Gentherm Inc (THRM) 2007 Q1 法說會逐字稿

I would like to welcome everyone to Amerigon's 2007 first quarter results conference call. After the speaker's remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Jill Bertotti. Ma'am, you may begin your conference.

Good morning, and thank you for joining us today for the Amerigon first quarter results conference call. Before we start today's call, there are a few items I would like to cover with you. First, as you have probably seen, we put out this morning's news release via PRNewswire announcing the results for the first quarter ended March 31, 2007. Also, an e-mail copy has been sent to many of the conference call participants. If any of you need a copy of the news release you may download a copy from either the Amerigon website at www. Amerigon.com or the Allen & Caron website at www. AllenCaron.com. A replay of this conference will be available on the internet via a link provided at Amerigon's website.

Finally, I have 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 this common stock may be negatively affected by these and other factors. Please refer to Amerigon's Securities and Exchange Commission filings and reports including, but not limited to, its form 10-Q for the period ending March 31, 2007, and its form 10-K for the year ended December 31, 2006. On the call today we have Dan Coker, President and CEO, Bud Marx, 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 would now like to turn the call over to Dan. Good morning, Dan.

Good morning, Jill. And thank you. Good morning, everyone. Thank you for joining us this morning and, Bud, thank you for dialing in from London. So good evening to you. We had a very good first quarter. Our revenues were up a little over 50%,quarter-over-quarter, and I think we continue to enjoy the benefit of a launch of several programs that happened in the fourth quarter of last year and have continued to roll forward with very good strength. Specifically of note, the Toyota Lexus programs are doing exceptionally well as are our Ford programs. All of our platforms now at Ford Motor Company have been refreshed and are all brand new. In addition to that we have the good results of the Range Rover coming on stream now and its good news to see the Jaguar, our second European program, adding. The revenues were strong and the profits followed suit in spite of a little bit of an increase of spending on our R&D for our BSST team. Barry's going to walk you through the numbers and we are going to do everything we can to keep our comments short and sweet so we can address any questions you may have today.

As Dan mentioned, revenue is up $5.8 million, or 56%, primarily driven by new program launches as well as those from the prior year carrying over to 2007. It is important to point out that our traditional automotive seasonal pattern will pan out as we move through 2007 this year, whereas the second quarter and third quarter are typically lower because of shut downs in our customers' operations. In the prior year, in 2006, we didn't see this pattern because one of our programs that launched last year, the GMT 900 or our Escalade platform was very substantial and wrapped up throughout the first and second quarters.. We will see a return to our more seasonal traditional pattern as we move through the year.

Gross margins were 32% versus 31.7% in the prior year, slightly lower than the fourth quarter which was 34.3%. This is completely driven by product mix from program to program. We would expect it to be moved through 2007 to see very consistent margins with the first quarter. As Dan mentioned also, our net R&D spending was $507,000 higher this quarter versus the prior year. That continues with the pattern we saw as we move through 2006, primarily driven by the advanced thermoelectric technology program that BSST (inaudible) Our SG&A,, selling, general and administrative, expenses were higher, primarily due to a stock comp amortization that we amortized during the quarter, primarily related to options issued December 29, 2006. Due to an increase in cost for our management incentive program, our management incentive program is performance-driven, and therefore with the exceptional quarter we had, there was more cost weighted in the first quarter for that program than in the prior year.

Our tax expense was 40% of pre-tax earnings. This is a slightly higher rate than we had in the prior year, primarily because of nondeductible stock option compensation that was higher in the quarter. So the rate is increased because of that. We still expect that we'll complete the utilization of our net offering losses some time in 2009. We are not a cash taxpayer today, but will expect to be one in 2009. Our share count increased and that was primarily due to the preferred conversion, the conversion of our preferred shares in 2006. This conversion did not impact our earnings per share because we are using a method called the two-stock method in the prior year with respect to those preferred shares. So that conversion actually did not reduce the earnings per share had they actually been outstanding in the current year.

