Gentherm Inc (THRM) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Amerigon second-quarter and six-months results conference call. At this time,all participants have been placed o a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Ms. Jill Bertotti of Allen & Caron. Ma'am, the floor is yours.

Good morning, and thank you for joining us today for the Amerigon, Inc. second-quarter and six-month results conference call. Before we start this morning's call, there are a few items I would like to cover with you.

First in addition to disseminating through PRNewswire this morning, today's news release announcing Amerigon's results, an e-mailed copy of the release was also sent to a large number of conference call participants. If any of you did not receive a copy of the news release, please call our California office at 949-474-4300 after the call and we will e-mail you a copy. Additionally, a replay of the conference call will be available on the Internet for one year via a link provided at the Company's website at www.Amerigon.com and www.viavid.com.

Finally, I've been asked to make the following statements. Certain matters discussed on this conference call are forward-looking statements that involve risks and uncertainties, and actual results may be different. Important factors that could cause the Company's actual results to differ materially from its expectations in this release are risks that sales may not significantly increase, necessary additional financing may be unavailable, new competitors may arise, and adverse conditions in the automotive industry may negatively affect its results. The liquidity and trading press of its common stock may be negatively affected by these and other factors. Please also refer to Amerigon's Securities and Exchange Commission filings and reports, included but not limited to its Forms 10-QSB for the period ending June 30th, 2004 and its Form 10-K for the year ended December 31st, 2003. Also, this call is copyrighted material of Amerigon. No recording, broadcast or other distribution of this call or any part of this call in any form is permitted without the Company's written permission.

On the call today from Amerigon, we have Bud Marx, Chairman, Dan Coker, President and CEO, and Bill Wills, Chief Financial Officer. Each member of management will provide a review of the results, after which there will be a question-and-answer period. I would now like to turn the call over to Bud. Good morning, Bud.

Hi, good morning, Jill, and morning to all our participants in the conference call this morning. I'd like to, as is my normal custom, give a high-level overview, and then I will turn the mike over to Dan for the, I'd say, more detailed view and also to answer the hard questions.

So starting with the revenue stuff, we filled 8.6 million worth of product in the 3 months ended June 30th, 2004. We were very pleased with the quarter. Our gross margin improved to 25.9 percent, and that improvement is a function both of product mix and also good effective cost reductions being made in both design and the purchasing.

Our research and development expenses were down compared with the prior year's quarter. And our selling, general and administrative were up slightly. So on balance, a good job is being done on costs within Amerigon, and margins have improved; and we recorded a $295,000 net income for the quarter, equal to 2 cents a share on the basic shares outstanding and a penny a share fully diluted.

Stepping back, and if you look at the sequential quarters of the first quarter of 2004 and prior quarters, we're running roughly at an 8.7 to 9 million rate, and the changes, as I have mentioned in previous calls, are often changes in mix because we have a distinctly different mix with some of our customers in terms of selling price compared with others. I think the real clue here is that our margins are improving and it's our -- another strong quarter of profitability for us. And the challenge for us is now to restart our growth engine against the coming quarters and to offset what we see as some softness in the industry market for vehicles with a better penetration by our product. And I think that's very doable over the time frame that we see. I think that's my summary comments. Dan, over to you.

Sure. Thanks, Bud, and again, thanks to everyone for joining us on the call today. I will kind of walk through some of that information in a little more detail. For Amerigon, the revenue for the second quarter, as Bud has mentioned, was 8 million 630, which is about a 53 percent increase over the 2003 second-quarter revenue of about 5,000,644. The second quarter of 2004 was slightly off the first-quarter run rate of 8 million 9, as the USA car companies have begun to adjust their production schedules to react to lower consumer demand, primarily due to higher fuel costs and increasing interest rates in the market today. Revenue for the first half of the year 2004 was 17.6 million compared to about 10.9 million for the same period in 2003. We get these revenues, of course, by shipping units to our customers. And the units shipped during the second quarter of 2004 was 134,800 units compared to about 92,100 units in the second quarter of 2003. The second quarter of 2004 was off about 4,700 units from the first quarter of 2004's 140,000 units shipped. The total units shipped for the first 6 months of 2004 are around 274,300 compared to about 172,000 during the same period of 2003. This means that we've shipped somewhere just under 1,150,000 CCS seat sets since the inception of the program in late 1999.

