Gentherm Inc (THRM) 2006 Q3 法說會逐字稿

Good morning ladies and gentlemen. My name is Stacy and I will be your conference operator today. At this time, I would like to welcome everyone to Amerigon third quarter and nine month results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to your host, Jill Bertotti of Allen & Caron. Ma'am, you may begin your conference.

Thank you. Good morning everyone and thank you for joining us this morning for Amerigon's third quarter and nine month results conference call.

Before we start this morning's call, there is a few items I would like to cover with you. First, in addition to disseminating through PR Newswire this morning's news release announcing Amerigon's results, an email copy of the release was also sent to a number of conference call participants. If any of you need a copy of the news release, you can either download a copy from Amerigon's Web site at www.amerigon.com or Allen & Caron's Web site at www.allencaron.com, or you can email me at jill@allencaron.com and I will be happy to email you a copy. Additionally, a replay of this conference call will be available on the Internet via a link provided at Amerigon's Web site.

Finally, I have also 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 on this call are risks that sales may not significantly increase, additional financing if necessary may not be available, new competitors may arise, and adverse conditions in the automotive industry may negatively affect its results. The liquidity and trading price 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 Form 10-Q for the period ended June 30, 2006, and its Form 10-K for the year ended December 31, 2005.

On the call this morning from Amerigon, we have Dan Coker, President and CEO; Bud Marks, Chairman; and Barry Steele, Chief Financial Officer. Management will provide a review of the results, after which there will be a question-and-answer period.

I'd now like to turn the call over to Dan. Good morning, Dan.

Good morning, Jill, and I thank you everyone for joining us today. We have a beautiful day here in Central Michigan and we would like to take a few minutes of your time to review Amerigon's, we think, very solid performance in the third quarter of 2006.

On the cost side, we have had a year of record quarters. This is the third straight quarter in a row that we have had record revenues and the fourth straight quarter in a row of record revenues and bottom line performance. So, we are quite pleased with the progress that the company is making. We feel that our products are still being accepted in the marketplace by the consumer and we are continuing to work with all of the major OEMs to expand our product platform base throughout the industry.

As an example, in the last couple of weeks, we have begun shipments to the Lincoln MKX, which is the new replacement vehicle for the old Lincoln Aviator, and it is just now coming to the market and it has been getting quite a very good set of critical acclaims. We have also recently announced the new Range Rover, the 2007 Range Rover. We will also offer in its front seats, the heated and cooled sets by Amerigon. We also are quite pleased with the results of some strong efforts we have made with Lexus. Lexus has redesigned the Amerigon heated and cooled seats in its new flagship, which is just coming out, the Lexus LS 460 and Lexus LS 460L. Both the front seat and the rear seats in both models are available to be heated and cooled and Amerigon is very pleased and proud of our long relationship with the Toyota folks.

We are going to turn the call over to Barry Steele, our CFO, who is going to guide you through some of the metrics of the business and then we are going to ask Bud Marks, our Chairman, to give us a quick update on how things are moving with our BSST advanced technology subsidiary.

Barry?

Thank you, Dan. As Dan mentioned, sales were up during the quarter. We had sales of 12.7 million for the three months ended September 30, versus 8.3 million last year. That's an increase of 4.8 million or 54%. Also in the year-to-date period, we had sales of 35.6 million compared to 25.8 million last year, an increase of 9.8 million or 38%. Largely driving this revenue growth are new programs, as well as programs that we launched in the third quarter of last year that have a full-year effect or full-quarter effect for the current year. Between those two categories, you have six new models that were introduced.

Additionally, on the models that have been redesigned, we have better volume. And so, there are three actual models that were redesigned including the Lincoln Navigator, Ford Expedition, and Lexus's Lexus LS460 that Dan mentioned.

This helps us report improved pretax earnings. Our pretax earnings were 1.5 million versus 878,000 last year in the third quarter. That's an increase of 573,000 or 65%.

We did record a tax provision during the quarter, whereas we did not record a tax provision in the prior year or the prior-year quarters. And so, our net earnings are up only slightly at 900,000 versus 878,000 in the prior year.

Our gross margin is continuing to improve. It was 32.7% for the quarter as compared to 32% even for the prior-year quarter, and 31.9% for the year-to-date period versus 29.4% for the year-to-date period in the prior year. That's due to a continuing -- our cost containment efforts as well as a change from the mix of products that we saw.

Our net R&D spending has continued to increase, largely due to higher research expenditures for the advanced thermoelectric program. Bud will talk about it a little bit more in a few moments. Our SG&A has also increased, 602,000 for the quarter, 1.1 million for the year-to-date period. There are several things that are driving that. Some of the more notable items include stock-option compensation, which was recorded in the current year, but not the prior year. We changed our accounting method to FAS 123R. That amount was 105,000 for the quarter and 317,000 for the year-to-date period.

