Phil Eyler
Analyst · Baird. Please proceed with your questions
Thanks, Matteo. Before we get started with a detailed review of our mid-term strategic plan, we will show you a short video about Gentherm. We encourage you to join via the webcast. You'll be able to see the video and slides on the webcast screen when we advance through them here in the room. For those of you remaining only on the phone line, you'll hear just a few minutes of silence while the video is playing for the next couple of minutes. [Video Presentation] We will now start a detailed review of our mid-term strategic plan and 2026 financial goals, and will conclude with a Q&A session. In 2018, we established our clear mission, creating and delivering extraordinary solutions that make meaningful differences in everyday life by improving health, wellness, comfort and energy efficiency. And we remained laser-focused. This has been our true north every day. We are truly a purpose driven company and we believe that our purpose differentiates us from the competition. Health, wellness, comfort and energy efficiency drives everything we do from long-term strategy to daily execution. This mission drives our entrepreneurial innovation around the world. You will certainly remember us and our mission on those winter mornings when you experience our thermal solutions in your car or if you or a loved one are treated by our patient temperature management products in a hospital, and realize an improved outcome and faster recovery. You're going to hear more today about the reasons why Gentherm is a compelling investment. And during the presentation, we'll walk you through more details on the points shown here. We are a pure play leader in thermal and pneumatic technologies. We continue to sharpen our portfolio to capitalize on our core competencies. Significant tailwinds for growth remain through a massively underpenetrated market as consumers demand more of the features we offer. Our best-in-class innovative technologies not only improve consumer experience, but importantly play a significant role in improving power consumption in the electric vehicles, particularly with respect to extending driving range. Our talented product development team has achieved some amazing results in creating new products and technologies that we believe will be in high demand on vehicles of the future. Our global reach is remarkable for the size of our company. We can support every customer who seeks our innovative solutions around the world. Our execution is proven. For five solid years, we have delivered consistently on our milestones, while constantly pivoting to address unprecedented volatility. And on the cost side, we are proud of our ability to drive results in turbulent times. We have transformed the talent and culture at Gentherm through development and refreshment. Talent is a competitive strength. And finally, our Board and executive team have partnered to continue our path forward, delivering results with strong governance. We have all certainly been tested in the storm and we are proven. This combination of attributes makes us poised for high-return growth outpacing the market. Our diverse Board is highly engaged, bringing talent from multiple relevant domains to guide our strategy and provide sound oversight. There is a very prudent blend of highly-experienced Gentherm Board members, who helped us navigate the transformation of the company and the unprecedented challenges. In addition, several key positions were refreshed to assure strong governance and fresh oversight. Our executive leadership team is highly talented with broad management experience from companies such as BMW, Pepsi, Infineon, General Electric, General Motors, Visteon, Sprint T-Mobile and HARMAN Samsung. This diverse team has together led a strong transformation of Gentherm and built the company with remarkable, resilient culture as we move to the next chapter. While our broad penetration of global customers is a strong competitive advantage, we maintain that edge by assuring that we can support our customers with localized technical support, sales, engineering and local manufacturing and distribution. Our remarkable global footprint with 14,000 employees in over 30 locations was especially powerful during the extreme supply chain challenges over the past few years. Our team has quickly pivoted to support customers in real time, tapped into a multi-regional network, and adapted our local supply as needed regardless of the continent. Over the past five years, our global ecosystem has led to an improved and balanced regional mix of revenues. For example, our revenue has grown to $1.3 billion, and Asia, including China, Japan and Korea, has grown from just over 20% in 2018 to nearly 28% of our company's revenue. We are extremely well positioned with our broad global reach to take our growth to much higher levels. With our industry-leading technology and market share, we serve over 50 different OEM customers worldwide. Our list of customers continues to expand as manufacturers add thermal and pneumatic applications to improve comfort and battery efficiency. I'm very proud of our continued international expansion with customers in Asia and Europe. Our strong and trusted relationships built on our innovative, value creating products continue to deepen with our customers as we've been a key partner to help them endure the global COVID disruptions and supply chain volatility. We certainly came through for our partners, and our customers recognize this. For example, General Motors has named us Supplier of the Year for two years in a row and Honda bestowed upon us their Excellence in Value