One other thing to point out that is very important, is our working capital decreased pretty substantially. If you take out cash and short-term investments, our working capital decreased by $1.3 million. That is because of lower inventory and higher accounts payable, offset partially by higher accounts receivable. Lower inventory is related to the fact that in the fourth quarter we had ran up our inventory levels related to the new program launches and we have been able to settle that down to more normal levels here in the first quarter. So that actually drove our operating cash flow. You'll see for the first time we have included our cash flow statement in our press release here, so you can see those vital statistics. You can see that your operating cash flow was $3.4 million in the first quarter compared to only $360,000 in the first quarter last year, so we are happy with that. That said, I'll turn it back over to Dan.

Thank you, Barry. The numbers, I think, speak for themselves. We are certainly willing to submit ourselves to your vicious grilling when we turn ourselves over. But for just a second, we would like to hear from Bud, dialing in from London, to get an update on how things are going with our BSST Program.

I would like to report the sky is blue and everything is right with the world in London. BSST, I think, makes very good progress in developing new product for the future. You'll see in the numbers that our spending is up a bit and our reimbursements are down a bit, which means that the net cost of BSST to Amerigon has risen. It is a function of two or three things. First of all, we have come through what I'll call the base development period with one of our major partners. That means that the funding for our spending gets a little more selective as we move into specific programs. Secondly, we are spending our own independent money now to develop new products. That's, obviously, something that we want to do carefully. But the good news is, we're beginning to see demand for these new products materialize earlier. We had been saying that we expected to see some revenue in 2008, which I think people had correctly interpreted, we were saying that we might not see a strong amount of revenue until 2009. We're now prepared to say that we're going to see the front foot of some modest revenue in early 2008 or late 2007. So that says that the programs we're developing and the products we're developing are going to reach the marketplace a bit earlier and we expect them to be successful. I think that's about all that's worth taking your time today to say about BSST. But things, in our opinion, are going well.

Thank you, very much, for that enlightenment, Bud, and we are glad the weather is good in London. We would like to open the floor, I guess, for questions, now. And operator, Nelson, if you could see if there's anybody in the queue that has any questions, we'd be delighted to address them.

(OPERATOR INSTRUCTIONS)

First question from Casey Flavin of CJS Securities.

Good morning. Congratulations on a good quarter.

Thank you, Casey.

On the last call you indicated that stronger sales were partially due to a pull through from Q1. With sequential growth up about 9% in Q1, can you give us a sense of what's driving the sales to these levels. Is it new platform sales production levels timing? What do you see in that?

Actually what we saw if the fourth quarter was a very strong demand for a group of newly designed, redesigned or new vehicle platforms that had been introduced either late the third quarter or early in the fourth quarter. We saw a very big push through demand. And we expected that demand to cool off a bit as the models were introduced into the marketplace. And the normalization of inventories. The car companies and their suppliers always like to get ready for a new launch. And when we do get that new launch activity going, then they get down to regular demand, supply and serve. We have actually seen that demand roll forward into the first quarter, particularly on all of these brand new programs. The new Lexus LS 460, both the front and rear seats, the car is selling very well and our option is taking very well. All of the Ford programs are all brand new. They're all either completely redesigned in the case of the Lincoln Navigator, the Ford Expedition or a brand new program like the MKX and the MKZ. So every Ford program we have is a brand new fresh, exciting vehicle and people are responding to it in the marketplace. So we have experience and enjoyed a very strong two solid quarters in a row, driven primarily from excitement generated by the platforms we are on.

Okay. Now in respect for your guidance of 15 to 20% sales growth in fiscal 07, sales typically pick up in the second half. Barry mentioned there is going to be more typical seasonality in the coming year. But even if we were to assume that sales remained flat on the absolute basis over the balance of the year we're looking at 30% growth. Can you give us a sense of how much of a sales decline you anticipate in Q2 and Q3 from Q1 levels?

We actually don't anticipate a sales decline quarter-to-quarter over this year. We do expect to see revenues in the second quarter to be less than revenues in the first quarter. Pardon me. And then in the third and fourth quarter, we expect to see good, solid performance. But we had a very strong base in the third and fourth quarter of last year, so if you'll note, we have said in our guidance, we commented on our guidance on our press release that we now believe that based on a very solid first quarter, we believe it will be on the high side of the guidance limit.

Okay. Just to clarify. You do not expect a sequential decline from Q1 to Q2?