Additionally, we have higher cost related to our efforts to become compliant with rule 404 of Sarbanes-Oxley. We do expect to be an accelerated filer this year, and so we have been making ourselves ready for that inevitability.

Moving on, earnings per share were $0.04 for the quarter, fully diluted and basic, and $0.12 for the year-to-date period, an increase of $0.03 for the year-to-date period. One thing to point out is, in the past periods, we have recorded -- we reported earnings per share using the two-stock method.

However, during the second quarter of 2006, all of our preferred stock, which was -- which participated in earnings, was converted to common shares, and so the third quarter of 2006 is the first quarter we actually reported an earnings per share not using the two-stock method. So that simplifies things a bit and helps it be a little more understandable. That actual change doesn't have a huge impact on the actual amount that are reported in terms of the dilution. One more data point now is cash flow from -- excuse me, our depreciation and amortization was 138,000 for the quarter and 371,000 for the year-to-date period. And our cash and investment reserves totaled 10.9 million to date. And with that, I will turn it back over to Dan.

Thank you very much, Barry, and we will open it up to questions in just a few minutes, so you guys can all drill Barry on all the accuracy of all of these numbers. But, first, I would like to hear a quick update from Bud who is standing by at the Detroit Metro Airport. Bud?

Dan, thanks very much. One thing I would mention just in terms of Barry's comments. Because of the tax provisions moving in and out, as we recognized that our loss carryforward could be utilized, I think it's probably useful to focus on the pretax numbers rather than the after-tax, because the tax numbers we are recording are not cash flow numbers. We still have the tax losses as cash flow shield.

So, just as an example, the tax provision in the first nine months of 2006 is about $0.07 a share and there is no such tax provision in the three quarters of 2005. So that $0.12 on an apples-to-apples basis will be more like 19. And the pretax numbers, I think, demonstrate that pretty well. Second thing would be to say that, as usual, I will repeat my caution on quarterly results that they do bounce around, but the trends I think are very, very positive.

Turning to BSST, we have said in our press release and it's so that we are seeing a record level of activity in companies and research groups, working to develop, advanced high-performance thermoelectric materials. That's very encouraging for us because it opens -- as these materials do become available, it opens major new markets for us and our development partners. And we have actually authorized BSST to go ahead and actually put resource behind our efforts to speed the progress of these new materials to a point where we can actually utilize them. So, I would say, there is nothing -- no silver bullet here and no banner announcement, but in broad strokes, we are seeing continued high level and increasing level of activity and that bodes well for us in the future. That's my report, Dan.

Excellent, Bud. All right. I appreciate that very much. And we will now -- operator, Stacy, we will take questions from the floor, if you can arrange it for us.

(OPERATOR INSTRUCTIONS). Steve Denault, Northland Securities.

Good morning guys, this is Caio Malta calling in -- filling in for Steve.

Good morning, Caio.

Before I begin, congratulations on a great quarter. And what is the average take rate for the CCS systems?

Well, the average on the existing 20-some odd programs we have today is probably somewhere around 70% of the people who buy the vehicle, choose to buy the options of heated and cooled seats. And that varies, it varies -- it's fairly steady in that range, but it varies from a high of -- well, for topmost vehicles, it's the standard feature on, and I think the lowest we have is somewhere in the 40 to 50% range.

Okay. And one more question, if you guys could provide a better picture in regards to the BSST group, and to be more specific, what is the probability and maybe a timeline of achieving the end goal for the group?

Let Bud take that probability question.

What we have said is that we expect to revenue from products developed by BSST in the 2008 timeframe and I think I will stick with that prediction. We are not suggesting that it is going to be $30 million that first year, but once we make a breakthrough and start providing products, we think the opportunities will grow significantly.

Does that address your question, Caio?

Yes, thank you.

Thank you very much.

Tyson Bauer, Wealth Monitors.

Great job, Dan and Bud and Barry on another successful quarter and going forward. Couple of quick questions. I will hit Bud right away with one. As you get closer to -- actually you are running product trials for BSST and you started requiring more capital for that venture. Are you seeking or are have people [stopped] to be an equity partner in that development?

I think we are still at the thinking stage and probably a year or more away from having to take any decisions. It's very helpful that we have a strong cash balance and borrowing power in Amerigon. So, we have access to what I will call financing at relatively low rates compared with other equity partners, but if it proved advantageous, it is something we would look at. It is our effort to have BSST essentially become a transformational agent in how the world is heated and cooled, and if the stakes get big enough, then I think we'd think beyond that, but at the moment, we feel that our resources are adequate in-house.

