Greetings. Welcome to Gentherm, Inc. Fourth Quarter and Full Year 2020 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] Please note this conference is being recorded. I will now turn the conference over to your host, Yijing Brentano. You may begin.

Thank you, and good morning, everyone. Thanks 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 earnings release and its SEC filings, including the latest 10-K and subsequent reports for discussions of our risk factors and other risks 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 or investor presentation. On the call with me today are Phil Eyler, President and Chief Executive Officer; and Matteo Anversa, Chief Financial Officer. 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. 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 for joining us today. 2020 was a year like no other, one that saw two polar opposite operating extremes for the Company. In the first half of 2020, the global pandemic created significant hardship and challenges worldwide, which was then followed by a strong recovery of automotive demand in the second half. I'm proud of the global Gentherm team for their flexibility, dedication and agility to swiftly pivot from preserving liquidity in the first half to delivering record results in the second half, all while maintaining the health and safety of our global team members. Our performance in the second half of the year confirms that our strategic plan to focus growth, realign our cost structure and bring innovative solutions to market continues to deliver long-term shareholder returns. Now, let's look at 2020 in a little more detail. Please turn to slide 4. We finished 2020 with a record-breaking fourth quarter, generating the highest quarterly revenue and profitability in the history of the Company. In automotive, we outperform light vehicle production in our key markets by over 20 percentage points. Accomplishing these achievements in such a challenging environment clearly demonstrates strong operational execution across our enterprise. Looking back at the full year of 2020, light vehicle production declined 14% in North America, Europe, China, Japan and Korea as a result of the pandemic. Gentherm’s new launches in Battery Thermal Management, hands-on-detection enabled steering wheel heaters and other electronics along with increasing take rates of climate and comfort solutions enabled us to consistently outperform in automotive versus the key markets that we serve. Excluding the impact of foreign currency translation, our 6% decrease in full year organic automotive revenue outperformed light vehicle production in our key markets by approximately 800 basis points.…

Thank you, Phil, and thank you to everyone during the call today. Before I discuss the details of our fourth quarter financial results, I would like to provide a little bit more information about our review of the valuation of certain tax assets. During the 2020 year-end close process, we determined that certain deferred tax assets were not properly evaluated for realizability in 2019. After a thorough investigation and review of historical Company records, we identified that in the fourth quarter of 2019, we overstated income tax expenses and understated net income by approximately $11.4 million due to an understatement of deferred tax assets. We have now revised the fourth quarter and full year 2019 financials, and that is reflected in the tables contained in the earnings release that we issued this morning. The revision had no cash impact and did not change our reported adjusted EBITDA figures. Now, let me move to slide 10 and focus on the items that most significantly impacted our fourth quarter results. For the quarter, product revenues increased by 25% compared to the same period of last year. If we adjust for the impact of FX, our overall product revenue increased by approximately 22%. Starting with the automotive segment. Revenue was a quarterly record of approximately $280 million, corresponding to a 27% increase compared to the prior year period. Adjusting for foreign currency translation, automotive revenue increased by approximately 23%. In comparison, according to IHS latest data, light vehicle production for our key markets of North America, Europe, China, Japan and Korea, increased by approximately 3% over the prior year quarter. And as Phil mentioned earlier, we outperformed light vehicle production by over 20 percentage points. We saw strength in virtually all of the product lines in automotive, and more specifically, BPS revenues increased…

[Operator Instructions] Our first question is from Matt Koranda with Roth Capital Partners.

Hey guys. Good morning and thanks. The 90% win rate is encouraging. What does the funnel of new opportunities look like in 2021, given we're back to sort of a more normalish level of operating scenarios for most OEMs, any way to quantify that? And then also, just what do some of these ClimateSense Phase 3 development projects drop into commercial bookings? It sounds like you guys gave some good color on completing a number of them and then working on like four more. How long after completion do you get a commercial booking on an OEM program for ClimateSense?

Good morning. Matt. Well, I'll start with your question on the awards. Certainly, 2021 is looking to be a healthy amount, better than 2020 in terms of the pipeline, for sure. And we're pretty excited about our progress already in Q1 and expect to see be a better year. So, it's a little hard to say exactly how much, but we're pretty optimistic. Definitely, OEMs are getting much more aggressive in terms of awarding suppliers for the new launches coming. On the ClimateSense side, yes, we're really excited about the progress. As you know, we have -- as we announced, we have two projects that are in Phase 3 now. And clearly, that's pretty big commitment by those OEMS. And we're pretty optimistic that we're getting closer to the potential for production award. So, we'll definitely be keeping you posted as that progresses. But as these move to Phase 3, they continue to get much more focused on potential vehicles that could go into production in the not-so-distant future.

