Hello, and welcome to the Gentherm Inc's. First Quarter 2021 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Yijing Brentano, Investor Relations. Please go ahead.

Thank you, and good morning, everyone, and thank you for joining us today. Gentherm's earnings results were released earlier this morning, and a copy of the release is available at gentherm.com. Additionally, a webcast replay of today's call will be available later today on the 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 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. I'm pleased with the strong execution of the Gentherm team as we continued our momentum on the top line and delivered solid financial results in the first quarter. This despite significant supply disruption, including semiconductor shortages, port congestions and other inflationary factors. Excluding the impact of foreign currency translation, we delivered 24% organic revenue growth in Automotive year-over-year in the first quarter, outperforming light vehicle production in our key markets by 850 basis points. While light vehicle production declined 15% sequentially from the fourth quarter of 2020 to the first quarter of 2021, reflecting the challenges in the global supply chain, our Automotive revenues remained flat to the fourth quarter, still at company record levels. In addition, we continued our momentum on automotive awards from the fourth quarter, securing $400 million in awards from global OEMs with a strong 90% win rate in the first quarter. On the cost front, our disciplined approach to managing expenses allowed us to further reduce operating expenses from the fourth quarter of 2020. In addition, when comparing to where we were 2 years ago, operating expenses in the first quarter of 2021 were 12% lower than the same period in 2019. We continued to deliver adjusted EBITDA margin rate in the high teens and generated strong free cash flow, even considering increased capital expenses as we prepare for new launches and invest in new technologies. Matteo will provide more details about our first quarter financial results in a few minutes. Now turning to the Automotive highlights on Slide 4. In the first quarter, we launched our automotive solutions on 10 different vehicles across 8 OEMs, including Great Wall, Honda, Hyundai, Nissan, Stellantis and Volkswagen. We continue to see momentum for our…

Thank you, Phil, and thank you to everyone joining the call today. So let me turn to Slide 7 to focus on the items that most significantly impacted our first quarter results. For the quarter, product revenues increased by 26% compared to the same period of last year. If we adjust for the impact of FX, our overall Product Revenues increased by 21%. Starting with the Automotive segment, revenue was $279 million, corresponding to a 29% increase compared to the prior-year period. Adjusting for foreign currency translation, Automotive revenue increased by 24%, driven by higher volume as a result of new launches and higher take rates, as well as the negative impact of COVID-19 in the prior-year period. 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 16% over the prior-year quarter. And as Phil mentioned earlier, we outperformed light vehicle production by 850 basis points. We saw strength in all of the Automotive product lines and more specifically, our BPS revenues increased 58% as a result of new launches with Mercedes, the strength of the cell connecting boards solution launched on the BMW e-Mini and the thermoelectric battery thermal management product with Stellantis on the Jeep Renegade. Steering wheel heaters revenue increased by 50% compared to the first quarter of last year as a result of the hands-on detection-enabled heaters with VW, the ramp-up of the Audi Q5 and Tesla Model Y. Electronics revenue increased almost 46% due to higher revenue from automotive, including the memory seat module program with Ford as well as RV products. CCS revenues increased 32% to $109 million, the second-highest quarter in the company's history due to higher volumes and take rate in Hyundai Kia, General Motors trucks…

[Operator Instructions]. Our first question today is coming from Matt Koranda from ROTH Capital Partners.

Just curious if you can provide a little bit more color on the cadence of revenue growth expectations for the rest of the year here, especially 2Q. I know that some of your customers have sort of talked about losing quite a bit of production given the semiconductor shortage. And just wanted to get your take on sort of how we should be thinking about the progression of revenue and margin for the rest of the year? Obviously, we can kind of infer that you're still guiding to some outperformance relative to light vehicle production for the rest of the year here but would just like a little bit more color on that.

Matt, I'm going to take this one. So the -- as I mentioned, the overall supply chain disruptions we faced in the first quarter impacted us by about $5 million in lost revenue for the first quarter, and when you look at the gross margin rate, about 120 bps of pressure in the first quarter. So currently, we are seeing a slightly bigger impact in the second quarter, I would say, as we continue to see OEMs, particularly in North America, both all FCA, Ford, GM announced plant shutdowns due to the semiconductor shortage. So we've seen a little bigger impact in the second quarter. I would say we don't give quarterly guidance. So I think the way I would provide it is, as you've seen, we are confirming the guidance that we gave for the year. So I think, in our thinking, the guidance that we have today, both on the revenue side and on the profitability reflects the best knowledge that we have around the supply chain disruptions that the industry is facing. I would say there is still a lot of uncertainty. And we are thinking that things will somewhat get a little better towards the second half, but that's kind of the best of our knowledge right now.

Okay. That's fair. And then just any concern that you guys are pulling forward any revenue in this environment, obviously, with OEMs prioritizing sort of the higher-profitability vehicles, higher trim-level vehicles that probably improves your take rates quite a bit I would assume. And so any concern as we sort of normalize as the shortages abates, whenever that may be, that the mix shift back to sort of a more base level vehicle may impact you in an outsized way?

Yes. I would say, not a huge amount. We are watching a couple of customers where the take rates seem a little bit high, but we are fortunate that the vehicles where we have the highest penetration have been the vehicles that have been the focus of maintaining production. Many of those are running at expected take rates. So we don't expect to see a change there. But built into our guidance is a little bit of softness on a few customers that we think are running a little bit high.

