Greetings and welcome to the Gentherm Incorporated Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Yijing Brentano. Thank you, Yijing. You may begin.

Thank you Lexi, 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 Securities 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 financials measures to the 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 comments, Phil and Matteo will be referring to a presentation deck that we have made available on our website at gentherm.com/events. In addition, they will refer to performance excluding divested assets and assets held for sale as our Core Business, which include Automotive and Gentherm Medical. After their prepared remarks, we will be pleased to take your questions. Before, I turn the call to Phil, I would like to remind you about certain adjustments related to a reclassification of amortization of customer relationships last year, which Matteo discussed on our 1Q earnings call. These adjustments continued to impact some of our previously reported second quarter 2018 financial items. This resulted in $2.6 million being reclassified from a contra-revenue item into SG&A for the second quarter of 2018, which impacted revenue for Other Automotive as well as revenue for each of our Industrial businesses. As Matteo pointed out last quarter, the annual impact for 2018 was $10.2 million increase in both product revenue and SG&A. As a result, the gross margin rate was also impacted by 70 basis points for full year 2018. Now I'd like to turn the call over to Phil.

Thank you, Yijing. Good morning everyone and thank you for joining us today. In the second quarter, the challenging macroeconomic and automotive industry conditions continued. Nonetheless, we were still able to deliver strong operating performance in the quarter, despite revenues being below our expectations. First, we were able to significantly outperform in Automotive versus the key markets that we serve. Excluding the impact of foreign currency translation, our 3% decline in organic automotive revenue compares to a decline of 8% in global vehicle production, outpacing the market by 500 basis points. Year-to-date we secured $660 million in Automotive awards. In addition, our pipeline of potential awards for the balance of 2019 gives us confidence in our continued ability to significantly outperform the automotive market. Also, we saw strong double-digit growth in Medical as a result of growth from many of our existing products such as Blanketrol, as well as the addition of Stihler products to our portfolio. Next, we continue to make significant progress on our focused growth and margin expansion activities and are seeing positive results in both our gross margin and operating expenses. As I shared with you on last quarter's call, we've turned our Fit-for-Growth cost reduction efforts towards gross margin expansion. On top of this, our teams took rapid operating actions to adjust our cost structure to the declining market. These actions allowed us to achieve a 100-basis point improvement year-over-year in gross margin in the second quarter. There are still significant opportunities ahead as we finalize our plan to improve our manufacturing productivity and rationalize our global footprint. Additionally, operating expenses declined 14% year-over-year in the quarter. This improvement was achieved even as we increased our R&D investment in future product technologies such as ClimateSense, BTM and Medical. While we work through the current external…

Thank you, Phil. And thank you to everyone joining the call today. So I will start now on slide 8 and focus on the items that most significantly impacted our second-quarter results. So while not shown on slide 8, there is a table in the earnings release which shows the breakdown of segment revenues for your reference. So now for the quarter. Product revenues declined by 8.7% compared to the same period of last year. While we outpaced the market in the Automotive segment, where our revenues declined 5.5%, actually 3% if we exclude the impact of foreign exchange, the Industrial segment declined by more than 40%, primarily due to the disposition of the CSZ Industrial Chambers business. If we exclude the assets held for sale and the impact of FX, our overall revenue declined by 1.9%. The 3% year-over-year decline in automotive was a result of a significant headwind in the global vehicle production. However, we outperformed our key markets again in the second quarter. According to IHS' latest data, global light vehicle production in the second quarter declined 8% year-over-year and approximately 400 basis points below their mid-April forecast. Our Automotive business outpaced the market as a result of the continued strength in the CCS product line where revenue was nearly flat year-over-year, excluding the impact of FX, despite the market headwinds. Additionally, our revenue in BTM increased almost 23% compared to the same period of last year, primarily due to the PACE award-winning BTM solution that we discussed during the last quarter. This revenue increase was offset by a decline in Seat Heaters and Steering Wheel Heaters. Seat Heaters revenue declined by 8%, primarily due to the continued decline in Volkswagen sales in China, as well as our conscious decision to walk away from lower margin business.…

[Operator Instructions]. Your first question comes from Chris Van Horn with FBR. Please go ahead.

I guess, could we just get into the guidance, maybe some of the puts and takes that you're seeing in terms of reducing the revenue guide and how you get from -- what causes 0% versus 2%? Is that just the cadence of your launches? And then a similar kind of question on the gross margin because obviously that's coming up a little bit on the bottom end. Are you just seeing something from a mix perspective or is Fit-for-Growth just progressing quicker and better than you thought? Thanks.