Okay, got it. And then, just on the outlook, maybe a little bit of help just on the cadence of revenue growth during the year. I mean, it sounds like just given the semi-shortage that you guys have baked that into the guidance, and so, maybe we should expect a little bit of a lower growth rates early in the year. But then, obviously, we have easy comps from last year. So, just a little bit of help on how you guys expect the year to progress from a revenue standpoint? What's embedded within that -- the midpoint of the outlook maybe?

Hi, Matt. Good morning. It's Matteo. So, yes, I think overall, I would expect the first half revenue to be slightly lower than what we're going to experience in the second half. And that's primarily due to the semiconductor shortage that you just referred to. So, that's how I would provide it.

Okay. And then, just last one from me, I'll jump back in queue. But, any call-outs on specific projects or plant expansion activity that's embedded in CapEx? I noticed it stepped up quite a bit from the last couple of years. Is there just some catch-up embedded in there, or are there any specific things you can call out within that CapEx budget for the year?

Sure. So, yes, you're right. We had only about $17 million of CapEx in 2020. And the number was particularly lower due to the fact that we implemented some austerity measures due to COVID. So, the $50 million to $60 million guidance for 2021 assumes a pickup in terms of CapEx due to the -- some of the delayed projects that we had out of 2020. Overall, I would say, if you look at the total $50 million to $60 million, about 60% of that amount is growth and 40% is maintenance. And the growth is going to really be around fulfilling some of the capital expenditures required in the projects that we won in the last 18, 24 months. That's the way we'll provide it.

And our next question is from Ryan Sigdahl with Craig-Hallum Capital Group.

I just wanted dive -- I know you said second half stronger -- a little stronger than first half. But, is it fair to assume kind of sequential growth throughout the year, given the chip shortage probably stronger here in Q1 that Q2 is bigger than Q1, et cetera?

Yes. That's what I would expect.

Good. And then, just a follow-up on ClimateSense seems to be continuing to make good traction there. And I know -- just got going to ask kind of first commercial award when we can expect that. But, how many development projects, any indication from, especially thinking BMW and GM, you're on the third development projects with them. Are we getting close, or do you think this could go fourth, fifth, who knows how long after that?

It's a little hard to tell, because I mean, one of the challenges the OEMs are -- I wouldn't say a challenge, but one of the parts of the project is that there's a pretty significant architecture change in these vehicles, clearly, implementing our system, which is a lot of different elements and components and the new controller and software go into that, but that's also an adjustment of the HVAC architecture. So, I mean, that said, we've been working on it for quite a while. So, I think we're -- we'll continue to get closer.

Good. Then, just on the balance sheet, continuing to generate nice free cash flow, keeps getting better, now in a nice net cash position. What are the allocation priorities comfortable with the debt, to plan to pay some of that down? But, how do you think about the growing cash on the balance sheet?

Yes. I think we're clearly, number one, focused on security and liquidity, and what we still think is a very dynamic economic bond. So, that's our first priority. But outside of that, we're definitely in a good position to keep our eyes out for both organic and inorganic investment opportunities to grow the business. So, that's a key area. And of course, as you know, we got approval for the potential of more share buybacks, should the opportunity arise, if it makes sense. And we'll keep our eyes on that. So, those are our top three areas of focus.

And our next question is from Ryan Brinkman with J.P. Morgan.

Hi. Thank you. I thought it was interesting you mentioned your strong relationship with General Motors, including the multiple CCS and CT awards in 4Q, and how they've been sort of quick to embrace your new technologies. I remember the work you did with them regarding -- you remember the greenhouse gas credit stemming from the CCS use. And I was just wondering if you think that this might be General Motors a natural customer for your future ClimateSense product, just given the relationship there, but also because of their recent announcements, they intend to be 100% battery electric by 2035. Are there any trends you can call out with regard -- I know you're limited in what you can say, but are there any trends you can call out with regard to your discussions or your development phase projects in terms of which geographies or maybe which vehicle segments, and I'm maybe most interested in which propulsion types that automakers are considering for using ClimateSense?

No, I think, the EV space, just to answer your last question first, we're getting a lot of interest on the EV side with ClimateSense, that's the most interest thing. I mean, the value proposition of range extension and extreme temperatures is really compelling. So that's the number one driver. Certainly, our system has an increase in thermal comfort. So, passenger satisfaction and driver satisfaction is better with this than even with our traditional CCS products. So, that's kind of in a 2 for 1 benefit there. I'll talk about GM. It's a great relationship we have. We're very focused on delivering value proposition for them. And we're in all of their EVs going forward with our -- that are coming to launch with our CCS products and other steering wheel and heat products. And as we talked about, we're -- the work with GM on the ClimateSense project is pretty advanced. We've been doing this for a couple of years now. And we're on Phase 3. And obviously, it's something that they're taking very seriously to be that far along. So, we continue to put a lot of resources into GM, pretty excited.