Gross margins, as Bud has mentioned, are improving, and we are pleased to see that the improvement has been consistent now during 2004. In the second quarter, our gross margins were 2 million 236 or about 25.9 percent of sales compared to about 1 million 398 or 24.8 percent of sales in Q2 of 2003. Gross margins for the second quarter were a little stronger due to improved product mix and cost reduction activities, as Bud mentioned earlier. Gross margins for the first 6 months of the year were around 4 million 324 or 24.6 percent for the year-to-date and compared to 2.4 million or 22.7 percent in the first half of 2003.

Net income for the second quarter was $295,000, which compares to a loss of $609,000 during the same period in 2003. Bud has gone over the net incomes per share for you, but the first 6 months of 2004, we have generated now a total net profit of $596,000 compared to the 2003 same-period results of a loss of 1 million 534. The Company is now generating revenue above our breakeven points, and we do expect to make a profit for the full year of 2004. The 6 months net income per share for 2004 was about 5 cents per share basic and 3 cents per share fully diluted compared with the same period of last year of a loss of 14 cents per share.

Looking a little bit of the operation experiences, research and development expense for 2004 was -- sorry, for the second quarter -- was 561,000; for the first half, it's been about a million 2, which is a decrease of about 18 and 27 percent for the same periods in 2003. These decreases were due to lower prototype costs for our engineering effort, with the launch of our new MTM design in the fall of last year; also, customer funding from Amerigon's BSST subsidiary, which is working on improving the efficiency of our base thermoelectric module. Approximately $136,000 of BSST's expense has not been fully funded by customers in the first half compared to about a $258,000 shortfall for the same period in 2003.

Bud mentioned selling and G&A -- the expense in 2002 second quarter and first half has increased slightly, about 7 to 9 percent. We are spending about 1.4 million in a quarter and about 2.7 million in the year. These increases are primarily due to increased customer support and through our marketing efforts to try to increase our penetration through the year.

An operational summary, our customer releases did drop off dramatically at the end of the second quarter of 2004 as our customers have adjusted their inventories to meet lower USA market demand. This lower demand has continued into the third quarter and we are now projecting full-year revenue growth in the 15 to 20 percent range 2004 over 2003. However, we're still projecting a net profit for the full year of 2004.

On the balance sheet, we ended the quarter with about $4 million in cash and total assets of about 12.9 million, with shareholder equity totaling about 6.4 million and no bank debt. In July, subsequent to the end of this second quarter, we received an additional $3.4 million in cash from the exercise of some warrants. We also expect to receive additional cash from warrants in the first quarter of 2005.

Our BSST subsidiary continues to do very good work in pursuing their challenge of improving the efficiency of the thermoelectric device, and we have continued to expand our program to try to meet the demands of our customers and our technology requirements. But, I will ask you to give a comment on BSST if you like when we conclude here.

And in summary, our second of 2004 was our third straight profitable quarter, which is a record for Amerigon. We expect to be profitable for the full year of 2004 despite a slight slowdown in the market in the USA OM automotive market. And we are also on track to add more platforms to our customer lists in the next few years as our CCS products continue to be accepted by customers and the end consumer in the market. Bud, if you had anything you'd like to add about the BSST operation, as an update, and then we will throw it open for questions.