award. While our core Thermal Comfort solutions continue to be our most prevalent segment, we significantly diversified our product offerings over the past five years by adding solutions that help us provide value to our customers, while staying true to our mission. For example, in 2018, Thermal Comfort was 87% of our revenue, compare that to 65% today. As we progress on our journey, the additional product segments will provide incremental growth to support our aspiration. Five years ago, we formalized our sustainability journey by building a people, planet and places framework and implemented it at every Gentherm location. Since then, we've enhanced that framework to also highlight our efforts in developing technologies that promote increased energy efficiency and driving range by reducing power consumption of an electric vehicle. Our framework is science-aligned and conforms to industry standards such as Sustainability Accounting Standards Board, or SASB, and the Automotive Industry Action Group. While we're still at the early stages of our sustainability journey, we achieved our initial seven-year environmental targets in less than half the forecasted time. In addition, we are being recognized for our sustainability efforts. We've been named as one of America's Most Responsible Companies by Newsweek; one of Investor's Business Daily 100 Best ESG Companies; named to the Detroit Free Press's list of Michigan Top Workplaces; and the Top Employer for Engineering from Germany's Top Employers Institute, just to name a few. At Gentherm, we strive to positively impact lives. I'll share more later in the presentation about how our products have a significant impact on sustainability. ESG is at the core of Gentherm's identity. Our industry is going through a transformation and Gentherm works to exceed our customers' expectations, sometimes even before they are aware of them. Almost every major trend in our industry provides strong tailwinds for profitable growth for Gentherm. One of the most significant purchasing decision factors for automotive consumers revolves around the in-cabin experience. You don't have to look far to see OEMs touting their enhancements for entertainment, user experience, comfort, health and wellness, with the goal of differentiating for their customers on these most sought-after features. Gentherm is clearly at the nexus of health, wellness, comfort and energy efficiency with our best-in-class thermal and pneumatic solutions. Our human-centric design approach along with the integration of software and intelligent algorithms makes us a very attractive partner to deliver personalization, which is the holy grail for the car of the future. As electric vehicles take hold, our comfort and battery performance solutions with the proven ability to help reduce power consumption and extend EV range are positioned perfectly. And in the medical industry, more and more clinical studies are showing that maintaining patient temperature at the appropriate level can lead to improved outcomes, reducing recovery time and enhancing quality of life. It will come as no surprise to you all that we are in the midst of an accelerating transition to electrification in this decade. In fact, S&P Global forecast that less than 20% of vehicles produced in 2030 will utilize non-electrified traditional internal combustion engines. And in fact, the vast majority are now expected to be high voltage, full EV or plug-in hybrid, as opposed to the 2018 estimate of higher concentrations of mild hybrid 48 volt. The need for efficient thermal solutions to support range extension and comfort will be dramatic. I'm excited to share that our proactive transition over the past five years has resulted in a product portfolio that is highly aligned to benefit from the EV transition. We are already there. In fact, over 85% of our Automotive revenue is from products that can either enable or are specifically engineered to support electrified vehicles. We are already reaping the benefits in three ways: more vehicle platforms adopting our technology; higher penetration rates; and increased content per vehicle. Building upon our success in internal combustion engines, where we've seen steady gains in content and penetration over the years, we expect an accelerated revenue growth opportunity with electric vehicles. Our thermal and pneumatic solutions help improve comfort, reduce weight and decrease power needed by the central HVAC system, which has proven to increase range. Thus, EV manufacturers are adding those solutions to more platforms, increasing applications as well as more seats per vehicle. Our multi-function electronic control units, which operate both the thermal functions as well as the control motors and other actuators are increasingly in demand as OEMs look to combine ECUs and remove sensors to decrease weight and complexity. And the pinnacle for us is ClimateSense, which will transform one of the most inefficient functions in a car, but more on that in a bit. ClimateSense can deliver up to four times the content of thermal products. Our innovative battery performance solutions will drive incremental content as well. And in total, we see the content per vehicle increasing from between $30 to $300 on ICE vehicles to $150 to $1,000 on electric vehicles. And while we're passionate about our thermal solutions and the impact on human experience, health and wellness, don't just take our word for it. We have recently partnered with Escalent, a company well known in the automotive industry for consumer research. We wanted to know how consumers are responding to our products when they experience them in their cars. We surveyed about 3,000 people in North America, Europe and China, and the numbers speak for themselves. 