Gentherm Incorporated (THRM) Q3 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to Gentherm Inc. Third quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I would now turn the conference over to your host, Ms. Yijing Brentano, Investor Relations. Please go ahead.

Thank you, Sian, 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 the federal security laws. These 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 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 the 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. So 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 continue to impact some of our previously reported third quarter 2018 financial items. This resulted in $2.6 million being reclassified from a contra revenue item into SG&A for the third quarter of 2018, which impacted revenue for other automotive as well as revenue for each of our industrial businesses. As Matteo pointed out on our 1Q earnings call, the annual impact for 2018 was $10.2 million increase in both product revenue and SG&A. As a result, the gross margin rate and EBITDA margin rate were also impacted by 70 basis points and 10 basis points, respectively, 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. During the third quarter, the challenging macroeconomic and automotive industry conditions continued. As we move through the year, actual light vehicle production levels have fallen well short of industry estimates every quarter. The strike at General Motors, our largest customer, magnified the impact of the shrinking production volume. Nonetheless, we were still able to deliver strong operating performance in the quarter despite revenues being below our expectations. First, we were able to continue to outperform in automotive versus the key markets that we serve. Excluding the impact of foreign currency translation and the GM strike, our 1.5% decline in organic automotive revenue compares to a decline of approximately 3% in global vehicle production. In our core automotive product line, which excludes cables and non-automotive electronics, we saw growth of nearly 1% in the quarter year-over-year. With the addition of $270 million in awards during the quarter, we have now secured $2.5 billion in automotive awards since the beginning of 2018. Our pipeline of potential awards for the balance of 2019 gives us confidence in our continued ability to outperform the automotive market, even in light of the reduced or delayed level of award activity that we are seeing by OEMs in the near term. Year-to-date, we saw a double-digit growth in Medical as a result of growth for many of our existing products, such as a Blanketrol as well as the addition of Stihler products to our portfolio. On the cost front, we continue to make progress on our Fit-for-Growth activities through purchasing excellent and rigorous cost controls. In addition, we took proactive steps to rightsize our factories for lower volumes earlier in the year when the slowdown in automotive production volume became apparent. This has allowed us to achieve our highest gross margin rate in 9 quarters. We continued our momentum in reducing operating expenses, which declined 9% in the quarter. After adjusting for restructuring cost, operating expenses declined 16%. As a result, we delivered quarterly adjusted EBITDA of approximately $41 million or 17% of revenues. This is the highest quarterly adjusted EBITDA since the first quarter of 2017. In late September, we announced plans to rationalize our global manufacturing footprint to improve productivity. We will consolidate and relocate certain existing automotive manufacturing and as a result, reduce the number of plants by 2. We expect to complete the plant consolidations by the end of 2021 and reduce our annual cost structure by $12 million to $14 million from the current levels. We're pursuing communications with our customers and employees in the coming months and we will provide more details over time. Matteo will provide more details about our financial results in a few minutes. Finally, we repurchased approximately $25 million of our shares during the third quarter and continue to repurchase more in October pursuant to a 10b5-1 plan. As of this week, we've repurchased a total of $250 million in shares since launching our share repurchase program, and we have $85 million remaining in our current authorization. We'll continue to evaluate and opportunistically deploy capital towards share repurchases depending on market conditions. Before I get into a few highlights from the quarter, I'd like to share with you a recent update on ClimateSense, Gentherm's unique, personalized, thermal management system of the future. As I previously discussed, we've been working with select OEMs on ClimateSense development project, and I'm very excited to share that one of these is with our largest customer, General Motors. A couple of weeks ago, GM and Gentherm jointly presented the new ClimateSense development project results at the Society of Automotive Engineers Thermal Management Systems Symposium. The key objective of the project was to achieve a significant reduction in energy consumption, while still delivering best-in-class occupant comfort in comparison to the existing central HVAC system of a Chevrolet Bolt electric vehicle. To address this challenge, Gentherm developed a personalized microclimate system utilizing advanced thermal delivery method, integrated electronics, and most importantly, our innovative, thermophysiology-based control algorithm. In addition, we introduced and utilized a novel human-centric comfort measurement methodology to measure passenger comfort. We were very happy with the results. And they have exceeded our customers' expectations. ClimateSense delivered between 50% to 69% energy