I think it's important to say that we are very successfully executing our business plan in BSST. Our objective has been to identify very capable partners in the market sectors that are going to benefit significantly from improved thermoelectrics, and in addition, to establish clearly, in the minds of both our potential partners and the technical community at large, our capability to double the efficiency of thermoelectrics as a way of encouraging their use in a broad spectrum of products. We are making extremely good progress in developing product with Visteon in our automotive agreement, which we have announced. And we have identified other very promising market sectors, where the thermoelectric technology and the improvement in efficiency will develop markets for us. And our model for this is not only to receive funding in the development of the products, which is the first step, but secondly to earn an operating profit, not only through royalty and license fees but also through the supply of a specially engineered thermoelectric module for these various products. So we expect a revenue stream from product capability as these markets are developed. And I'm very confident that we will achieve this over the next 12 to 18 months. So on balance, we have, I think, achieved the clear acceptance by the technical community that our technology works and is proprietary, and we are well down the road toward developing a number of market sectors with very capable partners to bring product to the market.

All right. With that comment, operator, I think we would like to open the door for questions from the listeners.

(Operator Instructions). Steve Gish, Roth Capital Partners.

Hi, Dan. A couple questions. Despite the lower number of shipments this quarter versus Q1, your gross margin continues to show improvement. Can you talk a little bit about what you have done differently and what you think those gross margins might look like in the second half of the year considering you expect revenue to be down both sequentially and it looks like year-over-year as well?

Certainly. You're very observant. We have reported better margins. One of the key drivers to that is product mix. We are getting a better blend of the products and services we offer to the marketplace. We are also beginning to enjoy some cost savings efforts that we've been pushing through in our business systems, as well as our engineering and R&D expenses in the programs. And we do expect that trend to continue into the second half. So we are hopeful that the margins will stay steady for the year and we are pleased with the results in general.

Okay. And Dan, you had talked about, you saw some softness at the end of Q2 and that's flowed through through this quarter. Can you just help us understand in a typical quarter how the shipments are distributed? Is it pretty even through the quarter? Is it unpredictable, or is it sometimes back-end loaded?

It's actually usually it is very seasonal. There are certain. That's a year when the car companies in the U.S. in particular gear up and drive out new model launches, for an example, or they have holiday shutdowns. Typically in the second quarter, they tend to run reasonably strong through the end of the second quarter and then they have a long holiday shutdown or some sort of holiday shutdown in the month of July. This year with the inventories that have been building up on the dealer lots and in the manufactures' lots, several of the manufactures decided at the end of the quarter to slow down production dramatically and extend some of their holidays in the July. And that is what has occurred.

It's not as readily predictable as you might think. We tend to get releases that look out in a fairly finite period of time. We get very solid releases a couple of weeks in advance and we get predictions of what's going to happen a month or so in advance. We were somewhat surprised by the steepness of the drop in the releases; but we were also -- we've been surprised by the slowdown in the sales in the U.S. market of certain classes of vehicles in particular; large SUV's and luxury cars have had quite a bit of difficulty dealing with the higher gas prices and the uncertainty in the economy. And we're saying that in the third quarter, and our July schedules were adversely affected, as well, and even some of our August schedules are not as strong as we would've liked to have seen.

Okay. And in terms of revenue concentration, because you have had the exposure to the increase in fuel prices with SUV's, are you seeing a change in that concentration? You have 15 platforms now. How many of those are generating revenue and do you think you will see a shift of that revenue not being so heavily concentrated in SUV's?

Actually we are getting revenue from all 15 announced programs right now. The latest one was the Nissan Gloria that we've just made a shipment at the end of June, that was a very preliminary shipment. We will see continued strength in all markets according to our preliminary releases during the balance of the year. Our international markets are very strong. The Asian markets are strong and powerful for us right now. And some of our new models are just starting to come up to speed. So the blend of mix of product will probably remain fairly consistent for the year. But we have seen a dampening of demand, especially in the large SUV market, for the month of June and July.

Okay. And from my understanding, most of the platforms that have CCS -- it comes as an option, I know there's one or two exceptions -- are you seeing any changes in terms of the market that this might become a standard product? And then also, when it is an option, what is it typically bundled with, what type of package?

We typically see ourselves bundled in the marketplace with certain leather accessories or interior upgrades for the vehicle. We don't expect to see any major shift of our product being offered as an option. It is offered on a few of the very high-end vehicles as a standard feature, where luxury is expected and demanded. But the car companies typically try to package our type of product as a discretionary expenditure for the consumer. People who are looking for enhanced comfort and convenience do tend to pick our type of product. But we do not see that becoming a standard feature across the board anytime soon, although we are beginning to reach down into some of the mid-price range vehicles, such as the Expedition. And our take rates there have been very good.