90%-plus of people globally are very satisfied with heated and cooled seats, and heated steering wheels, and the vast majority of them want to see the product on their next vehicle. Now, before we review our go-forward strategy with you, we wanted to take a moment to review our progress on the path we shared with you in June of 2018, as shown on slide 18. At that time, we articulated four major strategic imperatives: focused growth; extend our technology leadership; expand margins and return on invested capital; and finally, optimizing capital allocation. I'm proud to say that Gentherm has executed relentlessly on this strategy and delivered outstanding results. This relentless execution was certainly not done within the context of a stable environment. The past few years, as you all know, have presented more volatility than most of us have seen in our careers. Ginter has been significantly impacted by all of the major macro events, COVID, semiconductor shortages, inflation, and both supply and geopolitical disruptions. And yet, we have remained strong and flexible, implementing aggressive measures along the way to de-risk the business and, most importantly, to continue to deliver on our strategic milestones. We are now more than ever a company with the resilience to deal with uncertainty ahead and deliver profitable growth. The global headwinds have had a monumental effect on vehicle production compared to what was forecasted back in 2018. One key milestone year in our plan was 2021, where actual vehicle production came in a staggering 24% lower than was expected in 2018. And in 2022, it did not get much better. In fact, January forecast by S&P Global don't show a return to 2018 production levels throughout our current decade. Despite the market headwinds and vastly reduced vehicle production, Gentherm delivered on our strategic milestones and generated industry-leading results. We grew our climate comfort thermal business significantly through take rates and expanded products. In fact, our climate control seat products are at the highest revenue levels in our history despite the lower vehicle production. We significantly increased our revenue in Asia. For example, Hyundai has grown to be our second-largest automotive customer and we more than doubled our China revenue. We successfully introduced a scalable ClimateSense platform and picked up the industry's first award to launch on the Cadillac CELESTIQ and followed by a second General Motors of EV in 2025. We launched several new products that drove a seven-fold growth in our battery performance solutions segment with proprietary solutions. Through product portfolio expansion, we continue to grow our patient temperature management business. A great measure of our effectiveness is our growth versus vehicle production. If you look at the past three years, we have outpaced the market by an average of over 900 basis points. Our steady commitment to investment in technology development led to several game-changing new product introductions, ranging from innovations in our core solution, such as our next-generation thermal electric-based CCS called iMTM, or Intelligent Micro-Thermal Module, ranging all the way to our revolutionary ClimateSense system. It's especially gratifying to see these new industry-best solutions with increased levels of electronics and software. We've really made a shift from component to system-level product engineering. Some of you may recall, we instituted a program called Fit for Growth in 2018 to help us make strong moves in cost management and to reset the discipline for the future. I'm pleased to say that we have built this cost management and control into Gentherm's DNA. We've proven the ability to reach high-teens adjusted EBITDA margins. And while the impact of inflation and instability has been a significant challenge, our team responded, sustaining profitability and positioning us with a clear path to return to high-teens adjusted EBITDA margin in the mid-term. We also clarified a decisive capital allocation strategy and we've used it to guide us. We weathered multiple storms while maintaining strong liquidity, funded our own innovative growth, returned capital to shareholders through repurchases, and made targeted key acquisitions. Matteo will cover more of this in detail in a few minutes. As a result of consistent and dedicated execution of our strategy, shareholders have benefited with Gentherm delivering best-in-class total shareholder return. We delivered nearly 110% return since year-end 2017, and increased our market cap from $1.4 billion to $2.2 billion, significantly outperforming the market and peer averages in this five-year timeframe. Now, let me transition to discuss our future, starting with Slide 25. Our journey to deliver on our mission continues to evolve. Our roots will always be our industry-leading innovative thermal technologies, where we began as a startup from Caltech University in 1991. We are now taking steps to expand our human-centric value proposition beyond thermal within comfort, health and wellness. Our first major step was the addition of pneumatic lumbar and massage comfort to greatly enhance the occupant experience, and we won't stop there. Over the past five years, we've accelerated our company's transition from a world-leading thermal and electromechanical-driven device company to a more complete system solution innovator driven by software, algorithms and intelligence. This has all been built on the core science of the company, thermophysiology and physiotherapy. Our focus has