Gentherm Inc (THRM) 2007 Q2 法說會逐字稿

Welcome to the Amerigon -- ladies and gentlemen, thank you for standing by. Welcome to the Amerigon Incorporated second quarter 2007 results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be provided at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded Monday, August 6, 2007.

At this time I would like to turn the conference over to Ms. Jill Bertotti with Allen & Caron. Please go ahead, ma'am.

Good morning and good afternoon. Thank you for joining us today for the Amerigon Incorporated second quarter and six-month results conference call. Before we start today's call, there are 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 for its second quarter and six months ended June 30, 2007, an e-mail 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 may download a copy from either the Amerigon website at www.Amerigon.com or the Allen & Caron website at www.allencaron.com. Additionally, a replay of this conference call will be available on the Internet via a link provided at Amerigon's website. 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 maybe different. Important factors that could cause the Company's actual results to differ materially from its expectations on the 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, including but not limited to its Form 10-Q for the period ending June 30, 2007 and its Form 10-K for the year ended December 31, 2006. On our call today from Amerigon, 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, afternoon, Dan.

Good morning, Jill. Thank you very much. This call, I happen to be in the California office in Irwindale attending meetings, so it is still morning for me here. Actually Bud Marx and I have swapped positions. Normally he's in Michigan and I'm in California, today I'm in California and he's in Michigan. We do appreciate everyone dialing in today to pick up the latest news on what's happening at Amerigon. We feel we had a very good quarter in our second quarter which continues to a pretty good year for 2007.

As everyone can see, our revenues for the second quarter were just over $15 million, which follows a first quarter of about $16.2 million, giving us a revenue number for the year of around $31 million compared to last year's $22.8. So our revenue lines are continuing to grow and expand as we had predicted and our bottom lines are following along the same path. Our net income wound up being about $1.250 million compared to a first quarter of about $1.3 million. We feel like we're doing pretty good, we're achieving the goals we want to see for our CCS businesses and things are rolling fairly nicely.

We also had some highlights during the quarter, during the second quarter, we actually shipped our 3 millionth CCS unit which is a very big milestone for Amerigon. We had been making shipments for a little over 6 years and to achieve 3 million units in that short a period of time, we believe is a very exciting opportunity and prospect. We also saw during the quarter two new vehicle platforms announce that their future models will have CCS on them. The Jaguar XJ sedan, the flagship of the Jaguar line has now got heated and cooled seats available both in Europe and in North America, as does the new Lexus LS 600H, the hybrid version of the high-end Lexus LS 470. That's a very significant development for us, because it's our first hybrid vehicle. It also has all four seat positions as standard equipment CCS technology.

We also had during the quarter an announcement from one of our technology partners, the Herman-Miller Company introduced a new device that they will be marketing later this fall that they call the C2, which is a personal heater and cooler device, which Amerigon's BSST unit is supplying the thermal electric heat pump for that. So all in all, the second quarter continued a pretty good string of news for us the past few years and we're very pleased with the overall results and I will get those results in more detail now from Mr. Barry Steele, our CFO in Northville.

Thank you, Dan. I have a few additional comments on the numbers year. First of all, as Dan mentioned, product revenue had increased, it actually was up 21% in the quarter and 37% over the prior year. You'll remember from our last quarterly call, we mentioned that there'll be some seasonality during the year that would show through, whereas in prior years that didn't show through because of the timing of product launches. So we're actually down sequentially by 7%. Again, that's because of seasonal patterns in the automotive industry. As we look forward the next couple quarters, we'll start to come back to a growth state sequentially.

Our gross margin for the quarter was 34.2%. That's an increase of 2.9% year over year and sequentially an increase of 2.2%. Our margins have been fluctuating, primarily due to product mix when you look from program from program, there is some differences in the margin. We've also been able to, with the improved sales, cover some of our fixed costs better.

If you look at net R&D, you see a year-over-year increase of 450,000 or 51%, sequentially, that's an increase from the first quarter of 197,000 or 17%. This is completely driven by the advanced thermoelectric program at BSST. And I think Bud is going to talk a little more about that, how that's going.