saving in cold weather testing and 34% energy savings in hot weather testing. While OEMs are increasingly focused on improving energy savings and range extension, the need to provide customers with superior thermal comfort remains a critical target. Our work with GM and others demonstrates that Gentherm's innovative approach to occupant thermal comfort in ClimateSense is a strong and a very relevant solution. Now let's turn to automotive highlights on Slide 5. And the third quarter, we launched our automotive solutions on 32 different vehicles across 18 OEMs, including BMW, FAW, VW, General Motors, Hyundai, Kia, and SAIC. And we continue to see momentum for our CCS product and launched on the Ford F-250, Lincoln MKC, Subaru Legacy and Subaru Outback. Jaguar Land Rover continues to highly value Gentherm's industry-leading CCS solution, and this is evidenced by our incremental CCS Active launched on the new Land Rover Defender in the quarter. This is both in the first and second row seats. In China, we started production on our multifunction electronic control unit with integrated electronics and software for climate, memory seat and mirror control on the Changan CS75. Our ability to flexibly integrate hardware and software is proving to be a strong competitive advantage. Also noteworthy in the quarter, in battery thermal management, we launched our very first cell connecting technology on the BMW MINI full electric. This is another important milestone for us in BTM. If you recall, we're focused on 4 primary product lines. Thermal electric, Active battery thermal management, air cooling BTM, battery cell heating, and now cell connecting technology. Now on to Slide 6, where you can see that we continue to win new business at a pace that sets the solid foundation for future growth. In the third quarter, we secured $270 million in new program awards across 18 different customers, bringing us to $930 million in cumulative new program awards year-to-date. We won multiple CCS awards including platform wins with the Buick Enclave, Hyundai Starex, Kia Optima and the Mercedes-AMG SL and GT. We received steering wheel heaters awards across 6 OEMs including the BMW 5 series and M Sports series. The Ford Mustang Mach, GAC Aion, and the Mercedes MSL 5. While we've seen production headwinds impacting our steering wheel heater revenues in 2019, our award momentum in this product line positions us well to return to revenue growth in steering wheel heaters over the near term. I'm also very excited to share that over 40% of the awards we secured in the quarter are with the OEMs in Asia, including GAC, Great Wall, Hyundai, and Kia. While there are significant headwinds in the automotive industry in Asia, especially in China in the near term, Asia is a fast-growing market for automotive thermal management solution. For this reason, I'm pleased to announce that we have -- that Helen Xu has joined us to lead Gentherm's overall growth and operations in China and our global electronics business. She'll be responsible for growing the electronics portfolio, developing and launching new products and driving profitability. She will also oversee the growth strategy and execution of operation for Gentherm's business in China. Helen comes to Gentherm from Infineon Technologies, a semiconductor solutions company, where she has been the head of automotive division for China Mainland, Hong Kong and Taiwan region. Prior to Infineon, she held positions at International Automotive Components, or IAC, and Lear. Combined with Thomas Stocker coming on board beginning in September to lead our climate comfort and BTM Businesses from Germany, we now have a strong and truly global executive leadership team. Now let's turn to Slide 7 for a discussion of our industrial segment. In Gentherm Medical, product revenues in the quarter were below our expectations due to timing shifts of equipment orders from the third quarter to the fourth quarter. However, we continue to expect strong double-digit growth in Medical for the full year. During the quarter, we secured awards for Blanketrol, our liquid-based, patient thermal management solution, from several large U.S. hospital systems, including the State University of New York Medical Center, Northwestern University Medical Center, and Boston Medical Center to name a few. In addition, initial customer feedback has been overwhelmingly positive on our new cardiovascular heat/cool system with integrated UV disinfection technology, as we shift initial orders of our UV TREO in the quarter. We continue to make progress on new product development as we integrate disinfection technology to next-generation product. We continue to leverage our deep understanding of human thermophysiology through our Medical business to further develop innovations like our ClimateSense solution for the automotive market. Lastly, I'm pleased to share with you that we successfully divested GPT on October 1. With that, we now have completed all the exits and divestitures under our focused growth strategy, positioning us in the core markets where we want to compete. Let me summarize. The global automotive industry and the macroeconomic environment continue to present challenges. However, I'm very pleased with the team's ability to deliver improved profitability. To highlight this point, our year-to-date operating income increased $10.3 million, nearly 20%, this despite a 6.5% decline in revenue. We continue to take proactive steps to help mitigate the challenges we currently face as we work towards our longer-term objectives for focused growth. I remain proud of the hard work and commitment of the talented global Gentherm team to deliver on our plan. With that, I'll turn the call over to Matteo for a little more color on the financial results.