I think what we see is where they want to distinguish a particular series in a vehicle as a special and particularly luxurious segment, like the Eddy Bauer series of the Expedition, where we are standard. So they are using it as a marketing tool because it's a powerful option to give a particular series a personality and a standout ranking compared with the more vanilla versions.

I see. But I have a 2005 Ford Escape and it would have been a great option to have on the vehicle if it was available.

We agree with you.

Yes. The Nissan Gloria, I don't think you had announced that previously; is that correct?

We had not previously announced that.

And you now have 15 platforms. Would it still be realistic to assume that you will have about 20 platforms by the end of next year?

As you know, we don't forecast those types of events in the marketplace because they're pretty much dependent upon our customers making the final decisions. But we do expect to see a few new programs in the next 18 months or so, yes.

Okay, and then just one last question. If you can help me with the share count going forward. You mentioned the exercise of warrants brought in about $3.5 million -- or $3.4 million in cash. What would be the basic share count beginning for Q3?

Well the beginning of Q3 would be the end of Q2. And the end of Q2, the share count was 14,688.

I'm sorry, what?

That includes the exercise of warrants.

That includes the exercise of 1.7 million warrants.

Okay. I just can't (ph) hear the figure.

14 million 688 is the total figure after the warrant call.

Got you. Okay. Thank you.

Tom Diodi (ph), MTB Investments.

Can you give us a sense of the progress that you're making on increasing the efficiency in BSS or BSST? Yes.

Well, essentially our goal is to try to quadruple the electrical efficiency of the circuit's capability to convert electrical energy into thermal energy, or in the case of the Seebeck effect, to do the reverse, to convert thermal energy into electric power. I would say we are -- I don't know if we've actually ever said publicly how far along we are, but we're making very good progress.

We've said that in most applications, our technology will double the efficiency.

Today, we are a little -- we are around halfway to our ultimate goal, I guess is the easy way to say that. We're doubling the electrical efficiency of the current thermoelectric device in the market today.

But the second step is going to come from new materials. So if you think of it as an equation where 4 times the efficiency of today's thermoelectrics opens dramatic markets in cooling of vehicles and cooling and heating of rooms and a lot of personal comfort capability, our half of the equation is essentially there. And we have working prototypes that demonstrate that capability. And we are seeing now, I would say, very strong activity from people who are interested in these engineered materials side. So that's, I think, the best way to say it is, with twice the efficiency, which we have, we enable a number of uses that we're working on with potential partners, like in automotive. The big next step will come from the materials side and that will open many doors.

Are you working with partners on the materials side?

We are in contact with everyone that we know. And that number of potential materials suppliers probably is about 10 right now. And from our perspective, first, we're eager to work with them and we're receiving material samples from them, and so we are plugged into that community. In a broader sense, we are not dependent on any one firm getting there. Anyone of the materials approach is being taken, as long as it improves the efficiency, we will buckle up to our technology. So our wish is that they get there quick.

But they all succeed. Actually, it's a very mutually beneficial relationship. So coupled with our achievements in the heat pump designs, their materials work a lot better. So, it is a very good kind of symbiotic relationship. Does that answer your question, Tom?

Sort of. Do you have any relationships of the sort that you have with Visteon with any of the materials suppliers?

No, because we do not want to make choices prematurely. What we have is all of these material suppliers recognizing the capability of our technology want to work with us because they see this as a gateway. So we are encouraging them all in trying to build our relationships across the spectrum. Where we are looking for additional strategic partners is in the industrial sectors beyond automotive, where when this technology becomes available, it will open dramatic new markets.

Do have any such partners today on the industrial side?

I guess the best way to say it is that we're working hard on this. The Visteon one is announced, and I think that is where we stand officially at this time. But it is exactly where we are bending every effort in these other promising markets.