Moving on, SG&A, if you remember last quarter, we showed an increase and some of that was due to the management incentive program being weighted more in the first quarter, because of the increases that we've seen in operations. That actually has panned out to be a decrease in Q2. You will see that sequentially, SG&A is down by $130,000 or 6% and year over year we're at an increase of $175,000 or 9.5%. That also includes an increase in stock option compensation in comparison to the prior year, due to stock options that were issued at the very end of 2006, on December 29, actually. So you have those options amortizing in the current period, whereas they do not exist in the prior year.

A couple other things, our interest income has improved quite a bit. If you remember in the first quarter, we had very good cash flow. We've had very good operating cash flow again in the second quarter and that's translated into higher short-term investments. So we're showing improved interest on those investments.

A couple other things. As I mentioned, we still continue to have very good operating cash flow. It's coming earlier in our normal year as we would normally see, primarily because we worked to decrease our inventory levels. Additionally, you'll see that an increase or higher expenditures for patents in the second quarter -- and at the end of the second quarter, we purchased from Visteon, certain intellectual property at a cost of $1.5 million. That was actually something that shows throughout on the cash flow statement for the current quarter. I think that's it so we'll go back to Dan.

Thank you very much, Barry. We did, in fact, make an acquisition of some of Visteon's HVAC technologies that had been developed jointly with Amerigon and Bud's going to give us a little bit more detail about that very exciting announcement. Bud, are you still with us?

I am with you. I'm actually going to pull over so that I both don't lose the signal and don't lose control here. Just following on with that comment, for a period of months, we have been working with Visteon to negotiate for BSST, the ability to work with other Tier 1s.

Our agreement with Visteon, as we had initially shaped it for five years was to be exclusive. What we found was that Visteon, pursuing its own strategies, first we completed the -- what I'll call the development part of our program to get the technology meshed with the systems technology at Visteon. At that point the Visteon funding was dropping off and we really felt a need to find a set of relationships with other Tier 1s that would also let us work through with other OE customers and so we negotiated with Visteon to open up the exclusive development agreement so that we can work with a limited number of additional Tier 1 partners and we purchased Visteon's system technology rights for $1.5 million. We've licensed those back to Visteon on a royalty-free basis, but we have the ability to license that systems technology to our other Tier 1 partners.

Because we were in this negotiating period with Visteon, it wasn't possible for to us reach agreement on a timely basis with the other people that we view as likely and positive partners. So that's our task over the next six months is to find additional interested Tier 1s to help us drive the technology forward and with their strongly associated OE customer base as well. I view this as a significant positive, but it does mean that we have to backfill the development support that we had been getting from Visteon with support from others. In the interim, and we've described it in the press release, that created a bit of a funding gap and what both we and our Amerigon parent have done is to work hard to develop cost reductions to fill that gap until we can get additional support. Filling that gap with cost reductions means that we will not experience any significant deterioration in our Amerigon earning power.

I think that's really about as much as is worth saying on this whole funding and agreement side, but I'm sure there are people that will have questions. On the product side, as Dan mentioned, Herman-Miller has announced that they will be introducing the personal heater and cooler later this year and we will be in support of that and there are additional products that we're working on that we expect will provide revenue in 2008. You'll recall we said that the revenue, initially, from the Herman-Miller announcement, as we ramp up, will be quite small. So that's not going to move the needle one way or another in 2007, but it's an indication that we have a product that the marketplace will appreciate significantly over time. That, I think, concludes my remarks, Dan.

All right. Thank you very much for your roving report, there, Bud. I think at this point we will conclude our introductory comments and open the floor for questions. If there are any questions, we'll address them now.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question comes from Casey Flavin with CJS Securities. Please go ahead.

Good afternoon. Congratulations on a good second quarter.

Thank you, sir.

Your base business is growing nicely. Can you give us a sense of what your outlook is for '08? I know sometimes you don't like to hammer that down, but you've been enthusiastic. And do you think that your growth rate for fiscal '06 is perhaps achievable at about 40%?

You are right. We are very cautious about what we say about the future. We found out that people write it down and come back at us after we say it. We are very cautious about it and very conservative in our approach. Right now, we see 2007 as finishing up on a pretty strong note and I think you've noticed in the press release today we opened up slightly our indication of our expected revenue growth this year from 15 to 20% to all the way from 20 to 25% as a possibility.

