Gentherm Inc (THRM) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Amerigon, Inc. 2007 third quarter and nine months results call.

During today's presentation, all parties will be in a listen only mode. Following the presentation of the parties the conference will be open for questions.

If you have a question, please press the star followed by the 1 on your touch-tone phone. If you would like to withdraw your question, please press the star followed by the 2. If you are using a speaker equipment today, please lift the handset before making your selection.

This conference is being recorded today, Tuesday, October 30th, 2007.

I would now like to turn the conference over to Jill Bertotti of Allen & Caron. Please go ahead.

Good morning and thank you, everyone, for joining us today for the Amerigon, Inc. third quarter nine months results conference call.

Before we start today's call there are a few items I would like to cover with you.

First, in addition it disseminating through PR Newswire this morning's news release announcing Amerigon's results for third-quarter and nine months ended September 30th 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 web site at www.amerigon.com or the Allen & Caron web site at www.allencaron.com. 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 been asked to make the following statement: 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 the 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 of 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 September 30th, 2007 and its form 10-K for the year ended December 31st, 2006.

On the call today from Amerigon we have Dan Coker, Chief Executive Officer, Bud Marx, Chairman, and Barry Steele, Chief Financial Officer.

Management will provide a review of the results, after which 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 very much for the introduction and I would like to thank everyone for joining us this fine, beautiful Michigan day.

The first comment I would like to make is, I guess we were reasonably satisfied with our third quarter. Our revenues came in just below $16 million at about $15,9 million. And we were about $47.2 million for the year-to-date numbers. And that tracks pretty close to what we had expected during the year. This also tracks despite some uncertainty in the marketplace about the main customer for our products to date which are the automotive industry, have entered into their labor negotiation period and had very minor disruptions. But two of the big three in North America had slight disruptions but minimalized to their production runs.

The other big interest issue for us, of course, has been the general state of the economy and the credit markets, primarily the real estate market issues that have caused people to reassess their purchases and their purchasing strategies. So, we feel like the quarter survived those kind of catastrophic issues very well and we are on track to complete our year as we had originally projected and we think that things are going okay.

I am going to turn this subject over to Mr. Steele in just a second. But a couple of things I would like to point out that I think were significant during the quarter.

We had-- last fall, we had a nice introduction by the Jaguar program with their XJ platform which is their flagship. Just this quarter, we had a second announcement from Jaguar which is the XF platform, which is the replacement for their S-type vehicle if you are familiar with the Jaguar line. It is a very beautiful car and we are expecting big things from the vehicle in terms of sales, particularly for 2008, for us. So, we are very excited about that.

Bud is going to talk to us a little bit about some exciting news at BSST and how our progress is there. And Barry is going to mention a few things from the financial aspect, particularly focusing on an R&D tax credit advantage that we gained during the quarter.

So, at this point, I think I will turn it over to Barry and let him guide us through the financial statements. Barry?

Thank you, Dan.

As you mentioned, product revenues, we had a good quarter with growth of 25% on the quarter over the last year and 33% for the year-to-date period. Also, I might note that sequentially our revenues are up 6% and largely driven by seasonal patterns that we see this year. A lot of our sales performance is primarily attributable to new vehicle launches, mostly in the prior year and some in this current year. Our gross margin was slightly down year-over-year to 32.5% versus 32.7% for the third quarter last year. Sequentially, we are down to 32.5% from 34.2%. Our variances in gross margin are completely driven by mix-in products from various customers and various platforms.

Moving on, we see our net R&D costs have increased for the quarter. They are up by $375,000 for the year-to-date period, $1.332 million. That is a 38% and 53% increase, respectively. This has to do with a couple of things.

One is our overall spending in that category has increased as we had talked in the past that is primarily related to our advanced thermoelectric programs at BSST. It is also attributable to decreased funding from Visteon in particular. As you may recall, in the previous quarter, we changed our agreement with Visteon so that it is no longer an exclusive deal and that has resulted in less funding partnership with them. I think Bud will probably speak to that to a certain extent as well.