Good questions, Chris. I'll start with revenue side. Looking back at when we put the guidance together, we originally assumed flat IHS growth for the year and now it's based on the latest IHS market estimates -- it's down 4% compared to last year. So that's obviously an indicator of what's happening in the space. And if you just compare that number versus what we expected at the beginning of the quarter back in mid-April, it's a full 300-basis point degradation for full-year 2019. So, obviously the market is driving the bulk of our downward trend there. And there are a couple of unique issues that we're dealing within the business. I think you've heard over the last couple of quarters that we continue to struggle in our non-automotive electronics business, especially related to RV and consumer and industrial products. That's something that's been moving kind of in the wrong direction, and certainly our cable business as well. We're heavy weighted on one customer there and that outlook continues to look pretty difficult in the remaining part of the year. And then finally, a couple of our high-volume cars are experiencing some mix challenges and we referred to this in the last quarter as some roll-off issues, but these are new vehicle transitions that are happening, where -- just to give you an example, the old vehicle that is phasing out, this customer has decided to kind of strip down the options, so it's running at very, very low take rate on CCS. And the new car launching is running as expected, very nice take rates, but when you blend the 2 volumes, our CCS take rate overall on that vehicle is less than we expected. So we've got 2 or 3 of those examples that kind of provide other…

That makes a lot of sense. I was going to ask you about the ClimateSense bullet that you have on slide 5. You mentioned new and follow-on development projects. Could you give us a little more color there just in terms of is it -- are you progressing quicker than you thought because it seems like every time we talk during the quarter, it seems like more and more ClimateSense opportunities are arising? And then maybe any update on timing of potential awards or the product rollout?

Sure. Yes. First of all, let me talk about the follow-on. There's a couple of follow-on development projects with the US OEM that we announced previously. We completed the first phase of that development project and we had some very specific targets in terms of climate comfort performance and efficiency -- power efficiency gains, especially related to range extension on this EV that we were working on. That was very successful. And as a result, that extended into 2 more very specific development platform. So with that OEM, we're really optimistic and excited about the progress. That's continuing. The other one with a European OEM is a brand new award and one that's kind of ensued after many months of working with this OEM and discussion. Now we have a very specific project on a very specific platform. So lots of activity there and obviously it's difficult to say when a potential award would come, but we're certainly moving at a very fast pace with that technology.

And then last from me, how do you see the mix of SG&A versus R&D spend progress for 2019? And then if you can look out maybe in the out years, how do you see that mix progressing and where you're kind of putting the dollars in those areas?

Hi, Chris, it's Matteo. I would expect pretty much the mix that we have had for the first 6 months will pretty much stay in line with what you will see for the remainder of the year. So if you take about $200 million, we got about $120 million is SG&A and $80 million is net R&D. And the $80 million includes the R&D income that we receive from our customers. So that's kind of the way I would split it.

[Operator Instructions]. Your next question comes from Gary Prestopino from Barrington Research. Please go ahead.

Phil, I would assume that most of that delta in the IHS data is as a result of China, right? And about 9% of your sales are in China, is that correct?

About 10% of our sales, yeah are in China.

But most of the delta between the expectations that IHS had and then what actually happened I think is a result of China, is that a correct assumption?

It's definitely heavy weight in China. Yeah, we're seeing it in other markets as well but if you look at the number, China is highest. Yeah.

Okay. So going forward now, I mean you're definitely gaining share, got some great new products out there. Obviously, I think there's going to be a tamp down on your expected revenue growth. Can we expect maybe as an offset to that, that you guys would find more expense savings on the Fit-for-Growth initiative as you go through your planning? I mean it's supposed to be about $75 million by 2021. Is there a possibility that you could increase that?

Yes, and as a matter of fact, what I pointed out was that we have good line of sight to achieve our cost, profit and return outlook, even as we face this volatile market. So I'm feeling really good about our ability to manage the costs and also manage our product portfolio so that we're really going after higher margin business.

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

Well, thanks, everyone, for joining our call today. As I've consistently shared in the past, we remained very focused on execution, innovation and cost improvement. Also, we're perfectly positioned to capitalize on the automotive technology trends of the future, including electrification, connectivity and personalization and autonomous driving. I'm extremely proud of our team's ability to take swift operating action in light of the current challenges in the macroeconomic environment and with global automotive production levels. I'm confident that our efforts will allow us to deliver significant shareholder value in the future. We appreciate your interest and support and look forward to keeping you apprised of the progress.

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