Greetings, and welcome to Gentherm Fourth Quarter and Full Year 2018 Earnings Conference 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, Investor Relations and Corporate Communications. Thank you, you may begin.

Thank you, Sherry, and good morning, everyone. 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 Investor Relations section of Gentherm’s website. During this call, we may make forward-looking statements within the meaning of Federal Security laws. Statements reflect our current views with respect to future events and financial performance. We undertake no obligation to update them and actual results may differ materially. Please see Gentherm’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, we may discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to their comparable GAAP financial measures are included in our earnings release. On the call with me today are Phil Eyler, President and Chief Executive Officer and Matteo Anversa, Chief Financial Officer. Please note that during their remarks, 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 all for joining us today. 2018 was a transformative year for Gentherm. While headwinds across automotive industry presented some challenges, I’m pleased that we were able to deliver record revenue and automotive award levels for full year 2018. In addition, our Fit-for-Growth cost reduction initiative began to generate positive impact. While we demonstrated initial progress in 2018, there are certainly opportunities for further improvement in 2019. Before Matteo gets in to the details of our financial results, let me step back and look at all that we’ve accomplished in 2018. As shown on slide 4, it’s been just over a year since I joined Gentherm and we’ve driven significant change over that time. Let me spend a few minutes talking about how we’ve repositioned the company and some of our achievements over the past year. We’ve restructured the organization around the one Gentherm concept of a global business. To lead the organization going forward, we’re leveraging the strong internal executives with the years of successful experience at Gentherm and we’ve augmented team with proven external talents from industry-leading companies such as GE, Sprint, Pepsi, BD Medical, Fiat Chrysler and Panasonic in functions such a finance, medical, battery thermal management, technology and human resources. This has resulted in what I believe to be a truly world class team and I think it speaks to the optimism about our company going forward. We completed a strategic assessment in just under six months which resulted in a breakthrough transformation strategy that we shared with you back in June. That assessment has resulted in several things, we clarified the company’s’ mission, we identified a plan to divest and minimize non-core businesses, we created a focused growth strategy around automotive and medical verticals, which involves four…

Thank you, Phil, and thank you to everyone joining the call today, I am excited to be here and I look forward to speaking and meeting many of you in the forthcoming future. So if we start from slide 9, I will focus my prepared remarks on the items that impacted our fourth quarter results. For the fourth quarter; our product revenues declined year-over-year by 3.5 million or 1.4%. A 2% increase in the automotive revenues was more than offset by a 26% decline in industrial. If we adjust for the impact of FX in the Etratech acquisition, our overall organic revenue declined by 2%, with automotive growing 1% and industrial declining 26%. The 1% organic growth in the automotive segment was achieved despite headwinds in global vehicle production. According to IHS latest data for our key markets of North America, Europe, China, Japan and Korea, light vehicle production in the fourth quarter declined almost 6% year-over-year. More significantly this compares with the forecast in mid-October of a relatively flat fourth quarter, which was a negative swing of approximately 600 basis points. Our automotive business outpaced the market, as a result of new program launches and take rate improvement. The revenue increase in automotive was driven by strength in our Climate Control Seat product line, which was up 5%, as well as battery thermal management which was up more than three times year-over-year, due to the new product launches that occurred throughout 2018. Steering wheel heaters were also contributor with revenues up 3%. This revenue increase was partially offset by a 10% decline in seat heaters, primarily due to lower volume with European OEMs. Etratech’s volumes were down 13% on a pro forma basis, due to sedan platform cancellations with certain automotive OEMs, as well as a slowdown in the…

[Operator Instructions] Our first question is from Chris Van Horn with B. Riley FBR. Please proceed with your questions.

Looking at the 2019 guidance could you give us some of your assumptions for underlying industry production, and then kind of the puts and takes of that 4% to 6%, how we think about that as timing of launches or new business rolling on? And then on the same lines on the margin side, how much are you kind of - you’ve identified 37 million - you identified 65 million, you’ve had $37 million, what are you kind of thinking about for the Fit-for-Growth contribution in terms of the margin range?