always been not just on the car, but on the human beings in the car. Our OEM customers tell us that we are the only player in our space with this deep human-centric scientific expertise. As we progress, we will continue to evolve and expand these skills to generate incredible solutions in the car of the future and in operating rooms in hospitals. I can certainly talk about the technical details of our product, which I certainly will in a few minutes. But I think the next three vignettes will better illustrate our vision for the future. First, imagine you're on your way home from the gym or a tennis game or perhaps a round of golf, your tired and a little sore. We see a future where your vehicle activates contrasting temperature therapy that alternates between heating and cooling, plus pneumatic muscle massage, synchronize with uplifting music, soothing light and a refreshing scent. By stimulating five scientifically-proven comfort enhancing features, your future vehicle has the potential to aid in your recovery on the way home. Next, during a rush-hour commute or traffic, it's common for drivers to feel stressed or anxious. With our ClimateSense technology, we see the opportunity to read the vehicle environment and instantly respond with heating or cooling to create individualized zones of enhanced comfort, combining scientifically-proven benefits of massage and thermal therapy to reduce stressed hormone cortisol and to induce a state of calm. You're likely to take a long way home. The final scenario I'll share with you today is one that I'm sure we've all experienced at one time or another, and that's the feeling of drowsiness behind the wheel. Through a partnership, we see the opportunity for ClimateSense to work in coordination with future alertness features to stimulate the skin with cooler temperatures that increase brain wave activity and alertness. At the same time, rapid intermittent massage across the lower back stimulates the body, while the seat position tilts to alter the driver's posture, invoking alertness and restoring driver attention. This is just the beginning of where we see our technology driving health, wellness and comfort in vehicles of the future. And now let me dive into our strategy evolution. While we're proud of our company's progress, we know this is only the beginning of our journey and we must continue to evolve our plan to stay ahead of competition and drive above market performance for our customers, employees, communities and shareholders. Our 2023 and beyond strategic imperatives comprise four elements that are closely bound to help us create a flywheel of profitable growth. First, through leveraging and expanding our world-class talent and culture, we will drive -- we will extend our technology leadership. This will drive focused growth in areas where we have a right to win, which will in turn deliver strong financial returns, and this will fuel the cycle again to further attract world-class talent. As we continue to execute on these four strategies, the flywheel will continue to gain momentum. Our growth aspiration is to get to over $3 billion in revenue by 2030. Let me touch on each of these strategy elements, starting with talent. When I joined the company at the end of 2017, it was clear to me that several key elements of a winning culture already existed here. Most importantly, the culture of innovation, entrepreneurial spirit and a focus on science, all were the building blocks of a strong foundation. But as we move forward to transform the company, there were four areas that we needed to take to another level in order to build the capabilities and discipline, necessary to scale. [These four] (ph) winning culture behaviors are customer focus, employee engagement and inclusion, global mindset and performance and accountability. And we have engrained these winning culture behaviors into the fabric of our company. We've seen a dramatic enhancement of talent through internal development and recruitment; we've established DE&I as a foundation of the company with remarkable results; we've implemented an industry-leading manufacturing culture and environment, this is illustrated by our best-in-class safety results and strong community outreach in all the locations where we operate; and finally, we've been recognized through the adoption of leading board and government's best practices. All of this has set up a strong foundation for future acceleration. We believe that companies don't compete, people do. Now to strategy two on Slide 30. Technology and innovation are at the foundation of everything we do at Gentherm. In fact, it's where we came from. Our company was founded by a rocket propulsion scientist from Caltech University, which explains our obsession with science. We invented multiple product categories, such as heated and cooled seats and pneumatic seat massage. Our rapid growth was and continues to be driven by our significant investment in research and development. There are five underpinning technology domains that are key to our ability to bring the very best solutions to market and help us move towards our systems vision. At the center of it all is our core thermal and pneumatic device innovation. Finding the next level solution that delivers comfort faster, more efficiently and less space is never ending. We constantly obsessed about how to become better at our core. Software and electronics are fundamental to our strategy. We have significantly increased our resources and competency from embedded devices to algorithm-driven connected solutions. And to move towards our vision of the future, we are advancing in systems engineering, the ability to