Gentherm Incorporated (THRM) Q2 2021 Earnings Report, Transcript and Summary

Hello, and welcome to the Gentherm Inc. Second Quarter 2021 Earnings Conference Call and Webcast. [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 and Corporate Communications. Yijing, 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 continued strong execution of the Gentherm team for delivering solid financial results in the second quarter. The automotive industry continues to face significant supply disruptions, including semiconductor shortages, escalating freight costs and other inflationary factors. As a result, light vehicle production in our key markets in the quarter was 12% lower than we provided in our 2021 guidance, 11% lower than what was expected 3 months ago and 7% lower than the first quarter. Nonetheless, we delivered 96% organic revenue growth in Automotive year-over-year in the second quarter, excluding the impact of foreign currency translation. This outperformed light vehicle production in our key markets by 60 percentage points. In addition, we continued our momentum on Automotive awards, securing $400 million in awards from global OEMs with an 81% win rate in the second quarter.On the cost front, our disciplined approach to expense management allowed us to reduce some operating expenses from first quarter levels to offset the near-term material cost challenges we're experiencing as a result of the supply disruptions. In addition, when comparing to where we were 2 years ago, operating expenses in the second quarter of 2021 were 10% lower than in the same period of 2019.Year-to-date, in spite of the significant supply chain headwinds, we delivered adjusted EBITDA margin rate of 17.2%, and we generated $64 million in free cash flow, the highest free cash flow level in the first half of any calendar year in company's history. Matteo will provide more details on our financial results in a few minutes. Now let's turn to Automotive highlights on Slide 4. In the second quarter, we launched our Automotive solutions on 18 different vehicles across 10 OEMS, including General Motors, Great Wall, Kia, Nissan, Rivian, Stellantis and Volkswagen. We continue to see momentum for our CCS products and launch on the Chevy Bolt, Great Wall HAVAL, Mercedes EQS and a Rivian R1T.On the Battery Performance Solutions front, the fastest-growing product in our portfolio is our Cell Connecting technologies. We have both a wire-based cell connecting technology and our proprietary thin foil technology. Our R&D team applied an innovative mechanical structuring process that offers increased design flexibility and some exciting opportunities for new applications. Specifically, we're adding an embedded cell sensing circuit to our proprietary thin foil that could result in a higher overall safety of lithium-ion battery packs. By knowing the battery state of health, abnormalities inside the battery cells can be detected early. As a result of launching our proprietary thin foil solution, I'm pleased to share that we won the German Innovation Award in 2021 for our innovative Cell Connecting Board in the e-mobility technology category. This award recognizes our ultra-flat foil conductors for significant production in manufacturing complexity, a simplified and very fast design process and a modular structure that can be adapted to almost any type of battery module. I'd like to congratulate our R&D team for continuing to expand Gentherm's technology leadership. On the customer front, we were honored to be named the 2020 General Motors Supplier of the Year for the second consecutive year in recognition of our relentless dedication to delivering exceptional customer service and innovative solutions. The annual award highlights a very small percentage of global suppliers that distinguish themselves by exceeding GM's requirements, in turn, providing GM customers with innovative technologies and highest quality in the automotive industry. In addition, we're proud to be honored again this year by Honda as a top North American supplier. This recognition reflects our commitment to developing innovative solutions for our customers and our team's dedication and commitment to quality, innovation and operational excellence. I'd like to thank the Gentherm global team for continuing to exceed customer expectations.Now on to Slide 5 to discuss Automotive Awards. I'm very pleased to announce that we have won our first production vehicle award for climate sense technology, our software-driven micro-climate platform using an algorithm based on thermophysiology. As you might have already seen in yesterday's press release, this will be on a small volume, new 2024 model year electric vehicle with a global automaker. We expect content per vehicle for this particular EV to be significantly higher than vehicles with our traditional Climate Comfort Solutions. This is truly an important milestone in our long-term strategy, demonstrating the potential our technology has to address the growing needs of the electric vehicle market. With the introduction of ClimateSense, we are disrupting the current thermal solutions in vehicles by significantly reducing power consumption and increasing range, all while providing best-in-class passenger comfort. In the second quarter, we continued our business award momentum from the last couple of quarters and secured $400 million in new program awards across 11 different OEM customers. I'm proud of our global team for continuing to win over 80% of the opportunities available to us. We won multiple CCS awards, including platform wins with the Ford Expedition, Great Wall HAVAL F 7, Lincoln Navigator and the Hyundai Grandeur, which includes the CCS active solution. We received 15 steering wheel heater awards across 4 OEMS, including multiple Cadillac SUV electric vehicles, the Chevy Tahoe, Chevy Traverse and Hummer EV. Importantly, we want to combine steering wheel heat and hands-on detection sensor award for Audi, including the A4, A5, A6, A8 and Q5. This comes on the heels of seat heater awards on the same Audi vehicles that we announced last quarter. On the Battery Performance Solutions front, we continue to make progress in expanding our business, winning an air cooling battery thermal management award for the Kia Sportage.Now let's turn to Slide 6 for a discussion of our medical business. The pandemic continues to create challenges for our medical business with COVID-19 restrictions and reduced hospital access for our sales force, especially in Canada, Europe and Latin America. That said, hospital access is improving in the U.S. In the second quarter, we won a 3-year patient warming contract with Premier that also includes ASTOPAD and WarmAir, FilteredFlo products. Premier is one of the largest group purchasing organizations in the United States. This award opens the door for us to potentially increase our patient temperature management market share.On the R&D front, we launched Blanketrol CoolRepeat in the U.S. during the second quarter, further enhancing Blanketrol's functionalities. CoolRepeat is an accessory to the Blanketrol equipment. This device allows the patient temperature data from the Blanketrol to be displayed on the patient monitor. Here, the data can then be imported into their medical record. We expect this to have a significant impact on nursing efficiencies.To summarize, I'm proud of the Gentherm team for consistently outperforming light vehicle production in key markets we serve and securing another $400 million of new awards from automakers around the world, including our first ever production award for ClimateSense. Despite the headwinds in the global supply chain, we generated the highest level of quarterly cash flow from operations since 2018. While the supply disruptions will remain challenging in the near-term, the momentum in new awards, winning coveted supplier awards from General Motors and Honda, coupled with a disciplined approach to cost management, position us well to continue to deliver over the long-term.With that, I'll turn the call over to Matteo for a little more color on the financial results.