Looking forward to 2008, we do have significant revenue gains coming again -- I haven't really sat down and committed them to paper yet, but we are seeing them look a little more like '06 than '07's growth rate percentages. We will be making a formal announcement on what we see as the top line numbers for 2008 after our third quarter numbers, and we do get an early look at the first half of 2008.

Great. Thanks, Dan. Then the C2 personal climate control product that you announced during the quarter, it's the first commercial product application from BSST and you also mentioned a cooling product for computer chips on the last call. Can you provide an update there and provide us with sort of a better sense or even perhaps a range of revenue expectations from these initiatives over the balance of the year, and more importantly, in fiscal '08?

I don't -- this is Bud. I don't expect to see revenue from the (inaudible) cooling, better said, that be chip cooling device in '07. But it certainly is one of the products that we are expecting to start shipment on in 2008. I'm going to resist providing revenue guidance on that. These are nascent products, they'll start off in relatively low volume. But both of these markets are markets that we think are going to have significant appetite for BSST products and for its enabling technology over the next couple of years.

Okay. Bud, you provided some detail on the Visteon agreement, which I appreciate. And given the terms of the deal, it suggests that there are significantly more attractive opportunities available to the Company. Can you give us a sense for how you plan to further expand your partner relationships? Is there anything more you can provide there?

Well, there are obvious suspects, because the world of both heating and cooling and power generation with electronics for automotive is a pretty small world. We're particularly interested in -- Visteon's a worldwide company. I should say that from the outset. But people have various arenas where they're particularly strong and particularly concentrated and we see this as a significant opportunity to expand our relationships with Asian and European Tier 1s. So that's the task for us. Actually, we think that the opportunity should be very appealing and I'm hopeful we'll have a number of people who would like to form this relationship and if so that would be even more beneficial for us. But we won't be -- we won't be licensing this technology to four or five people, but probably one or two more. Just a function of how much we can work with and also a function of our wanting to continue the relationship with Visteon and not to attenuate it.

Great. Now in terms of R&D, can you give us a sense of how much funding was contributed by Visteon and how much you would expect the Company to have to cover until a new partner is named? You had, Barry, had originally talked or spoken to a $1 million of incremental R&D net expense from '06 to '07. What are your expectations going forward there?

This is sort of lumpy because -- I'll give you just a couple of numbers. We don't expect Visteon to contribute any significant development support in 2007. And in 2006, they contributed about $0.5 million more or less in round numbers. That gives you a sense of the kind of thing we need to cover in the future.

Great. Thank you. And I appreciate the time. This is my last question. In terms of gross margins, I guess this is for Barry, you've been guiding to a 32, 33% range. In two of the last three quarters, you've actually achieved 34% or higher. What are your expectations there going forward, Barry?

I wouldn't change what I've said in the past. We'll have better quarters and not as good a quarters. There's a lot of underlying currents that affect that, just from program to program. So I wouldn't increase it, even though we're showing a pretty good quarter here in Q2.

Fair enough. Thank you very much.

Thank you, sir. Our next question comes from Steve Denault with Northland Securities. Please go ahead with your question.

Good afternoon, everybody. If I could follow-up, Barry, the -- how should we be thinking about the absolute level of R&D spend for the firm in 2007, and maybe in 2008 also?

Are you asking what is the number going to be?

Well, what should it -- and maybe you don't want to speak in absolute terms is, but directionally, is what we saw, let's just pick on the June quarter, representative of what one should anticipate over the balance of the year?

I think you're going to see some amount of increase in that in the balance of the year, with maybe some more next year. Some of the areas we're cutting back to offset some of the funding shortfall isn't necessarily R&D, but a lot of it is. I think you really should think of increasing that number as opposed to decreasing it.

Okay. How about SG&A?

SG&A is going to be more consistent. Last year, you seen a lot of increases because of one-time things. You've actually seen some decreases in some of the underlying costs that were increased in the prior year, such as audit costs and things of that nature, but we're settling out at what normal growth in that line item should be.

Okay, perfect. Thank you.