But, your initial plan is like continuing to have Amerigon-BSST as one?

Yes.

Regarding the vehicle volumes, Barry, do you have any breakout as far as what type of growth Amerigon experienced on vehicles that you were in of 12 years or more than 12 months, so we take out some of these new platforms you just got on and try to gauge what kind of growth you had on vehicles you had prior?

Yes, we do have that and I could say that there is some disintegration on existing models, which we would expect as they start to get older. I don't have an exact number for you. But, there is a small amount that relates to that. There were a couple of programs actually ended during the period as well where the redesign version is going to come out immediately, so that had an impact as well.

Tyson, this is Bud. I think you are after a sort of a concept like same-store sales. But, in our case, it probably is not as relevant as it is in the retail industry, because we start out with such a high take rate that improving on that -- yes, I am sure we do incrementally, but they tend to equip their initially-introduced vehicles rather heavily with features they think will be very popular. So, it is more for us filling the white space, I think. Wouldn't you agree, Dan?

Yes, there is a high complement of that, plus in the industry, the platforms usually survive a five-year lifecycle, and there is an element of -- a small element of decay each year that the platform ages. But, Bud is right. When we come out with a vehicle, the OEMs usually try to dress up their vehicles as nice as they can and get as many features out to the market early as they can, which is very helpful for all of us and it -- number one, it publicizes the availability feature and it gets us out there fast. And then, we have been quite pleased with the retention level that we have been able to maintain in all of our platforms.

That sounds great, and the last one for me will be, are we still looking at a margin maintenance level as you continue with your cost savings? I am sure that must be getting easier as you increase your volumes compared with kind of the price concessions you have each year. Are we still in that 30, 31 range, or are we seeing any directional movements?

Our goal is obviously to maintain that low-30 range, and that is what we are endeavoring to do. Of course, we are under tremendous pressure to be competitive with our customers to try to make sure that we can achieve and attain our commitments to them of cost reductions each year, and then we have to find ways within our system to offset those cost reductions we have provided to our customers. And we have been fairly successful in being able to work that through so far. And you are right, our volume helps us a lot, our increasing volume is a good driver for that, but we have also worked very hard at keeping cost out of the entire supply chain system.

Very well. Thanks a lot, gentlemen.

Thank you, sir.

Steven Dyer, Craig-Hallum.

Craig-Hallum. Thank you. Thanks for taking my question guys, congratulations on another good quarter.

Thank you, sir.

I was wondering, with the Lincoln MKX and also the Range Rover, which are your two incremental platforms next year, if you have been given any sort of indication from the OEMs as to what kind of volumes that they expect for these new cars?

Yes, we actually have been given some indications of what we should plan for, and we are working to those goals.

Nothing that you care to share at this time?

No, actually, we don't. There are new platforms for both companies and they asked us to be -- treat that information as somewhat confidential, but they are both -- the Range Rover is a consistent steady seller. Its numbers are fairly easy to ascertain and the MKX is a -- it is basically kind of a hybrid SUV -- sorry, I shouldn't say the word hybrid, it is a modified SUV crossover vehicle, and they expect great things out of that much more so than the previous Aviator vehicle that it's designed to replace in the lineup.

Okay, great. And then, with respect to your increasing R&D, is that something that is being prompted by your R&D partners, Department of Energy and so forth, or is that something that you are sort of deciding to do on your own because you feel like you are getting close to a revenue generating product?

Why don't I take that, Dan? I think my earlier comments stand on that Steve. We are increasing on our own, because we see opportunities and we are being prudent about the amount of money we put in. But, I think the resource we put in play will more than create business opportunities for our future that are worthwhile. It is also fair to say that our R&D as a percentage of sales is actually dropping, because our revenues have gone up so strongly. So, our R&D is up, we think it's an appropriate percentage of sales on a gross basis and having the DOE and our partners assist us in financing it is just very, very helpful.

Great, thanks. And then, a couple of housekeeping questions for Barry. What was your cash flow from operations in the quarter, if you have it?

Yes, I do have it. It was 820,000.

Okay.

That's the year-to-date period.

Do you have third quarter?

I believe that's for third quarter too, because I -- if you remember, the year-to-date period at 6/30 was like [flat] or something like that.

Okay. And then, secondly, how should we think about I guess total operating expenses going forward? You indicated that R&D will continue to tick up a little bit. Is SG&A, do you feel like this is kind of a good run rate right here? Do you have any Sarbanes costs to drop off? How should we think about that?