Okay. That's helpful. I'm sort of hearing that maybe luxury battery electric vehicles could be a good first place to start with ClimateSense. I wanted to check in also on the 2021 outlook just in the context of the semiconductor shortage issue, which, the guidance looks unchanged versus the preannouncement on February 18 versus other suppliers have kind of been coming in a little bit softer maybe. So, you were looking for growth in your markets in the low teens versus IHS, which is I think looking for plus 13.4%. Just curious if you see your assumption for low teens, if that's driven by any different view versus IHS? If you're using the IHS numbers? If you see the customers you serve in the regions in which you operate being maybe more or less impacted than the global total? And then, just given that you do have your own in-house electronics business, which also serves external customers, and I don't know to what extent you're purchasing semiconductors in advance, what's scarce or if there's other electrical components maybe that are being impacted also? Just if you have any direct exposure there to difficulty sourcing components or if it's more just the indirect impact of lower customer production? And if you do have any kind of direct exposure, what you're doing to kind of limit that, or what risk you might see there?

Yes. I'll answer your last question first. On the direct side, definitely, it's an impact to us. We do source semiconductors for several of our products, and that's ICs, microcontrollers and motor drivers are the three most predominant, one that we are struggling with. So far, we've been able to get through it with some expedites and a lot of freight, and we seem to be in pretty good shape at the moment, although that could change at any time. Just as an example, we're expecting, I think, $3 million in expedited freights in Q1 around that. So, I think that's definitely not been easy. Our team has done a great job. And I give some of our suppliers a lot of credit for helping us to get through it successfully so far. And then, of course, on the customer end, yes, I mean, our guidance is based on what we see from customers. The IHS numbers are built in as one factor, but the driver of it is the specific information we get from our customers. And in the releases, obviously, with the semiconductor situation, the releases in the next couple of months, certainly through the first half of the year is what we're watching most closely. And that's where we're kind of deducting a little bit of revenue based on what we see. But I think, from our situation, we're maybe a little bit better than some because the OEMs are really focusing on their higher-margin vehicles, their vehicles where they have a higher mix of content, feature content, which keeps us a little bit more stable on those. Not that we're not seeing impact, but I think that's what's helping us stay just maybe a little bit higher.

[Operator Instructions] Our next question is from Scott Stember with CL King.

Can you maybe talk about the steering wheel heaters? Obviously, this is something in the past that was more of a -- or considered more of a, I don't know, commoditized item, but this seems like this is really starting to really take on some advanced technology. Maybe talk about that and some of the opportunities for additional growth.

Sure. Well, I wouldn't call it a commoditized item at all. I think it's still a luxury feature. In fact, if you look at it from a take rate perspective, it's significantly lower than our CCS and heat take rates, just in general. So we still think there's pretty good opportunities for growth, just in the steering wheel heat side of things. Now, obviously, the movement in the industry towards more ADAS content in vehicles has kind of picked up the need for hands-on-detection, integration in the steering wheel. So, you're going to see that I think grow steadily, which is why we focused on integrating a sensor capability into our Stihler heat product. And we're continuing to work on innovations around that. We're really focused on that so that we can provide an efficient solution for our OEMs. Certainly, we're very pleased with the growth, and we expect that growth to continue going forward. And we're going to continue to invest in making sure that we can add electronics and sensoring and other technologies so our product can stand out of most of competition.

Got it. And just last question on medical. It sounds like you expect growth in 2021. But, how should we look at that from first half versus second half of the year, given some of the deferral trends that you guys are seeing?

Yes. It's a tough space right now, to be honest with you, because of a couple of reasons. One is, of course, the electric procedure reduction overall has a direct effect on our product utilization. And hospitals are struggling a little bit more financially, so capital expenditures are down at hospitals. And then, the third factor is salespeople aren't allowed to go visit hospitals and sell products. So, when we're looking -- when we're out there trying to sell our new product like ASTOPAD, which was just approved this year, it is pretty difficult to do that virtually. So, I think those headwinds definitely are going to be steady in the first half. That's my expectation. We hope it picks up a little bit in the second half, and we are expecting some growth on the year in Medical, if that -- assuming that happens in the second half. But, I do expect Medical won't grow at the same rate as the overall Company. So, it's going to lag a little bit this year.

And we have reached the end of the question-and-answer session. And I'll now turn the call over to President and CEO, Phil Eyler, for closing remarks.

All right. Great. Thanks, everyone, for joining our call today. As I've consistently shared in the past, we remain very-focused on operational execution, innovation and cash flow generation. I'm really proud of our team's ability to take swift operating action in light of the pandemic and the fluctuating global automotive production levels and I’m very proud that we delivered record performance in the second half of 2020. Of course, we expect continued industry headwinds in 2021. That said, the momentum in new awards, along with expanding demand for our new technologies and continued focus on productivity, I believe, position us very well to deliver significant long-term shareholder value. We appreciate your interest and support and look forward to, as always, keeping you apprised of our progress.

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