Sure Chris. We’ll start with the growth side; we’ve basically taking the best estimates we have through the February release of IHS data, which basically says flat year-over-year, and if you look at the trends throughout the year, the first couple of quarters show a little bit more movement in the down direction and the last half comes back a little bit. So that’s basically what we’ve got in the model, and we’re comfortable that we can achieve our results given those latest forecast. In terms of our 4% to 6% growth, the lion share is new launches, new vehicles, and it will continue to grow with new technologies, certainly our climate and comfort business continues to grow with share and take rate and new launches in that period, so we’re pretty excited about that momentum heading into 2019. On the Fit-for-Growth side clearly we’re moving pretty fast on the operating expense side of the equation, and we’ll continue to see some momentum on that in 2019. We’re shifting our focus now to the opportunities we’ve identified on the gross margin side, which as you know, a significant part of our cost structure is in cost of goods sold. So we’ll be looking at efficiencies, we’ll look at our global footprint for manufacturing, and several other realignments there that we think will help us achieve those gross margin targets that we laid out going forward. So I think we’re pretty comfortable on those, and obviously we’re going to be really aggressive as we move forward.

And then just for a follow-on, a lot of new business seems like it’s coming from CCS, and you saw some good topline growth in the quarter from that business that in the past does that kind of seen some challenges as people switch from various technologies? I’m just wondering if you could offer some commentary on how you see that business going forward, it seems like customers are shifting back to maybe into more active (inaudible) and just what you’re seeing in the marketplace on the CCS side.

Sure. We’re really proud of the growth we continue to see even in this tough market on the CCS side, it certainly speaks to the momentum we have. When you look at the technology movement, it’s still definitely trending on the CCS event side with wins and launches, but given the movement toward electrification and the focus on fuel efficiency, we’re seeing lots of interest in active and that’s from customers in all regions. So we’ll continue to announce wins on the Active side and we’re excited about continuing to inform you of those wins that will be coming. But that shift really toward Active is going to be beyond the 2021 period, as we start winning those awards.

Our next question is from Steve Dwyer with Craig-Hallum Capital. Please proceed with your question.

On the 4% to 6% product growth that you had outlined for 2019, are you able to or willing to breakout sort of how it splits between the medical business and the auto business?

Well, we’ve not given a kind of detail on that, but I would say that the medical business is growing at a little faster rate relatively. But as you know, it’s a very small business compared to the overall company.

And then looking forward to the 2021 and the reiterated guidance there, revenue growth of high-single digits organically would imply a pretty significant reacceleration in 2020-2021. Given sort of what we’ve seen from IHS ratcheting down their production estimates and so forth, what sort of gives you the confidence that you’ll get that, and if you’re talking about sort of mid-single digits this year would imply double-digit organic growth in 2020 and 2021 to kind of get to those numbers. So, is that sort of based on the design wins that you’re seeing or new wins something like that, maybe a little more color there would be great.

Sure. Well clearly it’s the win rate, as we start layering in all these wins that we’ve been amassing over the last two years plays a big part of that, and that’s across multiple technologies, the CCS of course is a big part of that. We also continue to see growth in the battery thermal management business; it’s going to reach its higher run rate toward the end of 2019, so that’ll play a big part of it. We also see pretty strong growth coming in the medical business, both culminations of those three elements.

And then lastly from me along those lines, you just referred to battery thermal management sort of reaching the run rate, I assume that’s sort of based on those initial couple of design wins. Are you seeing sort of additional interest there, would you expect to add more nameplates going forward?

Yeah, definitely, we have a host of technologies there the thermoelectric BTM, that we couldn’t be more excited about our extension with Mercedes. I think that speaks to the value proposition of the product. So we certainly expect more from that product going forward. As I mentioned a couple of quarters ago, we’ve got some development contracts that are under way. But on top of that, we’ve got some very interesting technologies around air cooling, we’ve got heating and we’ve got some (inaudible) connecting product in that mix. So I think there’s going to be a nice run rate of growth in that whole business area.

Our next question is from Gary Prestopino with Barrington Research. Please proceed with your question.

Phil, you mentioned some factors and looking at your gross margin going forward, could we just revisit them and maybe you could kind of rank order them in terms of where you see the biggest impact to gross margin betterment?

Yeah. I will let Matteo take that question.

So I would say in order of importance back to Phil’s comment, we are shifting more attention of the Fit-for-Growth initiatives on the variable cost side. I think all the actions around improving our manufacturing footprint and efficiencies of the plants, the value engineering, reducing waste, the plan that I think is going to be the bulk of where you will see the gross margin improvements. In addition to this, I would say the continued work on the purchasing (inaudible) by achieving lower cost, either through piece price reduction or rebates from our supplier that we definitely rank the second and then the rest.