Thanks, Phil, and thank you to everyone joining the call today. I will start now on Slide 8, and focus on the items that most significantly impacted our third quarter. For the quarter, product revenues declined by 8.2% compared to the same period of last year. Automotive revenues declined 4.4%. After adjusting for the impact of foreign exchange, automotive revenues declined 2.8%, outpacing the global automotive production. The industrial segment declined approximately 48%, primarily due to the disposition of the CSZ Industrial chamber business. Excluding the assets held for sale and then impact of FX, our overall revenue declined by 2.8%. The 2.8% year-over-year decline in the automotive segment was a result of the headwind in global vehicle production as well as the GM strike, which impacted our automotive revenues by 1.3%. However, we slightly outperformed the global production in the third quarter. According to IHS latest data, global light vehicle production in the third quarter declined 3.2% year-over-year. Our automotive business outpaced the market as a result of the continued strength in our BTM product line, where revenue increased by 59% primarily due to the PACE award winning in BTM solution that we discussed in the prior quarters. In addition, we saw a slight increase in seat heaters and other automotive. New launches in seat heaters more than offset the continued revenue decline at Volkswagen. Our other automotive increased almost 15% as a result of strong take rate of thermal cupholders with BMW. CCS revenue declined 9.7%, actually 8.2% if we exclude FX, primarily due to the GM strike, lower automotive production level, new platform changeover effect as well as vehicle cancellation. This was partially offset by several new launches and growth with new customers. Steering wheel heaters revenue declined by 8%, primarily due to the lower vehicle production at FCA. Additionally, Automotive cables declined 18% due to the continued decrease in orders from our largest cable customer, Bosch. Electronics revenue was also down 7%, primarily due to the continuous slowdown in the RV industry, partially offset by the newly launched multifunction electronic control unit with Ford. If we move to industrial. Industrial revenue declined 48% compared to the third quarter of last year. The decline in revenue was primarily due to the absence of revenue from the CSZ Industrial chamber business, which was sold in February, as well as the lower sales from GPT, which has been disposed as of October 1. Medical revenues declined by 1% compared to the third quarter of last year. If we exclude the impact of the Stihler acquisition, revenue in Medical declined by 17%. And this decline is mostly due to the timing of equipment order shipment that shifted from the third to the fourth quarter. At this point, we're still expecting our Medical business to grow double digit for the full year of 2019 as a result of a strong fourth quarter. If we move to gross margin. Gross margin for the third quarter was 31.1%, an increase of 220 basis points compared to the year ago quarter. This year-over-year increase in gross margin was primarily driven by labor productivity at the factories, supplier cost reductions, the positive impact of our Fit-for-Growth actions as well as a onetime benefit from improved cost of quality. These improvements were partially offset by the annual price reductions, wage inflation as well as the negative fixed cost leverage from the lower unit volume. Now as Phil mentioned earlier, the labor productivity improvement in the quarter was achieved by rightsizing our factories to the lower volume levels. These actions, as you may recall, were proactively taken earlier in the year, when the slowdown in the automotive production volume became apparent. And as a result, our manufacturing headcount decreased by approximately 13% since the beginning of the year. Additionally, better efficiencies allowed us to minimize premium freight compared to last year, particularly out of our factories in Mexico. Regarding cost of quality, we continue to see a reduction in the manufacturing and scrap rate, which positively impacted our gross margin this quarter. Additionally, we had a onetime reduction of warranty expense by approximately $1 million due to resolution of our previous quality issue. On China tariffs, the negative impact in the quarter was approximately $800,000, which is pretty much in line with the prior quarters. And this amount was only slightly higher than what was incurred in the third quarter of last year. If we move to