And other than getting a doubling on the material side, is there anything else that you need to do in terms of technology breakthrough to make the applications more cost effective in the other industrial applications that you are looking at?

There is a second challenge that we believe we have overcome or succeeded, and that is to significantly improve the power density of the material, so that you don't have to have 1,000 of these wafers to generate the kind of power that would replace, for example, an automotive air conditioner. And that is also proprietary to us and we've made significant strides. So that is a second element of making this work commercially, and I'm pretty confident that we are where we need to be on that.

Thank you.

Any other questions, Tom?

Just in terms of the fall-off from the auto customers, you said it was pretty dramatic at the end of the quarter. Can you just size that in terms of, you know, was it 20 percent, 30 percent? What kind of numbers are you talking about?

If you look at the first quarter of operations, we did about 140,000 units during that quarter. And in the second quarter, we started off the quarter at that same pace. And then at the end of the quarter, our shipments in June dropped off very dramatically and we wound up being 5,000 units short of our run rate in the first quarter.

But I think it's important not to make this more alarming. We see releases and intentions out through the end of the year. And what we are saying is that we have seen some softness. These were late decisions in the second quarter as inventories piled up. The encouraging thing for us as we look at the marketplace going forward is there's a very significant driver for the automotive companies to do what's necessary in incentives or other forms of stimulating the market to get back their run rate, and as they do that, we expect to benefit.

And in addition to that, the car cycle -- the new model introductions -- start up in September. And that is typically a peak entrance period for the market. So we think that the OEMs did not want to go into that cycle carrying a heavy load of 2004 vehicles, and so they took actions to trim their production schedules and more aggressively sell in the marketplace, the vehicles through marketing discounts.

Thank you.

Kevin Tynan, Argus Research.

Good morning. Just 2 quick ones, if you could just talk a little bit about R&D expenses going forward, I guess, what was it 18 percent or so drop relative to the year-ago quarter. You know, relative to the product lifecycle, is that going to become a normalized rate? Or do you eventually reach a point where you need to pull more dollars back into that research?

Actually, if you will think back to 2003, we had no support in the first quarter from our customers for BSST. And in the second quarter, we just got a little bit of support started, I think. So we were fully funding that effort as an engineering and R&D expense for us. And what we are looking at right now is our normal engineering and R&D effort as Amerigon is fully funded within these numbers. And what we are seeing is that the extra expense that we were paying ourselves without support during 2002 and part of 2003 -- what you are seeing in the reduction of those numbers are the offset that these customers are paying us to help accelerate the product design cycle. So we believe that that trend will continue.

So that's a net R&D number then?

It's a net R&D number, yes. It's engineering and R&D combined.

Okay, got you. And then just quickly, the other income line, could you just add a little color on that line?

Yes. It's black, not red.

It's the amortization of the (indiscernible) deferred manufacturing.

Yes, it's -- Bill -- go ahead, Bill, tell him.

The 50,000 is the amortization of the deferred -- manufacturing agreement we had with Veritech (ph) Corporation. They paid Amerigon $2 million in the year 2000, and that is being amortized over a 5-year period.

Excellent. Thank you very much.

I should make one comment on the SG&A. There is a non-recurring factor in the quarter of 2003 where we included the expense of the 4 incentive warrants that we issued at the end of 2003. So our SG&A is actually up on a quarterly basis, and it reflects for the first time, because we are profitable, the expectation that we will pay a bonus; we've had a bonus plan for a number of years, but not paid on it because we had not made a profit. So we regard this as fundamentally a good thing. But it makes the SG&A line go up. And I think that rate of travel of about 1 million 4 is probably a rate of travel for us that is appropriate for the level of business that we're doing.

Okay, thank you.

James Bose (ph), (indiscernible) Partners.

Good morning, Bud and Dan. How are you? Beyond the expanding number of platforms, can you give us any additional color on 2005?