integrate hardware, software, external inputs and sensors seamlessly into the vehicle architecture. We're building advanced sensing and machine learning expertise as well as partnerships to enable our systems to "close the loop with the occupant and the environment." This is key to platforms such as ClimateSense. Finally, what separates Gentherm the most from our competition is our human-centric scientific practices of thermophysiology and physiotherapy. Thermophysiology is the science of human temperature regulation, and physiotherapy is a range of physical interventions that maintain, restore and improve human function and movement to improve quality of life. Our PhDs and scientists are engaged in our product development of today and tomorrow across both automotive and medical. Gentherm is also perfectly positioned to empower the software-defined vehicle of the future. For those of you who are new to the concept of the software-defined vehicle, it's any vehicle that manages its operations, adds functionality and enables new features primarily or entirely through software. To illustrate the potential of Gentherm's suite of advanced technology capabilities, our vision is to bring our integrated devices and system solutions to the software-defined vehicle of the future. A vehicle outfitted with our latest thermal and pneumatic devices will assure the most effective delivery of comfort and wellness to the body. The breakthrough will be that our software will enable countless features and therapies beyond basic comfort, wellness and refresh modes, mood enhancements, alertness response for safety, pain management and the list will keep on growing. Our system, when integrated with the connected vehicle, will allow post car sale delivery of these new modes as our scientists continue to develop them through over-the-air updates throughout the life of the vehicle. Now, let me dive into how we will take our vision to market through our focus growth pillars. We continue to believe in a carefully selected mix of innovative and complementary product solutions to maximize our growth and returns based on clear differentiated strengths. We will continue to funnel our investments and resources to those areas where we have a strong competitive advantage, driving forward on our mission and delivering strong financial returns. Pillar 1 is to accelerate growth in our core Thermal Comfort product lines. Thermal remains central to who we are and we will seek to accelerate this across our full continuum of solutions from seat heating, all the way to our crown jewel ClimateSense. Pillar 2 is to grow pneumatic comfort. As a result of the Alfmeier acquisition, we are now the global leader in pneumatic, lumbar and massage solutions and we see strong opportunities ahead, particularly with combined thermal and pneumatic solutions. And Pillar 3 is to drive battery performance solutions. We will do this with our unique technologies where we can add value for customers and produce strong financial returns. And Pillar 4, we will continue to leverage our expertise in thermophysiology to further expand our patient thermal solutions in the medical device market, capturing incremental share with our innovative solutions. All of this will be enabled by our ever-increasing digital and software content, allowing Gentherm to continue on the journey to a full system provider. Now, let me dive into each of our growth pillars in more detail. First, our largest business, Thermal Comfort. This is the heart of our company. We offer customers some of the most innovative devices and solutions in the industry from seat heating, climate control seats, steering wheel heat, which is increasingly enabled with our hands on detection, net conditioning, radiant heating and many others. All of this culminating with our complete microclimate solution named ClimateSense. As I mentioned, consumers are demanding more of these thermal technologies and OEMs are responding by rolling out more and more vehicle platforms that offer them. To illustrate the market tailwinds, our forecast is that the penetration of climate controlled seats and seat heating of the total share of vehicle production in our key markets will increase from 45% today to 65% by 2030. Similarly, steering wheel heat penetration is expected to increase 16 percentage points by 2030 to approximately 35%. If you already have a heated steering wheel in your car like we do, you might be wondering what the remaining 65% of vehicle owners are waiting for. Gentherm's market share in our core product line shows our global leadership as the largest independent innovator of thermal solutions with 50% market share of heated and cooled seats, 60% share of heated steering wheels, and 40% share of the more mature heated seats. We maintain this share through innovative, differentiated solutions and impeccable customer service. With the growing penetration and content per vehicle of thermal solutions we have discussed, the forecast is a 9% compound annual growth rate of the total available market between 2022 and 2030. Compare this to the 2% compound annual growth rate of vehicle production in our key markets over that same time. Let me discuss the key sustainable competitive advantages that allow us to maintain our leading market share. We are the largest independent supplier. And this independence is key and supports our selection by OEMs who direct source the majority of thermal awards as well as with key partner Tier 1 seat manufacturers. Regardless of customer, our focus on the most innovative, high value solutions provides us with a real competitive advantage. Our solutions include our own design and