Okay. 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 second quarter results. So for the quarter, product revenues increased by 96% compared to the same period last year, primarily due to the negative impact of the COVID-19 pandemic in last year's second quarter. And if we adjust for the impact of FX, our overall product revenue increased by 87%.Starting with the Automotive segment, revenue was $255 million, more than double the revenue we recorded last year. And adjusting for foreign currency translation, Automotive revenue increased by 96%, driven by higher volumes as a result of 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 36% over the prior year period. As Phil mentioned earlier, we outperformed light vehicle production by 60 percentage points, partially due to geographical mix. Albeit of more relevance, when compared to the second quarter of 2019, Automotive revenues increased 8%, excluding the impact of FX. And in comparison, light vehicle production decreased nearly 15% from the second quarter of 2019 to the second quarter of 2021 in our key markets. All the automotive product lines increased significantly year-over-year and has COVID negatively impacted all the product lines last year, I will just highlight a couple of important factors besides the COVID recovery that contributed to the revenue growth. CCS revenues increased due to higher volumes and take rates in Hyundai, Kia, trucks and SUVs for both Ford and General Motors, Mercedes S-Class, Mazda and several Stellantis models.Seat heaters revenue increased due to higher volumes with BMW, Ford, General Motors, Mercedes and Volkswagen. Steering wheel heaters were up, volume increased primarily as a result of the hands-on detection enabled heaters with several VW models. Cables revenue increased due to higher volumes with Bosch and other Tier 1s. BPS revenues increased as a result of Daimler's rollout of our PACE Award, bringing thermoelectric solution on the C-Class as well as the continued success of the BMW mini cell connector. In Electronics, revenue increased due to higher volume with Ford's manual seat module solution as well as this time in ERV industry.If we move to the Medical segment, revenues decreased approximately 7% compared to the prior year period. And let me remind you that last year's second quarter benefited from the extremely strong Blanketrol sales to help with temperature management of COVID patients. If we look at the second quarter of 2019 as a pre-quarter comparison, Medical revenues increased by 10% in the second quarter of 2021 compared to 2019. And revenues also increased 19% sequentially compared to the first quarter of 2021.If we move to gross margin, gross margin rate for the second quarter was 29.8%. This compares to 19.6% in the year ago period. The 10 percentage point increase was driven by fixed cost leverage due to the higher volume, labor productivity and factories and positive effects primarily due to the appreciation of the Euro compared to the U.S. dollar. These were partially offset by the negative impact from industry-wide supply chain reductions, annual customer price reductions as well as wage and material cost inflation. We estimate that the impact of the supply chain disruption in the quarter resulted in approximately $29 million in lost revenue for Gentherm and $4 million in higher cost of goods sold due to higher material costs and increase in freight.Moving to our operating expenses, which were $47.5 million in the quarter compared to $36.6 million in the prior year period. The 2021 second quarter amount included $2.1 million of restructuring charges, and this compares to last year's second quarter when we had a credit of $0.6 million due to a reduction in the estimate of previously recognized employee separation costs. If we adjust for restructuring and acquisition expenses in both periods, operating expenses were $44.6 million, up from $37.2 million in the second quarter of 2020, a year-over-year increase of approximately 20% was primarily driven by the reversal of the temporary hostility measures taken last year to mitigate the impact of the COVID pandemic, a onetime incentive compensation adjustment that occurred in the prior year period as a result of the COVID impact on the company's financial results and higher R&D expenses, partially offset by higher R&D income. Adjusted EBITDA in the quarter was $44 million compared to break- even in the prior year period. Finally, adjusted diluted earnings per share in the quarter was $0.85 per share compared to a loss of $0.30 per share in the second quarter of last year. Our effective tax rate was 18.8%, in line with the first quarter.Now moving to the balance sheet on Slide 8. Our cash position at the end of the quarter was $187 million, up sequentially from $171 million in the prior quarter. The increase of $16 million was a result of $34 million free cash flow generation, partially offset by a repayment of the revolver. The $34 million free cash flow generation in the second quarter compares to $17 million in the prior year period. And the $17 million year-over-year increase was driven by higher cash flow from operating activities, partially offset by higher capital expenditures.Net debt decreased sequentially by $29 million, and total debt stood at $48 million. We closed the second quarter in a net cash position of $139 million. Based on the trading format, consolidated adjusted EBITDA ended June 30, we had $432 million of remaining availability on our line of credit, up from $419 million at the end of the first quarter. The total available liquidity as of June 30, was $618 million, up from $590 million at the end of March.Now let me turn to Slide 9 for 2021 guidance. Let me start by saying that the semiconductor-related customer volume reductions continue to be extremely volatile and create significant near-term challenges. Based on our performance in the first half of 2021 and the updated light vehicle production forecast, we are updating the guidance range we provided at the beginning of the year. We are now expecting product revenues to be in the range of $1.11 billion to $1.17 billion based on the current forecast of customer orders and production outlook for the balance of 2021 and the FX remaining at the current level. This is based on the best information that we currently have from our customers and suppliers. The midpoint of our guidance implies an organic growth rate of 22%. Additionally, we now expect adjusted EBITDA margin rate to be in the range of 17% to 18%, and our effective tax rate for 2021 to be between 20% and 22%. We continue to expect capital expenditures to be in the range of $50 million to $60 million. With that, let me turn the call back to the operator to begin the Q&A session.