Actually, we don't give -- we do not forecast the future, and we do not give any particular color other than, we do expect to add a few new programs, and we do expect to continue our business over and above our breakeven point. So we don't really provide a number of platforms that we expect to target and hang next year. We can say that we think that 2004 will be much -- sorry, 2005 will be much like 2004. And we have I think projected that 2006 and 7 and 8 are very good years for us for future platform acquisitions.

Can you give us any sense as to how the incremental business from new platform releases might compare with the scale of units sold on your existing lines, fluctuating up-and-down with changes in the car industry?

I think what you're really asking is what's the driver for our business. And the driver for our business is penetrating more deeply into the product lines, both horizontally across various manufactures and then vertically down through the various classes of vehicle. If we do our job that successfully, we should overwhelm or offset any cyclical changes in industry volume. That's not going to hold every quarter or every half year. But that's the business plan that we have that we have been executing successfully against, and that's certainly our intention for the future. Does that give you a picture?

Excuse me?

Does that give you a picture for --?

It does. Thank you very much and continued good luck.

Saul Rubin, Rock (ph) Hampton.

Good morning. A couple of questions, really, sort of related and related to the last comments you made there. Can you just talk a little bit about the barriers to getting your product on new platforms, and what the greatest hurdle is? Is it cost? Is it competitive product? Is it lack of interest? Or is it technology concerns surrounding this sort of power drainage? But generally, what is it you have to overcome in order to get your product onto the vehicles?

Okay, Saul. Typically, what the biggest problem for us getting on vehicles is time. It takes time to do all of the engineering and all of the tests and evaluation and validation of our system in another vehicle, and that takes a lot of time, up to 3 years worth of engineering work on the front end. That's after the decision is made. Getting the decision made is one of a combination of all of the things you just mentioned. First, it's economics. The platform managers have to be convinced that adding our feature will add to the marketability of their platform, their particular platform in their target market arena. That is a fairly large and wide-open market opportunity for us, because lots of vehicles tend to try to tailor themselves, particularly with their option list, of what we call comfort and convenience items. So once we convince the platform management team that our product fits with their strategy, there is a question of economics. We are an expensive option. But we are also a profitable option for the car company. So it's basically, if I had to say what the biggest problem for us is basically, the problem is getting the decision made so we can launch the effort that it takes to get the product offered on the vehicle where we start generating a revenue stream.

Okay, good. And just a follow-on from there. Could you talk about the technology progress you've made through the different generations? You're into the MTM system, I'm not quite sure what the acronym stands for. But you're into that generation. And do you have to sort of -- what are the efforts to go beyond that? And what will the next generation bring in terms of advantages, if there are any?

Well, our first generation of product that was launched initially 4 years ago on the Lincoln Navigator and a little bit later on the Lexus LS 430 was essentially our first effort. It was a large fan and 2 thermoelectrics joined together by a set of ducts.

Our next generation of product, what we call micro thermal module, the MTM, is an effort to combine the thermoelectric with a small fan and mount 2 individual modules, 1 in the seatback and 1 in the cushion without having to connect these parts, so eliminating cost by eliminating components and effort to install the system in the seats.

We have been able to do that while we have been improving the efficiency of the thermoelectric design itself. And the future does bode very well for us continuing to be able to achieve these goals. For us in the automotive industry, we like to be smaller, cheaper and lighter. Every year, every chance we get, we try to redesign to make ourselves easier to package by being smaller -- using smaller components; lighter weight, obviously with fewer components; and of course with all of that, a lower cost. Our efforts with BSST should help us generate a smaller product in the future or at least a product that can produce more output with less power consumption. So we do see a very good technological edge for Amerigon in the opportunity to bring heating and cooling to seat services.

Great. Thanks very much.

Okay, Saul. Good afternoon.

(Operator Instructions). There appear to be no other questions at this time.

All right. Well we will take this opportunity to summarize. The second, we feel, was very good. The revenues continued to be strong. Our margins continued to improve, and our bottom line is improving and solid. And we expect a profit for the full year in 2004, and we're quite pleased with the consumer response to our technologies and the progress we're making with our BSST group. We'd like to also thank everybody for listening in today and invite you to continue keeping your eye on Amerigon. Thank you, operator.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.