Okay. Great. And then maybe just wondered if you could talk a little bit, Phil, about the current bookings environment. It looks like we're back to a pretty solid level with the $400 million, and just -- and you highlighted some nice wins on some pretty high-volume platforms. And so just curious if you could talk a little bit about what you're seeing in sort of the bookings environment. Has that changed at all just given, I would assume, OEMs are somewhat all hands on some of the production issues? It doesn't seem like it's the case, but I just wanted to see if you could kind of provide a little bit more color on the current bookings environment that you're seeing?

Obviously, we're pleased with the quarter, both on the overall awards and the win rate. And the profile we see over the course of the year so far looks strong. So we're pretty excited about the year. We're expecting to get back up to close to the run rate we had in '19, '18, at kind of level '17. So in that ballpark. It could be higher, it could be lower. It depends on timing, but it's pretty busy out there right now.

Okay. And then last one, just on the inventory and gross margin front. It looks like you guys have managed through that really well. Obviously, there's going to be an impact, no matter what, you're just in the environment that we're in. But could you guys call out just any particular raw materials or any sort of components that you purchase that are in short supply or that are seeing outsized inflationary pressure? I'm just curious how you're managing through that. It looks like higher level, you're managing very well. But anything to call out that we should be sort of noting and -- as we think about gross margins for the remainder of the year?

Sure. So let me maybe address the inventory question first, and then we'll talk about inflation. So as you look at our balance sheet actually, we increased our inventory by about almost $10 million since the end of the year. And the philosophy for us has been, we have a very strong cash-generating company. The balance sheet is extremely strong. Therefore, we are using that to our advantage and also to make sure that we have enough inventory to fulfill customer demand. So if you break down this increase in inventory, really half is driven by the -- to make sure that we can mitigate some of the pressures due to the port congestions, particularly on the West Coast. And other half is to make sure that we have enough electronics and semiconductors that we can fulfill customer demand. So that's the rationale of inventory strategy revenue. So really leveraging the strength of the balance sheet to our advantage and the customers' advantage. On the inflationary side, the biggest raw material that we consume, Matt, is copper. We don't buy copper per se, but we buy semi-finished products like harness wire, heating wire, magnet wire that all has copper. So we are obviously facing the inflationary pressure that copper has. About 40% is passed through. And then the rest is -- we are working selectively with some customers on price increases to try to mitigate this pressure. But to your point, I think the team has done a fabulous job in continuing to deliver a strong gross margin rate performance despite the supply chain disruptions that we've talked about.

Our next question today is coming from Ryan Sigdahl from Craig-Hallum Capital Group.

Great. Curious on so you had 10 nameplate launches in Q1. It was quite a bit lower than the 20 to 40-ish per quarter cadence looking back over the last couple of years. Just curious why the deceleration there?

Just launch time. That's it. It's the timing of the vehicle launches.

Good. Then when do you think -- as we talk about the chip supply, supply chains, et cetera, there are fairly wide expectations out there from companies. So I guess curious, what are you guys thinking? And do you expect those challenges to persist into 2022?

Yes. We take -- we have 2 data points. One is, of course, our semiconductors that we purchase from select suppliers. So we certainly are as deep as we can get with those suppliers and using that intelligence to forecast as best we can. But probably even bigger would be the impact to our customers. And looking at the releases that we're getting from customers and the feedback we're getting from customers on top of that and the public information that they're sharing with everyone, we're looking at all those elements and kind of putting our best estimates out there. So we feel like we've done the best we can with the information at hand. It seems to change relatively quickly. But if you listen to all those data points, those point to some kind of relief coming in the -- sometime in the second half of the year. But we also believe that, in general, the problem will persist at some level, probably into next year. So it's going to be a challenge. And as Matteo pointed out, there's continued uncertainty. So we'll have to watch it real closely. But we built in the best knowledge we have into our forecast.

And then two on EVs. I guess I don't know if you've ever quantified it or if you can, but any idea what type of market share you have on EVs from your cell connecting Battery Performance Solutions? And then secondly, on ClimateSense, any update on the third development project with GM and BMW? That's the same update, I believe you had last quarter. So I guess curious if there is a time line for that phase of development. And then any update specifically on those 2 OEMs kind of over the last few months within that development program?

Sure. I'll start with CCBs, the cell connecting boards. Pretty low market share right now, and that's because most EVs had already been launched before we developed our what we consider very innovative, competitive product. So that's ground we'll have to make up with new awards going forward. Feedback is great. We have a ton of activity on that. And we think we'll gradually start replacing. What right now is in the market which is primarily wire-based and some thin foil chemical-etched product. But we believe we have a nice advantage there, and we continue to advance that. So pretty excited about the potential growth of cell connecting. That's a big growth engine for us in the future, we think. On the ClimateSense side, I would say those -- some of those phases that we announced in the last quarter were relatively early. And so we're just kind of in the middle of those and continue to make good progress. But one data point that I shared is that with one of the OEMs, they did cold weather testing, and they actually showed power consumption performance that was even better than we had seen in other testing. So a lot of good validation of at least the power consumption side of the product, and everything continues to move forward. So we're working hard on it. We've got a ton of resources at it. And we know that we eventually have to get to a point of an award, and we expect that's in the not-too-distant future.

We reached end of our question-and-answer session. I'd like to turn the floor back over to Phil for any further or closing comments.

Sure. Thanks, everyone, for joining the call today. As we'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 agility, flexibility and dedication to deliver on all of our commitments to all of our stakeholders. While we certainly expect continued industry headwinds in the remainder of 2021, our momentum in new awards along with demand for our new technologies and our continued focus on productivity position us well to deliver significant long-term shareholder value. We appreciate your interest and support and look forward to keeping you apprised of our progress going forward.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.