In the SG&A line, we are -- we have seen an increase during the quarter, $250,000 or 13%. Year-to-date that was $984,000 or 19%. Much of this increase comes from stock option compensation. If you recall in December of last year, we issued some stock option to employees and this is the amortization related to those options that will be ongoing. Also, our management incentive program is a little bit higher in that quarter.

Moving on to the tax line. Obviously a big change there. We now expect our effective tax rate to be 37% for the year. Previously, it was closer to 40%. It was 39.8%, I believe. And that's because of a couple of changes in our estimate for the year, including a benefit given for, what we believe to be a credit, will earn in 2007 for research and development credits. In addition to that, we booked a research and development credit for prior years related to 1999 through 2006 activities. Research activities that equaled $1.7 million. We completed a study along these lines with our tax advisors and that was the result of the study and that was an asset that had not been valued on our books in the past equal to $1.7 million. So, we are glad to have that completed, and it will be a benefit that will turn into cash probably in 2009 when we become a taxpayer.

Moving on, we continue to have very strong cash flows. You will see that our inventory level has been decreasing and continues to do so from a couple of standpoints. We really worked product to our system and we are much more efficient. Additionally, more and more of our programs are sourced directly from our contract manufacturers to our customers which means that we don't have to keep a lot of inventory at hand. This is partially offset by higher accounts receivable. That means that our cash reserves have also increased during the quarter by about $2 million and now stand at $20.4 million.

And that's about it.

All right, Barry, thank you very much for that detailed report.

We would like to go to sunny California and see if we can get Bud to join us and give us an update on the Advanced Technology team.

Bud?

Good morning, everyone. Thank you, Dan.

It is indeed sunny out here, and we are surviving the wildfires pretty effectively.

On the BSST side, we have had, I think, a number of interesting developments.

First one, I think it is fair to say that the decline in funded research and development at BSST reflects our opening up the agreement from exclusivity with Visteon to permit us to work with other tier-one customers in both the power control and power generation arena. And as I mentioned in our quarterly conference last quarter, the challenge for us was to now, with the opportunity ahead of us, to go ahead and sign on to work with other tier-ones. And I predicted that would be probably a six to nine-month process and we are hard at work at that and, I would say, making encouraging progress.

The other thing I am finding very interesting is the surge of interest in power generation.

You may recall, we are in the third phase of a DOE-funded program with BMW and Visteon and a couple of academic institutions to develop solutions in power generation for automotive, at least at the first application, which would lead to a 10% improvement in fuel economy. We are in the third phase of that program. We have been, I think, quite successful in DOE's eyes.

But the new factor is that the European community has announced that it will institute a carbon tax. They had originally announced that it would be effective as early as 2011. We are now seeing, because of the great difficulty of implementing that timing, that this might be delayed. But it has sparked a significant interest in programs leading to production for heat recuperation into electricity which then feeds into the vehicle and would improve fuel economy and reduce carbon emissions.

And so, the developments in the European sector, I think, are beginning to materialize in a way that we had foreseen that the world wasn't going to find any cheaper energy and that the interest would become higher and higher in recuperating energy that, otherwise, is lost. So, I think that is the new news, very interesting. Obviously, it won't be revenue in the near term, but we've always said that power generation was going to be one of the very important developments for the application of our new technology and I think we are seeing that.

That is probably all the news that is fit to print from California.

Alright. Bud, thank you very much. In our current attempts to streamline these calls as much as possible the most important factor, of course, is addressing questions the audience may have. So, at this point Nicole will open the floor for questions.

(OPERATOR INSTRUCTIONS) One moment, please, for our first question.

Our first question comes from the line of [Casey Spelvin] of CJ&Securities. Please go. Go ahead.

Good morning. Congratulations on a good quarter, guys.

You've guided to an extremely robust revenue growth in 2008. Can you just give us a sense if that includes any contribution from BSST or is that based solely on the core CCS business?