No. We do expect a drop off in revenue in the second quarter compared to the $16.3 million in the first quarter. But it is going to be higher than the second quart quarter of 2006.

Got it. Okay. In terms of the gross margins is the 32 to 33% still an appropriate range for the balance of the year based on what you're saying?

That's correct.

We feel that's a very reasonable number.

Lastly, before I hop back in the queue, can you speak briefly to the addition of your Jaguar customer during the quarter and how that might your ability to win additional customers in the European market?

We are very pleased Jaguar is a very famous mark and very well-known worldwide for styling, performance and luxury. We have worked with the Jag people for -- obviously, in our business we worked for quite awhile and we were very excited when they asked us to come and start looking at some of their vehicles. The first vehicle that has adapted the climate control seat technology is their new XJ sedans. They are gorgeous vehicles with tremendous performance and almost the height of luxury in a sports car. We're very excited about it. It is not going to be a program like the GM 900 type of volume, but it is a very important milestone for Amerigon to have a luxury car in the European fold. We believe that will cause the European market to get very excited about the concept of heating and cooling seats for maximizing the passenger comfort. So we think that's going to be beneficial for us. And we also think it will bring the Jag people some notoriety as well.

Next question from Steve Denault of Northland Securities.

Good morning, everybody. Nice quarter. The BSST comments. It sounds like you're pulling in expectations or we should think about potential revenue a full year earlier than you had referenced in your last call. Did I hear you correct?

You did. But I want to be very careful about that. The amount of revenue we are expecting to see, and it would be earlier, will be quite small. It will be the absolute front foot, maybe even the front big toe of a couple of programs. What we are seeing is demand for products that have a much shorter lead time than automotive, to pick on one that has a very long lead time, in personal comfort, cooling and in cooling of complex high heat electronics, not boards or chip sets but a raise of boards and chip sets in computers. Those two markets seem to be very interested in improved and very compact and very reliable cooling performance. So based on the initial work with prototypes, we're seeing that that market might develop a bit earlier.

Okay.

But it will be small revenue at the start. That I have to say.

Okay. Should we still be thinking about the R&D line for 2007 as being up approximately a $1million?

I think I don't want to issue a forecast for the year on that. But I think we're going to have more net expense than we've had in the previous year, for the two reasons that I cited.

Okay. And I just -- last quarter Barry referenced R&D spending being up approximately $1 million in '07. That's why I asked the question.

That is correct.

I'm not answerable for Barry. But I think certainly it will be up that.

Okay. Perfect. Thank you.

Next question from Mark Tobin of Roth Capital Partners.

Good afternoon. On inventory, you mentioned kind of a return to normalized level. Looking at it, it actually looks like it's quite a bit lower than even kind of a normalized run rate that you guys had previously. Do you expect it to build back up at all?

It will definitely build back up. You know the higher sales for the quarter did get us into some of our reserve levels. We would expect to build it up to a certain extent, certainly as we launch new programs as well.

But on the raw material side there is no issues with shortages and supply chain type of issues?

No, there is not.

Okay. And then on, just to give a little bit more insight into the pipeline, I know Dan previously, you talked about the number of vehicles that you currently have under development in kind of a pre-design win stage. Can you give us any color on that?

No. We do have new programs coming. We'll have more notices in 2007. And several in 2008, but we don't like to project a number or which types of platforms we're going to be on during the year. We have a couple more coming. We are very excited about them. But we don't want to talk about them until our customers have a chance to talk about them first.

Fair enough. Thank you.

In fact, our customers will shoot us if we don't.

They actually insist on that.

Thank you. Our next question is coming from Tyson [Bauer] of Wealth Monitors Inc.

Great quarter gentlemen. Going back to the first questioner. It is hard to keep you guys held down on the revenue line to the top end of your range. Is there -- which almost makes it when you work through the numbers that Q1 may in fact be the strongest quarter for this year if we're going to stick with that revenue guidance. Is there a reason why you've chosen only to move toward the top end of that guidance as opposed to maybe shift that guidance range up?