Thank you, sir. Our next question comes from Mark Tobin with Roth Capital. Please go ahead with your question.

Barry, on the -- one more question on the R&D side, can you give us the BSST's R&D expenses, the total as well as the net for the quarter?

I can give you the net, because I have it right here with me. For the quarter it was -- actually, I have to turn to a different page to do that. Their net number was $695,000.

Okay, and then just add the reimbursement to that to get the total?

That's correct. For the year-to-date period, it was $1.164 million.

Okay, thank you. On -- so as far as going forward, we expect -- just to make sure I understand it, is the R&D expense line going up as well as the reimbursement line going down as far as the dynamics on the R&D?

I think, actually, the reimbursement line is actually increasing, but not the same rate as costs are going up.

Okay.

This is Bud. The reason -- we have a lot of other support besides Visteon, especially for Department of Energy programs and things like that. So we are getting some benefit from that in the second half.

Okay. More on the product side. I know we've spoken before about the heated and ventilated product. Is that something that we still expect to roll out in the latter half of '07, early '08 time frame?

We actually don't expect to roll the product out. I think we've said in the past, we expect to hear announcements from our customer -- our first customer, who is approved and plans to introduce that either late this year or early next year. The product is due to begin impacting our revenue sometime mid-2008.

Okay. And on the Herman-Miller C2, can you help us get a feel for the portion of BSST content that's in that product? I think it carries a $300 price tag.

We believe it has a $300 retail price tag. The actual prices to the end users and consumers are probably a little bit less than that. The BSST content is certainly less than $20 of that total cost.

Okay. I will jump back in the queue. Thank you.

Thank you, sir. Our next question comes from Steve Dyer with Craig-Hallum. Please go ahead with your question.

Hi, guys. Thanks for taking my call. I'm wondering as you look out into next year, how much variability is there in the production numbers that you get from the OEMs and how much of that is impacted by the economy and things like that, or is it a fairly solid number?

Well, there's always variabilities the further out you look. What we're looking at for next year is a fairly solid numbers. We are again conservative people, by nature. We look at their numbers and we do provide a little bit of caution to what they -- they're usually very excited about new models, so we usually back off a bit on that. But given steady economies around the world, particularly in the U.S., where there's a little bit of tension right now in some of the financial markets, particularly on interest rates. So I'd say that we're fairly solid on our numbers for next year and we don't see anything that is imminent that looks like it would impact the industry. Although, a sudden jump in interest rates or a sudden credit crunch in general driven by the already existing problems in the mortgage rate -- mortgage market could impact us to a certain extent. But we're not forecasting any dire drops in units or volumes based on that.

Okay, great. And then going back to the R&D line. I don't want to beat a dead horse here, but I guess my thought would be that if early next year you were able to secure additional funding partners to take the place of Visteon in addition to some cost cuts that you're making to compensate for that, I would think that R&D would flatten out a little bit. Am I hearing correctly that it will probably actually tick up?

It will definitely tick up. Some of the things that we're doing is putting off expenditures for things that we want it to do. I don't think you should expect it to actually decrease, like we're cutting some kind of run rate or something like that. It's temporary offsets to fuel the funding gap.

I guess you prepare to give what a decent quarterly run rate would be for next year, just ballpark, given that there's been some variability here in the last couple of quarters?

I don't think we want to give you a specific number at this time, I don't think.

We want to get a little experience with this and see how time treats us on that, but we're not going to project line by line on the P&L.

Okay, great. Thanks.

Thank you, sir. (OPERATOR INSTRUCTIONS) And our next question comes from Walter Ramsley with Walrus Partners. Please go ahead.

Congratulations. Thanks for taking the call. I had a question about the take rates on the cooled seats. Have they stayed about the same or what sort of trend are they following at this point?