The guidance that we provided today is primarily driven by our current customer base which is the automotive industry for the climate control seat. There is a very modest number in, therefore, climate control seat for nonautomotive applications from our advance technology team, but it is not significant at all.

Okay. I guess if I can ask you to go into a little more detail on, sort of, the status of your near-term commercial BSST projects, namely, the chip cooling device and would you be able to give us a sense what that small contribution might be and/or range of revenue contribution that you could see in 2008?

Actually we've -- as part of our policy, we have not identified that number at all. and we have identified -- earliest part of our BSST revenue will come from a very small program with [Herman Miller] and we had indicated that there will be other programs that will come and be announced by the second half of 2008 or early 2009. So, I prefer not to give you specific numbers on that as we are venturing into new areas.

Okay.

It is fair to say that we do expect to have more than one product in production by the end of 2008, but ,as Dan has said, the -- in terms of percentage of revenue, it would not be a significant percentage of the total.

Fair enough. Now, given your three-year window of visibility in the business for the most part, is there -- or can you provide sort of an initial view of your expectations for 2009 or is it still a little bit early?

Definitely a little bit early and out of context with what we normally do. We try to give as clear a vision as we have in practical sense. 2008 is a good solid year for us. We believe 2009 is going to be a continuation of our good steady growth, even as we continue to build now on a bigger base. We would like to see a good solid 25% average growth per year. And that's pretty much, I guess, the best guidance we can give you.

Okay, great, Thanks, Dan. And then there is going to be a lot of program activity in 2008. Can you give us a sense of how many programs we might be looking at? And do you expect these to be primarily existing customers or do you expect some new customer wins and may this be -- could this be the result of penetrating the lower end market models as well?

Well, there are a lot of questions there Mr. Spelvin, but the answers to the questions are, yes, there are a lot of new programs coming. There is a lot of activity for us in 2008.

Obviously being able to generate a 30% to 40% revenue basis over our current business is going to take a lot of activity. We have spent a good portion of 2007 getting ourselves ready to flex our system to grow for next year. And we have not specified the number of platforms, but it is going to be our biggest year yet in terms of new platform introductions and launches. They will be concentrated, I think we can safely say, in North America and in Asia, and we do have a couple of opportunities to step down a little bit further into the mid-price range market with a couple of our new products.

So, we are very excited about 2008, not just from a growth and revenue standpoint, but from an opportunity standpoint to continue to press out into a -- a very wide-open area in terms of the automotive industry.

Excellent. And lastly, you've mentioned you increased your spending to growth capacity. Are you comfortable with your current capacity level given your outlook over the next several years?

We are very comfortable with our outlook for 2008. That is what most of our efforts have been so far in this year as we get ready to launch the '08 models, and we are currently in the process of planning for our '09 and 2010 capacity utilization schedule. So, we are very comfortable that we had the capacities and we had the right partners in place to be able to help us supply high-quality parts to a very, very finicky industry.

Thanks a lot. I appreciate, Dan. I will hop back into queue.

Thank you, sir

Thank you. Our next question comes from the line of Steve Denault with Northland Securities. Please go ahead.

Hi, good morning, everybody. Great quarter. This question is directed to Barry. Barry, how should we think -- be thinking about the fourth-quarter tax rate in the 2008 tax rate?

That -- our best estimate is about 37%.

Okay. Going forward.

Going forward, yes.

What -- how should we be thinking about really both SG&A and R&D next year? In terms of the growth rate.

Well, they will increase. SG&A probably not at the same increase as you see this year or at the same increase as you see for R&D. R&D will probably increase a little bit more than you see than in the current year.

In terms of growth?

Probably at the same -- not -- no, much slower growth rate in terms of the current year growth rate, but it will increase.

Okay. That's it. Thank you.

Thank you. Our next question comes from the line of Tyson Bower with Wealth Monitors. Please go ahead.