operating expenses. Operating expenses in the quarter were $54.4 million. Now this amount included $8.7 million of restructuring charges, mostly related to the initial actions of the restructuring plan that we announced in late September as well the factory rightsizing that I mentioned earlier. If we adjust for the restructuring charges in both periods, operating expenses were $45.7 million, down from $54.2 million in the third quarter of last year. This year-over-year decline of 16% was primarily driven by the impact of the Fit-for-Growth cost reduction initiatives, lower incentive compensation cost, the sales of the CSZ Industrial chamber business, as well as lower cost in GPT. Additionally, we had a $3.3 million mark-to-market charge for cash-settled option in last year's third quarter that did not repeat this year. These effects were partially offset by lower R&D reimbursement compared to the unusually high reimbursement level that we had in the prior year period. Also in the quarter, as we continuously evaluate the fair value of our assets held for sale, we recorded an $800,000 impairment charge related to our GPT business. Adjusting for the nondeductible impact of this impairment charge, the effective tax rate in the quarter was 28.8%. And for the first 9 months of 2019, adjusting for the $21 million impairment charges related to the GPT business, the effective tax rate was 28.5%. Finally, our adjusted EPS in the quarter was $0.68 share compared to $0.54 a share in the third quarter of last year. Now before we move to Slide 9, I will point out 1 item for the fourth quarter. As we previously mentioned, we divested GPT earlier this month. And as a result, we will be recording an approximate $6 million pretax loss on sale in the fourth quarter, which is primarily related to the release of previously faired foreign currency translation losses. Moving to Slide 9 on the balance sheet. Our cash position in the quarter was $47.7 million including $2.5 million of restricted cash coming from the disposition of the CSZ Industrial chamber business. Our cash position increased sequentially by $11.5 million in the third quarter versus the second. We generated $43.6 million in cash from operating activities during the quarter compared to $38 million in the year ago quarter. And actually, year-to-date, we generated $84 million in cash from operating activities compared to $70.5 million in the same period of last year. We're actually very proud of the team for generating 19% more operating cash despite our revenue decline. Additionally in the quarter, we had approximately $25 million of cash outlay for our share repurchase program. And as a result, our net debt decreased by $19 million from $71 million at the end of the second quarter to $52 million at the end of the third. As of the end of the third quarter, the total debt stands at approximately $100 million. And as you may recall, during the second quarter, we also announced that we amended our credit agreement. This amended agreement provides our company with a new $475 million secured revolving credit facility, which will provide Gentherm with ample liquidity in an uncertain macroeconomic environment as well as actually lower interest expenses. And as a result of the new credit facility, our revolving line of credit availability at the end of September is approximately $385 million. If we move to Slide 10 on guidance. Based on our third quarter results, the continued challenging macroeconomic environment as well as the impact of the strike at General Motors, we are reducing our 2019 guidance for revenue. We now expect revenue to decline approximately 3% in 2019 compared to 2018 for our core business and excluding the impact of foreign exchange. This compares to our prior guidance of 0% to 2% growth. We are expecting gross margin rate to be approximately 29.5%. Operating expenses, as a percentage of revenue, is now expected to be approximately 20.5%, just slightly higher than our previous range of 19% to 20% due to the reduction in revenue. However, as a result of our continued progress on cost reduction activities, we are maintaining the profitability guidance despite the revenue decline with adjusted EBITDA margin expected to come in at approximately 14%. In summary, I would say that our third quarter results demonstrate, once again, the steps that we continue to take to aggressively manage our cost structure and deliver solid bottom line performance despite a challenging quarter on the top line. And with that, I'll turn the call back to Sian to begin the Q&A session. Sian?