manufactured electronics and software, a true differentiator. We have a long and proven track record of bringing the next generation of technologies to market. We have the broadest, deepest customer portfolio and relationships in our space. We are at the table when OEMs are working on challenging thermal problems in the cabin. Our industry leading R&D and manufacturing footprint are unparalleled, giving us the best scale and ability to flex quickly with our global or regional customers. Finally, our cutting-edge use of thermophysiology is at the heart of our human-centric designs. Now, let me talk about the anchor to our future, our breakthrough ClimateSense microclimate solution. The traditional HVAC system is simply not sufficient going forward. Using high volumes of heated or cooled air to bring the temperature in the whole cabin to a desired level is highly inefficient. In fact, the HVAC system is the second largest power drain on an EV battery next to the actual drivetrain. The accelerated movement to connected and electrified vehicles is driving the need for much more efficient and personalized climate, specific for each individual occupant and only for the occupants in the car; why waste energy on an empty area of the cabin? And, we have anticipated this need for years and have created the solution, and it's ready now. Our complete suite of thermal devices surround the body and are driven by our proprietary software ClimateSense algorithm based on thermal physiology principles and delivers heating or cooling to the optimal location of the body at the right time and for the right duration to assure the fastest times of comfort, but utilizing only the minimal power to get there. The benefits are significant. Reduced energy consumption, our customers have shown 70% reduction in the cold cycle correlating to an over 30% range extension and a 35% reduction in power in the hot weather cycle. In addition to range extension, ClimateSense provides the best-performing thermal comfort available and the enablement of reduced size and cost of the central HVAC system leading to much greater cabin design freedom and weight reduction in the car. And we are thrilled that we will launch for the first time on the 2024 Cadillac CELESTIQ and follow soon thereafter with a second General Motors' electric vehicle. Customer interest continues to grow as the market sees the impact this technology. I want to point out a critical design concept that we have implemented with ClimateSense. We've developed the solution as a scalable platform that can be incrementally integrated into today's EV architecture, or it can be unleashed for the next generation of heating and cooling visions for our OEM customers, who are ready to more completely update the heating and cooling architecture. Our proprietary Smart Effectors, which can be installed on a modular building block platform, will allow customers take advantage of a continuum of implementation based on their current EV migration and their product strategy. And this allows us to scale our content to support steady increases in energy efficiency and thermal performance from incremental all the way to the fully implemented ClimateSense content. Our thermal content can then grow to between 2 and 4 times our best systems on the market today. So, how do we expect to capture above market growth for Thermal Comfort? First, we will continue to drive increased take rates. While the market tailwinds will certainly give us natural growth, we've developed a playbook to work with OEMs to increase take rates through initiatives, such as improved option packages and regional extensions. Our constantly growing set of solutions that add wellness and comfort will also enable us to increase content per vehicle, such as additional seats using our technology, adding neck conditioning, surface heating, radiant heating and continued increases in electronics and software content. We will build on our strong global customer relationships to deepen our problem solving and value for these partners, [indiscernible] adoption by more vehicle nameplates offering our solutions, especially on lower priced mass market vehicles where we're seeing good momentum for additions. And we see opportunities to continue to add and extend our business with new customers, and grow where our take rate and content is low. This will primarily play out in Japan and China. I'm very excited about our momentum in these countries. Finally, the game changer is ClimateSense, with 2 to 4 times the content, and potentially near 100% take rate on vehicles that will rely on the integration of ClimateSense as part of an overall vehicle climate architecture. Now to Pillar 2, which is our newest growth vector, grow pneumatic comfort, capitalizing on what we believe is the next wave of momentum in health, wellness and comfort in the vehicle, physiotherapy through lumbar and massage technologies. We acquired Alfmeier, an innovative market leader of automotive lumbar and massage comfort solution with a 50-year-old culture of innovation that often puts them one generation ahead of the competition with respect to technology. This has resulted in a strong IT leadership position with more than 200 patents, including significant coverage for advanced shape memory alloy technology, or SMA. Alfmeier pioneered the use of SMA valve and pump actuator technology for automotive seat comfort systems, which delivers quiet, high speed pneumatic lumbar and massage performance. And we're excited to offer more compelling and high value solutions across complementary customer relationships, leveraging the combined technologies, teams and capabilities. Alfmeier