Those are the actions Gary, but if you look at the quarter and the 27% versus the normalized 30% from last year, I would categorize it one-third, two-thirds, about a third of the gap was related to our own operational issues. So some of the efficiency issues, one-time effects of expedited freight, and the ramp up of our Mexico plant, two-thirds was related to market factors such as - obviously in the fourth quarter the overall volume came in lower and that affected everybody in our space. We also had a one-off effect of a steep decline in orders or order cancellations from a couple of European customers, one of them was this cable customer that dramatically cut our orders, and left us really - we had no time to really respond to that at the end of the quarter, same thing on key business toward the end of the quarter with European customers. So that combination was about two-thirds of the problem we had in fourth quarter.

I guess what I’m getting at, obviously improving the footprint would be one thing, but in terms of some of these things like efficiencies, waste, have you been like applying six sigma principles at the plant or is this something that you are really going to go full [blow], because you can continually improve your gross margin if you get continually better at running your plants?

Yeah I think that’s exactly right. As I mentioned, we focused most of the year one Fit-for-Growth activities on operating expenses, getting those back on track. I think we’re showing good progress there. And through the year we’ve identified opportunities with the gross margin, but now we’re in a stage to really start the solid execution of those. And those fall into two buckets; the bigger bucket is more of structural changes, where most of the cost savings would come, whether that’s footprint rationalization, how we manage the network, make versus buy that kind of thing. May be smaller bucket would be the in-plant efficiencies. We’re really proud of our plants, I think it’s a proven competitive advantage for us as a company in terms of our quality and the talent we have in the plants, so I think there’s a really good culture of execution in the plants, and we’ll just continue to go after that.

Okay and then just a couple of more here. In terms of Cincinnati Sub-Zero, I went through the press release, I didn’t see it here. What is the annualized revenue of the medical business at this point? Can you make that public?

It’s in the neighborhood of 30 million.

Okay, so medical is 30 million, okay. And your guidance is really pegged-off of the auto business, the medical, but there’s nothing in there, we should not consider anything for more power generation just kind of treat that as a discontinued op as we got our numbers together?

Yeah, GPT Investment and CSZ Industrial Chambers have all taken out of that altogether.

Okay, that’s fine. And then lastly at the auto show plenty of SUVs, crossovers and all of that. Are you still seeing that attitude, as we transition away from sedans into these light trucks and all of, that there is more of an appetite for your CCS products in steering wheel heaters and things like that?

Yeah, I think that’s true. We’re generally on the trucks and SUVs, we have a little bit higher take rates, and it seems like the OEMs are competing more and more on these comfort convenience features in the vehicle, so we definitely see that trend. We are facing the challenge of roll off of sedan though, that certainly - those announcements by some of the big players that has a negative effect in the short run, and we’re hopeful that SUV and truck market continue to overcome that, but certainly that’s been a factor, and it will continue to be a factor in the next year as end of production comes on some of these vehicle.

Our next question is from Ryan Brinkman with JPMorgan. Please proceed with your question.

What is your expectation for the China market this year? What’s the latest you’re seeing on the ground there in terms of demand for the vehicles, new supply, and then anything that might be happening with your take rates there, and also if you could just remind us of your revenue exposure and who your biggest customers are?

We definitely got growth in China in 2019, and a lot of that is coming from, well it comes from two places, we still have growth in penetration rates with our international OEMs that are operating in JVs in China, and then we’re going to be launching several programs with domestic OEMs, such as Geely, and Great Wall and GAC as we roll into the new year. The China market is now about 100 millionish in revenue, and we see that as significant upside in the years ahead. But certainly the bulk of the growth is going to come more in the out years as we win more vehicles and the take rates pickup.

And then how should we regard the lower R&D in 4Q, how much of this was due to the higher than normal level of customer reimbursements, which I would think is probably more of a timing related issue, versus how much is coming from maybe your efforts to better focus the business and entire R&D to revenue-generating activities, the benefit for which, I imagine, would carry forward (inaudible) and do you have an outlook for R&D that you can share?

Yeah, it’s definitely coming down, that’s coming down, we did see a little more decline in the quarter given the higher reimbursement. But we will definitely see it on a normalized basis coming down from 19% to 18%, and that’s built into our OpEx target that we put out there the 19% to 20%. That said, in the four key areas of growth, we are adding resources and we’re funneling more into those areas that will offset some of the savings. So for example, the Battery Thermal Management business, our new Climate Sense Solution, certainly on the medical side, those areas are getting some reinforcements in terms of R&D expertise.

And then last question, have you done any work to try to understand the potential impact of Section 232 to your business, if those tasks were to be extended from steel and aluminum to also include autos and auto parts and perhaps while answering that if you could give us an update on the Section 301 and your efforts there to try to mitigate some of the impact of those tariffs to your margin?