Thank you, Walter. We have seen a very steady and promising take rate with all of our platforms as they were introduced. There's usually a little bit of instability when the new vehicle comes out in terms of a take rate for our product and it has been stabilizing out very much along the lines we believe. Also in 2007, we've seen several platforms adapt our CCS product from an optional list to a standard feature. Examples of that would be the Nissan M45 and M35 and the Nissan Fuga in Japan. Both had a very high take rate. Something in the range of the mid- to upper 80s and it was quite obvious to them that it was costing them more money to offer the other 10, 15% not taking the feature as it was, to just make it a standard feature across the board. So more and more people are picking up on this. In the high end ranges, we're still seeing something in the 70 to 80% take rate range, and in the midmarkets, we're seeing 40s to 60s, and that's very encouraging to for us with a product that has a fairly high (inaudible). The take rates have been very consistent and as we move down into the middle market area with our heated and cooled product, we're still seeing very good, solid take rate numbers.

That sounds terrific. Now as far as the warranty situation, has that -- it's always been pretty low, is it still down there?

Yes. Actually, our warranty reserve -- excuse me a second, let me knock on wood here, but our warranty numbers have been very, very good and very, very promising for the future.

Okay. The manufacturing, any problems from that standpoint?

There have been no problems. Actually, you bring a good point, though, Walter. What we are doing right now is we are in the final phases of gearing up our supply chain links to make sure that we are ready for next year's growth rate. And we have a lot of programs in play for next year and we're doing a lot of hard work to get the factories ready to tune up and get ready to go. So we're having no issues at all, again, knocking on wood, and looking forward to a very strong and robust growth in 2008. We believe we're ready.

And then just as far as the competition or potential competition might be concerned, are there any ventilated products that are making any inroads or traction that you've been able to see? What's the situation there?

Well, certainly, our competitors are very active. The market space is expanding and more and more people are dipping their toes into the market, trying to find something. Our traditional competitors, of course, always still there. The people who are primarily seat heater manufacturers. They continue to press very hard with their various designs in products and they've had some successes here and there. But again the predominance of what's in the market today is produced by Amerigon and we are continuing to push forward.

Okay. I guess I might as well as you a BSST question. That air-conditioning product that Visteon renegotiated that deal, when's that product actually going to be commercialized?

This is Bud. These are programs that, first of all, the development of the basic technology both at the module level by us and the system level by Visteon was intended for products with market entry well out 2010 and beyond. So this doesn't signal any change in our revenue outlook here, but rather that we're working to broaden the base of people we can work with because it will strengthen us and it will also, I believe, bring more people in the Tier 1 world looking at and trying to sell products with our advanced thermoelectric technology to their strongest customers.

Thank you, sir. Our next question is a follow-up from Mark Tobin. Please go ahead with your question.

I know we commented on seasonality heading into this quarter. How should we look at the back half from a seasonality perspective?

I would look at it in terms of, as I said, we believe it will be sequentially increasing in the second half of the year, not as much in Q3, so seasonality in Q3 is still a little bit down because of shutdowns that carry over into July, but that will go away in Q4. In fact, we'll have new programs that have already been announced that will start to hit Q4 as well. So sequentially higher, probably more so in Q4.

Okay. And on the ASPs, they were fairly consistent with what we had in the first quarter, which was actually down year over year. Is that again due to product mix, with just lower levels of the control portion?

Absolutely.

Okay. Is that on the Lexus, specifically?

Ford and Toyota are the customers that don't use our, don't purchase that component through us.

Okay. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS) Gentlemen, there appear to be no further questions, please continue with any additional comments.

Well, again, we would very much like to thank everyone for taking time out of your busy days to hear the news about Amerigon. We believe all the news has been very positive, particularly the second quarter results, I think, continue our story of growth and growth in profitability and in revenue. We also see a lot of good progress being made by increasing penetration of the CCS in broader markets across the world. We're getting better penetration in Asia and in Europe and we believe that will be a trend that will continue in the future. In fact, if you watch this space in the second half of the year, we believe there's still one or two more model announcements that may yet get out in 2007.

2008, as we've indicated, is going to be a very good year for Amerigon in terms of revenue growth and hopefully bottom line growth and we think that we're in a very good position to be able to exploit a unique technology and a very unique application. So we would like to thank all of our partners, our supply chain partners, our technology partners, and our employees for delivering another solid quarter for Amerigon and we ask you to join us again in about 90 days to hear some results for the third quarter and a formal preview of what 2008 may bring. Thank you very much.

Thank you. Ladies and gentlemen, that does conclude our conference call for today. Thank you all for your participation. You may now disconnect.