[Operator Instructions]. The first question comes from Gary Prestopino from Barrington Research.

Just looking at the gross margin and you factored back in that warranty expense, looks like the gross margin was running at about 30.7%. Given your Fit-for-Growth initiatives that -- and what you're doing with the plant consolidation, Phil, do you think that, that is kind of the high watermark that the company -- or a level the company can maintain going forward, somewhere in the 30% range?

Yes, Gary, I do. I think, obviously it's somewhat going to be relative to the volume levels on a quarterly basis, but certainly if you look at the volume level that we operated in this quarter, we feel very good about 30%-plus being kind of our run rate. We have a good pipeline of continued cost improvements that will help us offset future price downs from our customers. And so we're feeling really good about this range of 30% to 32% that we've been guiding towards longer term.

Okay. And then the -- what you're doing with the factories, that's already in -- that is -- the expense capture that you're getting there from consolidating two plants, that's already in the numbers that you totaled for Firt-For-Growth initiatives that you're targeting?

It is part of our Fit-for-Growth that we're targeting, yes. We won't see the cost benefit from that start to kick in until 2021. And the completion of those projects won't be done until the end of 2021. So you will see the full effect of those really in 2022 going forward.

Okay. And then two other quick ones. On the CCSC, so I think Matteo, you mentioned a lot of that was due to GM. Is that correct? Where the revenues were down almost 10% a lot of that was due -- I know GM is a big client there, but I just want to make sure I got that right.

So let me grab that one too, Gary. The -- yes, the GM stock was a significant part of our decline in CCS. But there are handful of other things too. We talked last quarter about the GM truck transition from the old model to the new model. That continued to have some impact in the quarter, in Q3. And if you look year-over-year, certainly combination of vehicle cancellations, so if you look at sedans across, especially the U.S. customers, that was a pretty significant hit compared to last year, many cars just disappeared. And then market decline. If you look at customers like VW, Honda, Nissan, they have all seen significant sales decline year-over-year in the quarter. We offset -- we did have some nice offsets though. We had new vehicles and new customers come online in the quarter. A few examples of those are, especially in Japan in the quarter, Mazda and Subaru saw some nice increases in the quarter. But that kind of give you a feel for the net impact. We continue to still be very confident in CCS going forward. Just as a note, we in the quarter -- or actually year-to-date, we've won 90% of our CCS acquisition targets, with still very, very, very high hit rate on CCS.

Okay. And then just lastly, the new revenue growth that you have given the decline -- actually the decline this year, that pegged off of core revenues, that's just your core revenue, right? Core automotive and Gentherm Medical, right?

That is correct.

Your next question comes from Chris Van Horn from B. Riley FBR.

Congrats on the execution despite a challenging environment. So just really quick on the guidance. The adjustment on the top line, would you be able to quantify what effect the GM strike had on that adjustment? And what it might have been ex GM strike?

Yes. Let me break that down a little bit in terms of the overall impact there. The strike was over half of that decline in terms of the guidance last period versus this period. 30%-or-so is continued market deterioration, not necessarily correlates to GM. If you look at the overall market, back in -- let's just look at the second half as an example, between July and October, we've seen about a 3.9% deterioration in the market. Take GM out of that equation, about 3.5%, and we're definitely seeing that across our other customers. That's about a 30% impact of the change. We're also seeing some very specific headwinds, mostly market related, but in some of the specific areas, we play outside of the, let's call it, standard automotive product line. So cables continue to be a headwind. We'll keep running into declining revenue from Bosch, most of that related to oxygen sensors on ICE vehicles and especially diesels. We also see continued declines in our forecast from customers related to non-automotive electronic, and we think that's really tied to RV more than anything. We do have 1 discrete item related to -- that we expect to see in Q4, which is a decline in orders from Daimler on their 48 Volt EQ Boost system of which our BTM solution is integral. And this is -- we believe, this is an endeavor production correction for them, and we expect the recovery to come in the next year.