has built a strong customer portfolio, especially with European OEMs. Some of the customers that we both serve are BMW, Volkswagen, Mercedes Benz, Ford and Tesla. Similar to Gentherm, the majority of Alfmeier's business is direct sourced by OEMs. We are well positioned to increase our pneumatic comfort market share by capitalizing on Gentherm's market-leading customer base, especially in North America and Asia. As we've discussed, automotive customers are increasingly demanding features that enhance comfort and well-being. In addition to thermal, we see significant tailwinds for features that enhance the driving experience to allow occupants to leave the vehicle feeling better than when the drive started. While there was approximately 39% of vehicle production in our key markets that offer lumbar or massage solutions, the reality is that the vast majority, 34%, are mechanical or electromechanical mechanisms. These devices are heavy, take up significant seat space, and can use too much power. We are seeing fast growth in pneumatic solutions, which use low profile bladder networks and small-scale electronics and valve systems are much lighter, quieter and use less energy while increasing comfort. The demand to grow and replace the larger mechanisms continues to build steam. A great example is Volkswagen, who is expanding the penetration of massage and lumbar and switching many vehicles, especially EVs, from the electro mechanical systems to Gentherm's pneumatic solutions. The market is approximately $1 billion today and we expect it to grow and to shift dramatically towards pneumatic solutions over the coming years. Through our acquisition of Alfmeier, we are now the market leader in pneumatic lumbar massage. In fact, Alfmeier invented the category at 1995 on the Mercedes S-Class. Our innovative technology is leading the market. We introduced the shape memory alloy-driven valve system first to the market in 2005 and we continue to have the industry-leading technology and value creating solutions. Our software-driven modular platform can scale from a simple one bladder lumbar solution, all the way to a 50-plus bladder intense massage system. Our customers tell us this is the perfect architecture to scale across nameplates and trim packages. As we think longer term, the benefits of system design, including thermal, pneumatics, electronics and software and our scientific expertise in thermophysiology and physiotherapy, in one efficient scalable platform will be Gentherm's gamechanger. Not only will we be able to address comfort, but the implications of increasing wellness therapeutics to support health and pain management of occupants will be unlocked. To conclude on pneumatics, we see several avenues to outpace the market with growth initiatives. First, we will maintain a laser focus on delivering for our long-time customers where we continue to see big growth opportunities, such as with VW, BMW, Mercedes, Tesla and Ford. Using the playbook we have introduced in our Thermal Solutions segment, we will proactively work with OEMs to increase take rates and content per vehicle. For example, we see the rear seat as a blank canvas. Our most significant near-term growth will come as we expand pneumatic comfort into Gentherm's vast customer portfolio, especially in North America and Asia, where Alfmeier only minimally participated previously. Our powerful relationships with North American customers and also our broad OEM base in Japan and Korea provide significant opportunity. We're already working with several customers on potential introductions. Finally, we see the opportunity to launch proprietary technology in this space. Our next big thing is a pulsating massage solution called Pulse A. This proprietary game-changing Pulse A pneumatic system combines massage with high-frequency pulsation, which can stimulate muscles and alleviate pain and tension. We're excited and expect to see pneumatics grow at the save or even higher rates than thermal comfort in automotive. Focused growth, Pillar 3, is driving battery performance solutions that help EV manufacturers improve efficiency and performance. The early growth for Gentherm in this area has been our PACE Award winning thermal electric battery thermal management system, which has helped our customers such as Mercedes and Jeep deliver 48-volt mild hybrid systems at high volume while assuring proper battery heating and cooling in extreme environments. We are very proud of this innovative product and it's given us strong credibility in the EV space. While this is a great product, its growth will be limited in the future as a result of OEM's decision to jump ahead quickly to high-voltage plug-in hybrid and full-battery electric vehicles. Fortunately, we had anticipated this change in the market and we've been working hard to develop and launch a suite of products that add strong value to high-voltage battery systems. Most significantly, Gentherm has invented an innovative and proprietary thin foil flexible circuit product line that can be used either as a battery cell heater or a cell connecting device, opening up meaningful possible growth. In addition, our portfolio of battery products includes intelligent battery air cooling devices and certain high-voltage battery cables. Our team has deep, proven expertise in battery thermal and connection systems that have been built, giving us strong credibility with the most demanding customer numbers. Now, let me talk about our most important BPS development, our proprietary cell connecting technology. This product takes advantage of the industry's first mechanical structuring process to create a thin