I think if you look at our estimate of 3 million to 5 million, it captures everything we see right now that we know about. And we’re still working to offset those; I think the team has done a good job. If you look at our previous estimate, we originally expected to have double that impact in 2019, so we’re really happy with what we’ve already mitigated through supplier changes, supplier location changes and even some of our own internal manufacturing locations. We’ll continue to work on that, we’ve got some other ideas in the hopper, but as you know, in automotive, making design changes and supplier changes takes time, you have to go through qualifications, you have to get approvals from customers and the like. So I think we feel comfortable with the 3 million to 5 million at this point.

Our next question is from Matt Koranda with ROTH Capital. Please proceed with your question.

A question in regards to one you answered earlier Phil. I think you mentioned that the take rate is growing this year for you guys, just wanted to clarify, do you mean you’re seeing a mixed tailwind in 2019 as OEMs produce more high tuned vehicles with your content or is CCS just being put down into the mid-term level vehicle?

It’s a combination; we’re seeing current vehicles that were on apply the technology at a higher take rate, so just market take rate going up. We’re also seeing adoption rate, so vehicles that in the past haven’t had the technology are now launching with it, and by the way the supplies to CCS, heat steering wheel, that kind of lump all that together. And then on top of that, you add increased content in the specific vehicle. So rear seat, as we’re seeing rear seats with heat, we’re seeing rear seats with full CCS, both passive or both (inaudible) and active and all those things kind of coming together to drive our take rate. The reason you’re seeing it surprisingly in the large SUVs, we’re are seeing it in the third row.

Okay, interesting, and then just in terms of gross margins that you mentioned, I think that two-thirds of the issue with gross margins was essentially sort of the end of quarter adjustments that you saw from some customers, was this better than thermal management launch sort of the balance of that headwind or were there additional headwinds in the quarter?

That was in the on-third. Sorry, go ahead Matteo.

So the impact of the battery thermal launch was about 60 basis points, and then the (inaudible) in the freight makes the rest. Sorry.

Okay, that’s helpful. And assuming that that launch essentially goes to plan toward the back half of the year, that then becomes a tailwind, is that embedded in the gross margin outlook sort of at the midpoint or is that sort of what gets you to maybe the higher end of the range that you highlighted?

I think we are expecting that the margin on the BTM to improve, but I would still say that the gross margin of BTM in ‘19 will still be dilutive compared to the total company. That’s the way I will portray it.

And then in the Fit-for-Growth actions and sort of a longer term gross margin improvement action, you guys did highlight footprint actions a fair bit in your commentary today. Just wondering timing-wise, when do we sort of have to see those additional announcements around footprint action for some of the footprints to have to take hold by 2021? I would assume we’re going to need to see it by middle point of this year at the very least to start to see that kind of flow through to the gross margin improvement, is that fair?

Yeah, definitely, we’ll be announcing this year and start working on those adjustments this year.

Okay, got it. And I hate OpEx questions, but I have to ask one more, so the 18% to 20% that you guys highlighted implies about 200 million of annualized OpEx. But even if I annualize sort of what you did in Q4, and I ex-out sort of the one-time R&D reimbursement something you got, it still sort of puts me in the 190 range. So any help there in terms of the gap?

Yeah. I think we’re going to keep prudently investing in R&D. That’ll be your delta. As I mentioned, our strategy is focused growth and we got it, we have to invest in those technologies. The core of our company is competing on technology and innovation, that’s what we’re all about, and we’re really going to prudently portion resources into those growth areas.

[Operator Instructions] Our next question is from Anthony Deem with Longbow Research. Please proceed with your question.

So, a few from me, it sounds like all the Fit-for-Growth operating cost benefits also included in the 2019 guidance. If that’s the case, we’re looking at a 300-400 basis point improvement expected for 2020 to 2021 operating expenses as a percentage of revenue, right. So I’m just wondering if this is simply accomplished by excluding GPT, is that a restructuring payback timing issue or was this guidance for the 300 to 400 basis point improvements, is that based primarily on leverage on higher revenues? I think that was about 100 to 150 basis points before in the upgrades to the lower operating expenses? So, just kind of wondering if you can dimension those issues, and if that is the case what’s driving it?

So I think I would say the major one it’s definitely the work on the continued actions on Fit-for-Growth. I would also say that we are assuming at least 1 point and 1.5 points of fixed cost leverage, thanks to the revenue increase. So that’s how I would portray it.

