quite some time, many, many more vehicles will have steering wheel heaters that haven’t had them in the past.

And we are also seeing some recovery, a little bit of strength in the seat heater business in Europe which has been very helpful and Barry says, the steering wheel heater is a new product for us and we have a very interesting approach to how that product is applied to the vehicle and that has been very popular and we are getting lots of penetration and lot support whenever we get into a program that is a very popular feature from the consumer side.

Got it. Thanks for the color there. And then can you just quickly comment on the decline in other automotive, was it just a timing thing or was it you know maybe take rates kind of an adversive what we saw on steering wheel?

Two main drivers there is in our comfort and convenience group, we have the heated cup holder product. There was a program that balanced out, so there will be a little bit of a period where we have a lower level of revenue there but we have a couple of new programs coming that will be launched next year I believe, so that will come back. There is also with us very small aftermarket business that we have that has tended to be little bit up and down, so that was a small part of that change.

Okay, great. And then just one final one from me. On GPT, I mean you are still booking revenues, right and so it’s still kind of a recurring revenue type business, is what you are seeing, are you still booking new business in that category, is it existing customers just ordering more and then on that front, when you get an order in GPT, how quickly does it roll out to the revenue line? Thanks.

Well there is a couple of factors and it’s very good question. GPT is kind of a hybrid business for us. It’s a combination. They have part of their product lines, what I would kind of call a catalog list where they have standard products that have very short lead times and are technically used in like a service application for repair, maintenance and repair type business. Another big piece of their business which we are very excited about is what we call the custom area where the more system level approach is taken to a project all the way up to including power management and distribution actually vehicles and buildings that are produced and many of these have long lead times. The order log that we see right now for GPT is very solid and is building, so we are seeing strength coming back in. GPT is very much a global business hence the name Global Power. They are concentrating in new markets, in new areas that are bringing new demand for our services around the world. Right now, last year, Southeast Asia was hot and we took a lot of steps to get new business there. This year, we are seeing lots of business in South America, Central America and Southeast Asia. So the business that we see for them, it’s a lot more unusual than the typical automotive business that you see. It was very clever of us to try to diversify out of the automotive business but we happen to be clever enough to pick the oil and gas industry at a time when the oil and gas industry collapsed. We are beginning to see strengths in the gas market and gas pricing has stabilized and gas sales and exploration is beginning to pick up, that’s typically where we do the most of our business with GPT. So in answer to your question, the order log is solid, it is building, and we expect to see some recovery beginning next year.

Got it. Thank you very much.

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

Thanks. Good morning, Dan, Berry.

Good morning.

Good morning, sir.

So CCS has been beaten to death I think but just a question as it relates to margins, this mix shift from heat cool to heat vent, does it have any impact either positive or negative or otherwise on the margins, or is that just strictly cover revenue headwind?

It certainly have a revenue headwind of types but even when I say that, there is a definite price difference between heat cool and heat ventilated product but the lower price allows the heat vent system to sell in much more significant volume than the heat cool does in a midrange vehicle. Those cost savings are actually very significant in terms of what we believe the mid range customer will take. In terms of the gross margin, the percentages are very similar. We have a very simple formula about how we like to supply our products to the marketplace. Although that said, obviously taking a similar gross profit against the lower sales number there will be some impact on the gross profit dollars. But the gross profit margin percentages are very similar.

That’s very helpful. So with that said, gross margins were strong again this quarter relative certainly to the last couple of quarters. Is there any change to how we should think about that in terms of a range, I think you’ve kind of if I am not mistaken you said kind of the 30 to 32 range something like that and it was nicely better than that this quarter. Anything should change there going forward?

I don’t think so. Actually, what we actually say is that our gross margin targets were in the low 30s right now and that’s where we believe that we have been able to stabilize. That ebbs and flows with quarter-to-quarter based upon product mix and customer mix around the world, we happen to have a pretty good quarter, this quarter. We weren’t that embarrassed by last quarter. So we think that the margins are well within our targets and they are I would say well within our model and there is still room for improvement. So we are working to try to find ways to get better cost improvements push the SAR systems so that we can continue to offer our customers price enhancements and still be able to make little bit of money at the end of the day ourselves.

Steve, I would add to that. Now that we have GPT recovering a little bit in 2017 and the medical business growing, you will see some, in term outside the automotive space, we are seeing a little bit better margins, so that will help free things up a little bit but not that dramatically as we look to next year.

Okay. And then lastly for me, your guidance both for Q4 but more specifically for 2017, does that anticipate any further production cuts or is that just sort of based on you know what they have told you as of today?

We believe it’s a wide enough range to cover everything that we have been told so far. Obviously, if there is a cash conclusive [ph] event and the markets all fall the hell in a hand basket, we are not going to be within these guidance. But we believe that what we see right now that number we gave you guys the 5% to 10% for 2017 is pretty solid and should be quite attainable for us, but we are giving, we always give a range because we don’t know exactly what’s going to happen and – but we believe that it’s going to be, there is going to be pressure on the automotive industry and that’s going to be something that we have to make sure that as a conservative company, we prepare not only the markets but also our own internal businesses, we are trying to adjust spending, we are trying to adjust our capital spending, we are trying to adjust our supply chain businesses to make sure that everyone is staged and ready for what we believe is going to be, you know, a bit of a period, a pressure for the auto space.