The primary reason is that the two most dynamic quarters of any year in the automotive industry are the second and third quarter. The first and fourth are a little bit more predictable and we don't really know what's really going to happen. We have a pretty good idea right now what's going to happen in the second quarter. But we're not really sure what's really going to happen in the third quarter at this point. So we only have 90 days worth of experience in a 12-month period and we'd like to hold reserve judgment on the full 12 months of the year until we see just a little bit more data.

But the door is open once we get to the Q2 call and you have greater visibility in Q3 we could see an adjustment from the company's guidance at that time?

Yes. We will review it at the mid-year and give whatever guidance we see fit in terms of change.

Okay. On the SG&A side if we are moving the BSST forward as far as previous expectations, will there be increased SG&A expenses related to that pull forward on getting product into the market and earlier developments?

I don't think that the SG&A line will be significant. We tend to carry most, if not all, of our BSST expenses in R&D. So that's a pretty self contained number. And to the degree there are a couple of administrative heads or efforts to sustain these programs, I don't think they'll change the numbers much.

Okay. On the BSST, at least in the initial product, are there any revenue sharing or profit sharing ventures with some of these partners you referenced?

Let me think about that for a second. In general, what we'll be doing is delivering the thermalelectric engine, a module that has our advanced technology or elements of it to a customer for installation in a product. So in that sense, I think it's more likely that it will come through cleanly from us to the customer and from the customer to the ultimate user. Does that answer your question?

Okay. So you're going to -- you'll have your own separate, essentially cog in the system for the end product? You may not necessarily be providing the end product to the customer?

We are unlikely to be providing the end product to a retail customer. We are much more likely to be supplying a module or the thermoelectric part of the product to someone else who will incorporate it and then ship it onto retail or whatever the end user is.

You keep saying retail. We hopefully won't draw too many conclusions on that but you know our tendency. Dan, it would appear, this is my last question/comment, that we're now to the point we've got another quarter to get through. And I don't want to say we're home free. But we now then can focus on '08 models, we can focus on BSST product. We enter into a whole brand new landscape for the company. Will we start to see the CCS product start to see more higher volume applications now that's been in the marketplace as long as this has with the great adoption rate?

Yes, I think you're going to continue to see us get into broader-based programs. I think the first example of that has been the GMT 900. We are actually only in the front edge of the introduction stage of that platform by itself. The next big wave of things that happen I think happen in 2008. And you'll start seeing more programs that are on the, what I would call, the higher volume but higher end mid-market type of vehicles.

So they will actually be vehicle-based as opposed to packaged-based. Where we are going from, in Ford's case, an Eddie Bauer down to the standard feature level? This will actually be high volume vehicle platforms?

Yes. Much like the GMT 900 where you've now seen us show on three Escalades. There are another eight or ten so platform models built off that same structure and we're going to continue to see those new vehicles roll into the fold off of that one single platform and we'll see that pattern hopefully repeated in other areas.

But we're not going to be referring to this as a luxury feature but more of a standard feature for automobiles?

I think instead of a luxury or standard I think it's going to be desirable. I think more and more people are going to be looking for this despite the fact they may not be buying a super high-end Cadillac or Lincoln or Lexus. They may be looking a little bit further down the food chain in the product mix of each of our customers. But they're still going to be demanding these types of comfort features.

Sounds great. Great job, guys.

Thank you, sir.

Next question from Tom [Zilati]of Brandywine Global.

My question has been answered. Thank you.

Thank you very much, Tom.

Next question from Steve Dyer of Craig-Hallum.

Good morning, guys. Congratulations for a great quarter. A couple of questions. First off, somewhat pertaining to the last question. Can you talk a little bit about sort of your plans or expectations for your heated and ventilated product? You've said you know in the past we may hear something, the first model later this year. How do you look at that relative to the heated and cooled product, you know, looking out a couple years? Is it on par with it? Is it always going to be a complimentary product? What are your thoughts?