Okay. Got it. The activity -- the award activity level just continues to be impressive, in my view. So your active cool, you've seen a number of wins here. Are you starting to see a little bit more activity on that -- on the Active side? And I think you mentioned it's the first and second row, and maybe some of the dynamics around what OEMs are thinking there as well?

Definitely, we are seeing more interest. Last quarter, we announced the BMW 7 Series award. This quarter we announced the launch on the Land Rover. And many more discussions happening with other OEMs around adding active cool to systems, and I think, that becomes even more relevant with the EVs. And there seems to be a lot more interest around it, as part of incremental solutions going forward on some form of electrified vehicles. So we're pretty optimistic that we're going to see that part of CCS gradually increase, let's say, following the 2021 year as these new awards start rolling in.

Got it. And then just forgot to ask, on the Land Rover and BMW, are those global programs?

BMW is, yes. Land Rover I believe is, yes.

Okay. And then on the BEV cell connecting technology, just remind us of maybe what that does? And any detail you can give around that product and the opportunities that are there?

So this product is the device that literally connects every cell on the battery-packed network in the BMW MINI EV, and the high complex -- this system happens to be a high complex copper wire-based system that has, as you can imagine, exceedingly high performance and reliability standards. We are happy about this one. This gives us a ton of credibility, not only with the BMW but in the market. On the heels of that, we have some very innovative cell connecting technologies that are garnering a lot of interest by OEMs. So we really think that sell-connecting technology will be a big part of our growth in the electrification space.

Okay. Got it. And then the last one for me, with the new hire, it seems like you're starting to get a little bit more aggressive on the Asian front. And I just want to get an update on how you see that expanding, and specifically in China, how you see that business growing in terms of percent of revenue? And is there any margin difference relative to some of your other regions?

Yes. That's I mean, obviously, the -- one of the major objectives is for us to accelerate growth in China. I think we're still very underserved in that market across all of our product platforms. If you look at our business, it's about right now 7% for the year, which is just -- it's too low. And most of our business there is our, let's call it, more traditional product. So we're really going to get aggressive with electronic. Obviously, Helen has quite a background in high-tech product lines, especially in electronic. So we will look at that as a key opportunity as well as pushing to drive battery thermal management opportunities as well as more climate comfort solution. But we'll also look -- we're strategic. What are opportunities to partner in China? Are there specific product lines and solutions that might be unique in China? And we're really looking for that share of our total revenue to grow dramatically over the coming years. In terms of your margin question, we operate at about the same margin right now in China, as we do otherwise worldwide.

Your next question comes from Steve Dyer from Craig-Hallum.

A lot of mine have been answered. I guess, just as you look at the new auto awards, you've touched on it a little bit. They've been a little softer in the last 2 quarters versus the 5, 6 quarters before that, and you sort of referenced in your prepared remarks some delays and reductions. Can you give a little bit more color there to the degree that you are willing what you're seeing there?

Sure. Sure. Yes, we've definitely seen some delays in reductions in the year. The majority of it is -- appears to be kind of delayed decision-making by the OEMs on how they want to architect their vehicles and make decisions on suppliers. We do have a nice pipeline now that we're tracking. I would expect this year to be somewhere between our results of 2017 and 2018. So I still think it's going to close out in a solid manner, but last year was certainly a banner year, and there was a lot of activity last year.

Got it. Okay. And then just jumping over to the ECU business, that business came on really, really strongly last year, and it's sort of been at a run rate flat to down a little bit since then. Is that sort of a function of the program, or programs that it's on? Anything particularly driving that? I know you had a new win in the quarter and then sort of how do you see that business in the future?