Very good. Thanks, guys.

[Operator Instructions] Our next question comes from the line of Gary Prestopino with Barrington Research. Please proceed with your question.

Hi good morning.

Good morning.

Just in terms of your know, your elevated expense levels on OpEx, is that something, and I was trying to write down as you went through your narrative Barry, but is that something we should continue to see throughout 2017 as well?

Gary, there will be some additional cost as we get deeper into the infrastructure improvements we are making, this is the software system, the business systems, you know…

But those are fairly insignificant…

Yes, there is half a million a quarter that sort of thing. So I think that will be fairly steady. If you see increases therefore likely opportunities that [indiscernible] things.

So to answer your question, it would probably be fairly steady to where we are with a little bit of slight pressure for inflation and a couple of projects that we are picking up in terms of infrastructure.

Alright, so as we go forward, like your OpEx was about 21% of revenues this quarter, it should – certainly shouldn’t be as high next year?

What we are saying is that the run rate should be steady with that maybe just increasing little bit but not, I am not talking about the percentage of revenue, we are talking about the actual spend? The actual dollar spend.

Alright, $31, okay.

So the growth should be able to drive the bottom line little easier.

Okay. And then could you just explain something, tell us, we are kind of scratching our heads here, you know, you said the CCS business experienced year-over-year softening, is active by customer driven timing decisions on incorporated products into certain automotive lines, is that, that really deals around with the take rates, it’s not that they are not putting in your product, in the malls, it’s just the take rates, or is there some issue with models you thought you were going to be on or not, you are not on? Is that, I am trying to understand that?

It’s more Gary the timing of expanding within a overall platform, one model to another outside the timing of getting on certain packages, what you call, bundles or option packages, features, it’s not that current vehicle program has been canceled that was effecting us, it’s more, these decisions the OEM has about kind of broadly expanding within a overall platform and different nameplates and packages and just what end up what the take rates end up being.

Well just for our purposes, I mean, why would they if you are dealing with like say a Chevy Impala and there is all sorts of different like letters denoting different models, why would they push back on that? I mean, shouldn’t it be more of a selling point to even have this on the lower end cars, lower end models of you know existing platforms?

Actually Gary, here is where you are confused. You are using logic and that doesn’t necessarily always apply when dealing with some of our customers. That’s exactly what a normal person would do. You would definitely try to add enhancements and features to make your product more appealing during the downturn. Most of our customers tend to go the exact opposite direction and there is a good reason for that. It’s an economic reason. It cost money to add a feature to a product line. If you are going to add something, it cost millions of dollars to do the preparation work and the testing and evaluation to make sure that that new feature is going to be perfect when it rolls through your products. So the real reason that most of these people defer is because of that cost factor or the secondary reason is because of complexity of launch. It’s a very, very complicated situation when you take 25 to 30,000 components and you have to put them together in two and half minutes absolutely defect free. So there’s a lot of work, a lot of planning, a lot of money is spent getting ready to launch vehicles. As they get into this process, sometimes they find out they’ve overreached and it gets very complex and they pull back a few things to make sure that everything goes smooth on the launch. And then they come back and add the additional features at the – after the – what we call job one has launched and stabilized then they come in and add additional features.

Alright, thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Coker for closing comments.

Well, thank you. I think all those questions were very appropriate and hopefully they illuminated some of the concerns and issues that people have had. Our stock is getting under a lot of pressure beginning in the early part of the year when we saw the Magna announcement that a competing technology came out. We saw additional pressure when Lear announced an investment in Tempronics, which also has the potential competitive technology but we continue to be the strongest in the – player in the marketplace. We continue to be the technology leader. We continue to dominate the space that we are in. It’s a position we work very hard to achieve and we continue to invest very heavily and work very hard to continue being the best answer when any of our customers think about needing heating and cooling. The example of this and this reputation that we've achieved is the Battery Thermal Management products which will be rolling out as Barry said with very small revenues beginning at the end of 2017 with very good strength in 2018, 2019 and 2020 where potentially $50 million worth of additional revenue came to us because of our reputation of being able to heat and cool devices in a mobile sense. So we believe that we are on the right path. We do believe that we see some weakness in the marketplace and that’s something that we have to address. So we have definitely adjusted our outlook for 2017 to 5% and 10% but we still believe there's lots of good opportunities in the marketplace, we’re also continuing to see strength in our diversification efforts where we have invested in an industrial business that generates power remotely, and we’ve also invested in a industrial environmental chamber business, and we have a new medical products groups. Our electronics business which we didn't seem to talk much about today is one of our bright stars as well. We are seeing lots of interest and we are actually winning contracts today from outside customers to support their needs with electronic control modules and specialized electronic control devices. So we believe that all of these things combined continue to make Gentherm a strong player and a source of future growth not only in the automotive business but also in the industrial business in heating and cooling technologies. So we ask everyone to please join us again in about 90 days, we will talk about our yearend results and we will give more color and flavor on 2017. Thank you all for coming.

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