Yes we mentioned you might hear something about this in the latter half of this year, certainly in the late fall as the new auto shows start beginning their cycle, We believe at one one of our customers for the heated and ventilated seat will start talking about their new model that will be offering this product in the future. The reason we have introduced the heated and ventilated version of our seat structures is simply that we realize that as we go down the product mix and each of our customer's product base, the price points are extremely difficult to hit. So as we get into the middle market and the entry level market where some of the higher volume programs in the world exist, we felt like we had to have a entry level product to bring these people, at least the early stage of comfort, even though they didn't have the discretionary cash to buy the super high-end, actively heated and cooled seat. In addition to that, some of our customers worldwide are focusing on many of the new growth markets that are developing worldwide, including China and the Asian developing country areas. And the market that those people are targeting today happens to be the primarily the entry level market with a few products in the mid and upper-mid level. So these types of products are targeted at a customer base in a developing country where transportation is exciting and comfortable transportation is still a bit of a luxury. So we felt like we had to come out with that type of product in order to be able to help our customers deliver the message and the medium down to their worldwide global customers. The other part of this discussion is once we do the engineering for either the heated and ventilated or the heated and cooled seat, then we are allowed to turn that decision over to the program engineers in each of the platforms. It's one time discussion. Once we get the product, either it be heated and cooled or heated and ventilated, designed into the seat structure then the engineers have the ability to switch back and forth or add or upgrade from a heated and vented to a heated and cooled. So we think it was a very good strategic move on our part.

So looking kind of beyond this first platform are you getting good response? Are there additional winds you think are on the horizon? Anything else you can say about that?

We feel it is a product necessary to provide full coverage and the coverage we're looking to target is the high volume market. We think long-term there is a very, very good market upside for this type of product.

Okay. Great. My next question is you know with respect to take rates it's always been in the 70% average category, better for some cars, worse on others. Are you seeing any notable trends in that area?

Not really. Certainly in any of our traditional programs we've maintained pretty much our consistent steady take rates of customers. We do see, as we go down into the middle market and upper-middle market vehicles, we do have a slightly lower take rate. But I think that's quite expected in terms of the price points that the customers are setting.

Okay. And then more of a model question. How should we think about SG&A this year? It looks like it was up a little bit this quarter relative to what I think the street was expecting, due largely to the amortization of stock comp. How should we think about that going forward this year? Is it pretty flat? Is it up how much over last year?

I think you'll see numbers that are fairly flat with respect to the first quarter throughout the year.

Should be consistent.

Should be consistent.

Okay. Great. Thanks. Nice quarter, guys.

Thank you.

Next question from Walter [Ramsley] of Walrus Partners.

Good morning, Dan. Congratulations. You are doing a terrific job.

Thank you, Mr Ramsley.

Couple of questions, I guess first for Barry. The tax rate is that supposed to be 34% plus whatever the stock option influences?

That is for state taxes as well.

Okay. So, in the current quarter you had in a supplement here an expense of $389,000 for the stock option costs. I mean that whole amount was nondeductible?

A majority of it is, yes.

Okay. Okay. And as far as the unit volume and the revenues, you had 67% increase in the unit volume and 56% I guess in revenue. Does that indicate just more or less paraphernalia going with it? Or have you actually been able to reduce the costs and pass some of those savings along to the customers?

It's more a function of content than it is to lower prices.

Okay.

Back to the question of mix. We had a few of the customers who buy less content from us. We're strong in the first quarter,.

Just one last thing. Any changes in the warranty liabilities?

None so far. You'll hear that noise is me knocking on a wooden table. But no, we've experienced no warranty or quality issues thus far.

Sounds great. Thanks again.

Thank you.

Thank you. Next question is a follow-up from Steve Dyer of Craig-Hallum.

Hi, guys. Just a couple of last housekeeping issues. Barry what was the depreciation amortization on the quarter?

if you look at the earnings release the number is $119,000 for the quarter.

What about stock comp? I guess I could look for that as well.

That was the $218,000 number.

Great. Thank you.

There are no further questions at this time.

Excellent. Because we don't know anything else. It is a good thing to wind up when we ran out of information.

This is Bud. I think what we are really saying is we had a very good quarter and we appreciate the thoughts and sentiments of you folks. What we want to caution is the year is young and we don't want to multiply that first quarter times four. We've got some seasonality and also as we look at the industry out there, it's got some of its own issues. So we are being optimistic but cautious.

No other questions. We would like again, to thank everybody, for attending our conference call, and we'll see you in about 90 days. Thank you very much.