Sure. Yes, most of the ECU business is related to the Etratech acquisition that took place back in late 2017. And that's where we're seeing most of the decline, is that what I call non-automotive business and I lump RV into that. So RV revenue is down significantly over the last couple of years, and that's had a big impact. That said, we are launching new products. We have announced the Changan product. We now had a full quarter of production for the platform, the first platform for our Ford Multifunction ECU. Just as a reminder, that is an integrated device that controls memory heat module and CCS for Ford vehicles. So pretty excited about that. And obviously, we're aggressively pursuing other opportunities to grow that side of the business. But certainly, it's been a tough run for nonautomotive electronics.

Got it. Okay. And then last one for me. Can you just remind me, I know at one point, you had a little bit longer-term guidance out there and haven't said anything more recently obviously, a lot is changing day-to-day in the auto industry, but do you have this year sort of -- could you remind us sort of the targets or how you're thinking about the next year or two?

Yes. We are obviously -- one thing we announced last quarter was given the dynamic situation in the market, we made a decision to stop giving quarterly updates on our 2021 and beyond estimates with the caveat that we plan on early next year giving some general direction on our future performance, let's call that beyond 2021. So we'll come back in line with that. Obviously, market conditions since June of 2018 have been dramatically pressured downward. So that's an area we'll have to look closely at. I will say that we're ahead of schedule on our margin expansion activities. So when you look at the profitability direction that we have given all along, we still feel very strong that we are in good shape there.

[Operator Instructions]. Your next question comes from Scott Stember from CL King.

Most of my questions have been answered as well, but a couple of items. I appreciate obviously, last year was a better year for new awards, and it sounds like there are some delays, but could you just maybe talk about the level of quotation activity or bidding that you're giving, just to I guess, assure people that there's a lot of stuff in the pipeline that could come through next year that was delayed this year?

Yes. No, there is I think a very nice pipeline of opportunities that we're tracking over the next 18 months. As I said, I think, Q4 is going to be solid. I think we've got a good track on some pretty exciting opportunities there, and that will flow into the next year. And we're seeing more and more RFQs come in for ETM-type product, whether that's battery heating or cell connecting devices. Those 2 product lines, we see a nice flow. And then still, CCS continues -- we continue to see more RFQs for new vehicles and customers related to CCS and our other core products. On top of that, obviously, we've got a nice innovation pipeline that we continue to grow. And I believe, we are well positioned to grow through these innovations within our focused growth strategy.

Got it. And last one for me going to BTM, maybe you touched on that. I guess, early this year, you have given some targets of exit run rates for this year and potentially I think for 2020 as well. Can you maybe just touch on those, particularly now that you have this new, I guess, this fourth leg to the stool that will be helping you out?

Yes. I mean most of those new products that we're adding on are going to obviously launch in outer years. Our first, let's call it, new product line will launch in 2020, and that's the cell heating device. So most of the exit rate that we talked about was related to BTM, and most of that is related to the Daimler and FCA. Unfortunately in Q4, we've seen declines in orders from FCA and then we are seeing an adjustment order from Daimler in Q4, which we expect to come back in Q1. For you, the run rate based on those declines, we're probably close to $30 million run rate as opposed to the $50 million, but we expect that to pick up in 2020.

We have reached the end of the question-and-answer session. And I will now hand over to Mr. Phil Eyler for closing remarks.

Okay. Thanks, everyone, for joining our call today. As I've consistently shared in the past, we remain very focused on execution, innovation and cost improvement. 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 continue to be confident that our efforts will allow us to deliver significant shareholder value in the future. Our innovation pipeline continues to grow, and we're well positioned to grow through our focused growth strategy. We appreciate your interest and support and look forward to keeping you apprised of our progress.

This concludes today's conference, and you may now disconnect your lines at this time. Thank you for your participation.