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

Thanks for taking the question. Just wondered if you could start off by talking about the bookings environment. The $400 million awards look pretty solid for the quarter. And I did notice quite a few steering wheel heaters that were called out. So just wanted to see maybe if you could break out by category what the $400 million in awards look like between maybe steering wheel heaters and CCS?

Yes. We don't really usually breakout the awards in particular, but I can talk a little bit about the environment. Certainly, a lot more active than last year, no doubt about it, and expect that to continue at a pretty good level for the remainder of the year. So it's definitely a nice pick up. And certainly quite happy about the performance that we were able to achieve in the quarter in terms of win rates and still looking to execute throughout the rest of the year. Steering wheel-wise, but we do see an increase in interest, not just for our steering wheel heat, but also for our integrated HoD Hands on Detect and steering wheel product, as you can see with the Audi wins in particular. And I will say that CCS was pretty strong. CCS equated to about one-third of our wins in the period. So I'd say that kind of shapes up what's looking well.

That's helpful, Phil thank you. And then on the ClimateSense win, congrats, first of all, and wanted to see, is it safe to say that, that win is likely with one of the Phase III customers that you guys had talked about in prior calls? And then on the content per vehicle on that one, I know you said significantly higher than CCS, but is there any way to quantify that just a bit more, I would assume, typically, I've thought of ClimateSense as multiples of typical CCS award, but any way to maybe drill down a little bit on that one and quantify it a bit more?