The Sarbanes-Oxley costs should drop off. They are a good amount for next year. It won't be until next year, of course. The costs of our audit will continue to be higher than it has been in the past, [however] we'll hit a plateau or drop off a little bit. The stock option compensation will probably -- that wasn't a major increase.

It will be consistent.

Yes, it will be consistent as well. So, I don't think you will see a bigger runup. But, as we grow, obviously it will still grow at a certain rate, but not obviously as much as sales.

Okay, great. Thanks.

Thank you. Our next question is coming from [Daniel Yeary] from Litmus Capital.

Congratulations on a great quarter guys.

Thank you.

Just a quick housekeeping question on the balance sheet. It looks like accounts receivable, inventories, and on the liability side, accounts payable are all up quite a bit. How should we try -- I guess, first of all, why are they up so much for the quarter and how should we think about working capital on a go-forward basis?

First of all, accounts receivable is purely the increase in sales. Our customers pay us on roughly 60-day terms. And so, that's what drives that. Just keep in mind that, in the fourth quarter, we usually have a shut down in the Christmas period [and beyond] and close our plant. So, you will see -- you should see a decrease in receivables at the end of this year, which would sort of reverse a lot of that runoff. Inventory, we are obviously increasing as the business grows as well. Lot of our new programs are the MTM style, which has a longer logistic line than the old CCS version of the programs that have ended. And so, we are putting a lot more product overseas. So, that's forced us to have a little slightly higher inventories here. And we've been able to finance that largely with payables. So, obviously, things there are driven by just the growth in the business and I think that, as we continue to grow, we still see increase there. Again, there's a seasonal metric to it that again in the fourth quarter, you will see that come back a little bit.

Okay. And then, just on the implied ASP per each unit, it looks like it's comes down a bit both year-over-year and sequentially. How should we think about that and will that continue to come down and at what kind of rate?

I don't believe it will continue to come down. I think it will still grow slightly. Again, what drives that is each customer has a different amount of content that they purchase from us. Specifically, there's a computer or a little controller that drives our systems. Some customers source it directly, some customers source it through us. So, that's a major driver in the average price, but again I think that in fact the decrease this quarter was a little of an anomaly because a couple of programs that are being launched don't take a controller. But, I think it will continue to grow slightly.

Okay. Great. Well, thanks guys. Keep up the good work.

Tina Jacobsen, CapitalWorks.

Hi, guys. Good job. I just had a question. I am trying to understand how your business is impacted by all of the production cuts that we see coming from the OEMs, and maybe that's where we were trying to go with sort of the comp question. But, just maybe if you could explain what volumes look like at some of the OEMs that you have had relationships with for a while, if they are just up or down or sort of in line?

Well, actually the impact that we have seen, obviously, the North American customers are too that are having the most trouble, I think, worldwide. Ford and General Motors are very big customers of Amerigon and their condition I guess has deteriorated fairly significantly in terms of their market share percentage and their unit volumes for their total fleet of vehicles sold over the last 18 months to two years. We have absorbed all of those -- most of those downward trends in their unit volumes, with few of our platforms that are directly affected by these economic downturn. So, I would say fuel driven -- fuel economy driven downturn. We are fortunate however to be very highly concentrated in a group of very popular vehicles that have continued to remain strong or at least resist the kind of vicious downward pressure on the unit volumes. All the car companies in North American have adjusted their fourth quarter production schedules and we have now gotten our first look at all of the production schedules through year-end and we continue to see a strong fourth quarter. So, I believe that the, maybe an odd coincidence or perhaps a bit of luck on our part, we have found our way onto some vehicles that are very popular. We have already survived all of the downplay that we were going to see, I think mostly in 2005 compared to 2004, and I think that our volumes now are going to continue to grow as they have for the last five years.

Okay. That's helpful. And so just to be clear then, the Q4 production schedule that you have seen was roughly in line with what you are expecting to begin with?

Yes.

A very sneaky question.

There are very sneaky folks here.

Okay. That will do it. Thank you.

(OPERATOR INSTRUCTIONS)

Thank you. It sounds like we have answered all the questions perfectly and that everyone is now satisfied with the informations. So, I will give them another second or so to think about it. If there are any follow-up questions, we would certainly invite anyone to email either Jill Bertotti or us with any follow-on question. No additional questions?

Sir, there appears we have no additional questions.

Thank you very much. We would like to thank everybody for joining us. Again, we think we had a very good and strong third quarter. We are looking forward to a good, strong fourth quarter and finishing out an excellent year in 2006 and we are very excited about our prospects for 2007, 2008, and 2009 as well. So, again, Amerigon thanks you very much for your time and we look forward to hearing from you again in about 90 days. Thank you.

This concludes today's Amerigon conference call. You may now disconnect your lines at this time. Have a wonderful day.