Okay, got you. So still Fit-for-Growth benefits coming past 2019, and in addition to the operating leverage. So with said, the leverage 2018-’21 guidance, can you just be more specific around the high-single digit product growth? Does this high single-digit mean 7% or does it mean 9%, because we can make some very different assumptions there? And also I’m also wondering on top of that, for that I think there’s a product growth guidance, does that include the upside with Etratech in ‘18 or does it use your adjusted decline of 1% in 2018?

So the growth is high-single digit, I think that’s what we’re willing to share at this point in time. And it’s a combination of, as I mentioned earlier, we see higher growth in the climate comfort business for sure in that period of time through take rates and starting to roll out the new awards with our record backlog, that’s going to start having an effect in those years. And clearly the BTM business is going to pick up the pace, and we are expecting a fair amount of growth as compared to 2018 in that regards. And then medical, medical is - we’re expecting to double the business basically in medical between ‘18 and ‘21. All those things are net of the businesses we’re exiting, of course, so the starting point is kind of what we’re laying out as the net result of 2018 after assets that are either divested or held for sale.

Are you able to sort of break out contribution between those three in terms of the win rate, higher BTM run rate, and the medical? I think we can back into the medical, interested in contribution or if it’s pretty (inaudible) your expectation.

On the dollar value, it’s going to be higher in the climate and comfort business, so the core business on a percentage growth basis is certainly higher in BTM and medical.

And then just last question from me, the Lear entity, congrats on this collaboration. So is this one area Lear looks to accelerate their growth certainly, they highlight how this can help set, I think high, medium, low temperatures about thermostat. I’m just wondering, do you see this seat option as a luxury product with a few customers or in your opinion does it really have mass market potential? And thanks for taking my questions.

Yeah, I mean that’s probably a detail I can’t give, because that’s not the Lear project, but I think certainly the idea behind it is that it is modular and something that can be efficiently integrated into the design, so, certainly not meant to be something that only would be used on the highest of the high-end.

Our next question is from Richard Carlson with BMO Capital Markets. Please proceed with your question.

So, Phil, you talked a little bit about BTM, I hope you could may be dig in a little bit more, because it sounds like you’ve been very successful as to when that’s going to be probably a pretty big part of your growth story the next couple of years? So with the add-on for Mercedes, I think in the past you’ve shared kind of what you expect just from the current wins, what the revenue would be once you fully ramp, are you willing to give us some numbers on that and then talk about the number of - maybe how big the pipeline is for that currently?

Yeah. I think, in general, if you look between 2018 and 2021, our expectation is on a dollar basis to grow somewhere between 80 million and 100 million, and that’s a combination of all the different product lines.

So that’s certainly pretty substantial growth, and so are you hearing anything different from your customers because certainly the expectation is that especially with the 48-volt, that’s going to go from a pretty low penetration, currently to a pretty substantial size, are you hearing anything different with that?

No, I think the estimates are still pretty solid based on where we built our plans, and if you look at our solution set right now, that’s the lion share of the BTM business we have, whether it’s the thermoelectric based or air cooling is really growing fast in that 48-volt miles hybrid space. So that’s certainly what we expect to be the largest market through 2025.

And then what’s your regional concentration for that business, I assume it is mostly Europe and China?

Yeah, right now it is mostly Europe and China. Of course, we have the one program in the US with FCA, and we are seeing some other opportunity start to come in, but right now most of the shipments are Europe and China.

And just one last modeling question, so your tax rate of 28 to 30 of course is much higher than what you’ve shown over the past couple of years, is that just a GAAP number and they’re being lower on an adjusted basis?

We have till 2019, if that’s the question. We are expecting 28% to 30%. It’s going to be couple of points higher than what we experienced in ‘18 because in ‘18 we enjoyed some favorable tax rates on inter-company transactions that we are not expecting to occur again in ‘19 and that’s the reason for the increase.

And then, so that should be what we should think about going forward as well for the out years?

For now, that’s what I would use.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Eyler for closing remarks.

Great. Well, thanks everyone for joining our call today. As I said in my opening comments, we remain focused on execution, innovation, and cost improvement. Just to briefly recap what you’ve heard today, 2018 was really a transformative year for Gentherm. We clarified our mission and strengthened our leadership team, we design, develop and continued to implement a strong strategic plan to drive focused growth, and it’s already achieving early returns. Today, Gentherm really is perfectly positioned to capitalize on the emerging trends in the automotive industry, electrification, connected and autonomous vehicles and consumer demand for comfort and convenience. I’m confident that we’ll continue to deliver significant shareholder value in the quarters and years ahead. I appreciate your interest and support, and we look forward to keeping you appraised of our progress. Thank you.

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