Yes. What we said is about all our share, just due to confidentiality. So it is a customer we've worked with for a long time. We're excited about the award. It is a relatively small volume, but a great chance to prove out the technology, get it on the road, and we're very excited about the milestone. In terms of content, it's definitely several multiples, or at least a few multiples above the current climate and comfort solutions. And they kind have been line up with what we've said in the past.

That makes sense. And then just a couple on the outlook. Maybe Matteo can handle a couple of these. But noticed, I mean, the growth outlook for the second half that you're implying, I think, is somewhere in kind of the mid-to-high single digits. Just wanted to see if maybe you could help split between 3Q and 4Q, just given the supply chain disruptions and tightness. Any help there would be helpful.

Yes, Matt. So let me start by reiterating some of the messages that we highlighted in our prepared remarks, primarily the fact that the situation continues to be extremely fluid and things are changing regularly. So this is really based on the best information that we have from our customers and our suppliers. We are seeing -- what we have projected is basically a slightly improvement of the current supply chain situation towards the back-end of the year. And in terms of, when you do the sequential comparison, second half versus first half, you're getting exactly to the kind of mid-single-digit growth in the second half versus the first half. It's a little lighter than what maybe IHS is saying, but this is really based on the best information that we have. And we think that the challenges that we are seeing today will continue for quite some time. So that's kind of how we profile the second half of the year.

Okay. And then just last one for me. The EBITDA margin outlook, I guess, was trimmed by 50 bps at the midpoint. And just wanted to see, I mean, how much of that $50 million is supply chain-related versus other items that may have been trimmed?

It's all of it, quite frankly. You see what we said the impact was in the second quarter. If I just take the first half, just on higher cost of goods sold in terms of higher premium freight, spot buys, raw material, cost pressure primarily copper, we are amounting about $7 million of gross margin impact year-to-date. We are not expecting things, as I said before, to dramatically improve in the second half. So that's pretty much the key driver here.

Thank you. [Operator Instructions] Our next question is coming from Ryan Sigdahl from Craig-Hallum.

Congrats on the nice results. First, on ClimateSense award. Just want to dig in on ClimateSense that award a little bit. Within the $400 million of auto awards you announced, is that award in there? And then secondly, any sort of R&D, SG&A, CapEx considerations related to the ramp of that award in the next couple of years?

It is in the overall number, yes. And yes, we will expect to continue to slightly ramp up our investment in R&D and CapEx for that program over the coming quarters. Yes. This is, obviously, our top priority now with ClimateSense is the best possible execution of that program. This is our chance to get it on the road and in mass production and huge priority.

And then you mentioned small volume. Is this a small volume platform? Or is this only going to be specked in on certain trims or packages for a specific vehicle?

It's a small volume platform.

Got it. So you're on every vehicle within that platform?

That's our expectation. Yeah.

Got it. And then just going back to kind of the IHS kind of sequential first half or second half. I mean, significant outperformance in the quarter relative to industry production, but a little lighter in the back half. Is that just a timing difference between therm and kind of IHS production? Or was there something, I guess, specific that drove that 60% outperformance in the quarter and then maybe slightly weaker in the back half relative to IHS?

So let me talk maybe first about the outperformance in the quarter. I think when you compare us to IHS, we definitely benefited, as I mentioned in my prepared remarks, from the geographical mix as we are much heavier within North America. Then the impact of new launches and higher take rates, as we mentioned with Hyundai, Mercedes, GM, VW; BPS, still performed extremely well in terms of revenue in the quarter as we continue to see growth with BMW, in the Daimler application that I mentioned earlier. And then HoD, the hands-on detection device with VW really positively impacting the steering wheel heaters. So and also China then I would also add, we had a nice growth for us. If you look at, you will see it when we publish the Q tomorrow, our China revenue as a percentage of the total now is almost 13% in the second quarter, which is the highest we have had in quite some time. So these are the, I would say, the key drivers for the second quarter outperformance. As far as the second half, as I mentioned before to Matt, this is really based on the information that we are receiving from our customers and suppliers, and that's what drives our profile. That's how we keep it.

I think in general, we see directly the headwinds of plant shutdowns. It's definitely still happening, definitely in front of us. And I think that's what's informing it.