multi-purpose flex foil. This mechanical structured flex foil has significant advantages when compared to the state-of-the-art on the market today, which are complex cable harnesses and chemically-etched flex circuits. Our technology is fully automatic with industry-leading production speed and very low production complexity. Our flex foil technology allows OEMs or battery makers more flexibility in material selection. For example, aluminum is a desirable choice compared to copper and we can deliver this. In fact, aluminum is the solution chosen by our first launched customer BMW, which launched on the BMW 7 Series plug-in hybrid EV. While the technical performance of this product is compelling, it's our incredible sustainability impact that is truly transformative. Our solution is environmentally friendly with essentially all waste fully recyclable. In a study performed by the Fraunhofer Institute, our solution improved environmental impact by 99% compared to chemically-etched solutions. Now, let me put this in perspective. If 1 million vehicles replaced chemical etch with our aluminum flex foil solution, it would save over 186,000 tons of greenhouse emissions. Just for perspective, that's equivalent to all the emissions made by 40,000 gasoline-powered cars driven for a year. In addition, this flex foil technology works very well for conductive battery cell heating solutions. This flex foil quickly conducts heat to the battery cell and challenging designs to assure proper battery performance and longevity in cold environments. The quick heating also can benefit rapid charging as a pre-warm battery can be charged at a higher rate. And we're proud to see our proprietary flex foil battery heater launch on Jeep programs and soon to follow with launches on Renault EVs. So, how will we continue to drive battery performance solutions? We are still in the early stages of adoption of our flexible circuit cell connecting, but we're convinced of its differentiated technology to solve the needs of electric vehicles. The launch on BMW vehicles will give us much needed credibility. We have several interested customers and are selectively engaging in quotations. While we're confident in the value of this cell connecting product, which falls into a category with a multi-billion future total addressable market, we are also only pursuing projects with appropriate financial returns. We believe the favorable environmental impact and material flexibility of our solution is superior, and we'll look for customers who value this and are willing to partner with us. As we look to the future for flex foil battery cell connecting, we're developing concepts that move intelligent battery health monitoring closer to the cell, mounting these to the flex foil. We call this eCCB and have been partnering with Datang NXP on early concepts. In fact, these early tests, especially around impeded spectroscopy, which can detect early thermal issues in a battery has shown promise. Finally, we see incremental growth with our high-quality battery air cooling solutions and our high-voltage battery cables. While we are very selective in these projects based on differentiation and margin profile, we've been approached and are launching with customers such as Rivian, Porsche and Nikola. Gentherm's only non-automotive growth pillar is number 4 on the list, expanding patient thermal solutions within the medical device market. This product line is in the medical device vertical. The space is attractive and has meaningful synergy with our core Automotive Thermal Comfort technology. Why do we see it as attractive? The market is large and highly fragmented at over $2.5 billion total addressable market. This market has been ripe for our disruption, especially with our industry-leading broad product portfolio encompassing more modes of thermal delivery than any competitor. The medical business has a superior contribution margin compared to our core automotive business. That coupled with consistent and sustainable demand should help offset some of the seasonality of the Automotive business. The investment required for growth is low relative to our Automotive business, which can drive superior returns. Most importantly of all, synergies with our Automotive business are significant and differentiate us from the competition. Our deep understanding of the human body and thermophysiology utilized to help save lives in the hospital is directly brought to bear on our automotive thermal solutions for comfort and wellness. This brings remarkable credibility with OEMs. We are the only company in the industry with this capability. As I mentioned, Gentherm has expertise in all three modalities: liquid, resistive and air. This extensive selection of products offer medical practitioners the most flexibility in the operating room. We can provide solutions at every stage of the patient experience, seamlessly maintaining temperature from the pre-op all the way to hospital discharge. We're excited about our growth opportunities in medical and will leverage key initiatives. In partnership with our automotive research and development team, we have a compelling pipeline of new product and technology. We will take share with our differentiated, resistive warming, which can reduce airborne infection risk. We will expand in Europe and China through our acquisitions of Stihler and Dacheng in those respective regions. And we're working to diversify our go-to-market channels, such as utilizing OEM direct sourcing, white label and equipment rentals. And now, I'd like to transfer to Matteo, who will walk you through the details of our strategy four, deliver financial excellence.