Great. Then just switching over to capital allocation. I mean, the balance sheet continues to get stronger and grow cash there, generating a lot of free cash flow. Any change in priorities? And then I guess, secondly, how do you feel about kind of stock buybacks versus the M&A pipeline?

Yes. I mean, priorities still remain the same. The first priority is still to manage liquidity to protect for any potential volatility in the economy. We still aren't completely out of the woods. So we're still being mindful of that. Second priority for us is inorganic growth. So we're certainly looking at investments and acquisitions at a higher level than we have in the last few years. And we think that provides a good opportunity for us to accelerate our focused growth strategy along the pillars that we have identified strategically. And then definitely share buybacks, as we deem falling into the right range of price and timing, we would look at that, along with our normal CapEx expansion needed for new business.

Thanks guys. That's it for me. Good luck.

Our next question is coming from Ryan Brinkman from JPMorgan.

Just wanted to follow-up on the, what you're seeing relative to the semiconductor shortage situation in the second quarter. I think there's a lot of call for easing impact on customer production, but also the insight into when the customers are going down, if you're getting any more heads up? And then relative to your own procurement of electronic components, if they're more available or if you're seeing any less inflationary pressure?

I didn't catch the very first part of the question, but I think I got the gist of it. So just talking about the situation with demand related to semiconductor shortages first, we're still seeing significant pressure in the short-term. What I have to do is read the news in the last several weeks, there's still been several plant shutdowns. And based on the information we're receiving from our customers, still see some headwinds, no doubt about that. And it's a very -- as Matteo mentioned, it's very fluid. This is not something that anyone can predict, because as opposed to reliable order reductions, these are more in the tune of immediate cancellations. Now, of course, we're hopeful some of that comes back with a significant demand in the marketplace, and we are seeing some signs of some easing in the back half of the year, in the last few months of the year. So that's positive. But again, we'll have to wait and see how that pans out. When it comes to our supply of semiconductors, definitely still facing challenges. We have a SWOT team put together, draining a lot of resources from our purchasing and supply chain and manufacturing teams just to keep our plants running with semiconductors. We've done a good job. I'm very proud of what the team has done so far, but we're still having to pay expedited freight to get material in, increased prices to buy on the open market instead of through our suppliers, and that hasn't slowed down a whole lot. So we still see the headwinds for that. And your last point on inflation, I'll let Matteo talk about the inflationary pressures.

Yes. So Ryan, in terms of, if I dissect the inflationary pressure and the impact on the quarter, just, for example, the $4 million that I mentioned earlier in terms of the impact on cost of goods sold, you have about a $1 million, which is comprised of higher premium freight and then lost productivity due to the abrupt shutdowns that Phil just mentioned. And then you have about a couple of million dollars coming from the spot buys, the open market of semiconductor type of products. And then the remaining million is raw material inflation and primarily copper. We are not expecting a significant improvement of these kind of dynamics happening in the second half of the year. So I think to Phil's point, we are very proud of what the team was able to accomplish in the first half of the year by delivering still like a 30% gross margin rate in spite of all these challenges. But I think these challenges, we are expecting this to stay for quite some time.

Great. Thanks. And are you able to say whether the ClimateSense award is in conjunction with Lear, with whom I know you had partnered on a go-to-market strategy? And then separate from that, are you able to say whether the customer motivation do you think was driven more by the energy efficiency savings, as highlighted in the press release or a desire to increase feature comfort, for example, via net conditioning, et cetera., or maybe both, such as you might expect in a luxury vehicle?

We can't give any more details around who we're partnering with or any customer details. But in terms of the motivation, it was a combination of the value proposition of ClimateSense. Certainly, big driver was power consumption reduction and range extension. No question about that. But also the idea of taking thermal comfort to a level probably never achieved before in a vehicle was certainly, and will certainly be a big part of the solution.

Very helpful. Thank you.

Thanks, Ryan.

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

Sure. Thanks, everyone, for joining our call today. As I consistently shared with you in the past, we remain laser-focused on operational execution, innovation and cash flow generation. I'm extremely proud of our team's agility, flexibility and dedication to deliver on our commitment to all of our stakeholders in spite of the significant challenges we face in the supply chain. While we expect continued industry headwinds in the remainder of the year, the momentum in new awards along with expanding demand for our new technologies and our continued focus on productivity, really 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.

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.