Great quarter, gentlemen, especially given the uncertainty in the North American side. So commend you on that. A couple of quick questions. Given the increase on the CCS units expected for 2008, and that we are probably looking at some bigger programs or more vehicles in those programs, should we expect a significant change in revenue per unit on the CCS side and, also, what kind of product mix are we trending toward on the margin side of this?

Well, in answer to the question about the revenue, we will continue to see as we have in the past few years trying to eke our prices down as best we can to keep our in-product competitive in the marketplace. The increased volume is a big bite for us to swallow. We obviously are not trying to corner the market place and jack the prices up. We have got a good target in mind and it will be slightly lower than this year's average selling price.

What was the other part of the question?

Just the -- if there are more -- I am guessing as to your latest generation of CCS units are being put in, which should give you a better margin on that mix.

Actually, yes. We are seeing our -- a broader proliferation of our latest generation of product that we call the MTM2. The mix issues for us that were primarily based upon the content that we are allowed or, kind of, tasked to supply by the OEM. And that trend has continued fairly steady as we have seen our -- our base prices go down. We have seen our average selling prices stay steady because of the increased content that we have seen. That will probably begin to reach an equilibrium during 2008.

Okay. So, you don't know revenue per unit may go down, your margins should stay fairly stable.

I think we are hoping to stay again in the low 30s. That is our target.

Okay. Barry, as we saw last year, although you had a better chance to accrue throughout this year, any true-up situations that you see possibly in Q4 on SG&A side?

No, we wouldn't see. We are, sort of, same rates as we currently see.

Okay. And, given that you sell mainly in North America, Asia is the primary focus of the new programs. Would that -- given such a robust outlook for '08, will that tend to lend itself to the OEMs that have chosen to introduce new products earlier in the year, more in that January, February time frame?

That is a continuing trend for us, although this next year we are going to see -- we are going to see a good steady trickle up of revenue but the second half is going to be a strong period for us.

Okay. And the last question, any currency rate benefits that you are seeing as you try to make greater inroads into Asia or the Europe automakers?

We've kept our contracts with our customers as well as with our suppliers in U.S. dollars. So, we don't have any specific risk or opportunities at the moment.

Okay. Thanks a lot, gentlemen.

Thank you. Once again, ladies and gentlemen, if would you like to ask a question, please press the star followed by the 1 at this time. Our next question comes from the line of Steve Dyer with Craig and Hallum. Please go ahead.

Good morning, guys. Thanks for taking my call. A couple of quick questions. A lot of them have been answered. First off, was there a dynamic that happened in the industry this year that led Q3 to be stronger and now we are kind of looking at implied guidance of maybe a sequentially down Q4? I know typically Q4 is very strong and Q3, because of the plant shutdowns and other things, is lower.

Well, I would say what happened a little bit is that we did have a good third quarter, and I think there was a little bit of banking of inventory on the auto industries as they entered into their negotiation periods. And I believe that we are going to see a little bit of that inventory being eaten out into the fourth quarter and I think that would be the main indicator that we have seen in terms of a shift from a historical trend.

Great. Okay. And then with the soft new car environment, I was wondering if you seen, anecdotally, any changes in the take rates one way or the other?

We have not seen any significant change. In fact, with the changes that we are seeing, is that we are seeing more and more people as they see the popularity of the feature. More and more people I think are considering broadening the availability of the product and that actually has been a very good thing for us. But we haven't seen any appreciable decline in the average take-rate, in general, on the vehicles we offer.

Okay. And then any update on when we may hear something more on the heated and ventilated solution?

You should hear updates on that fairly soon.

Okay. Great. And then finally, the Herman Miller C2 obviously was not supposed to be necessarily a mover on the top line. Is that shipping? And if so, what is the qualitative feedback on that.

The original projections, I think, were that Herman Miller and, of course, Amerigon will be shipping these products beginning in the fourth quarter and that fourth quarter begins in a few days. So, we haven't really had any feedback from any customers. We are in the, can I say, the final preparation production stage right now and we will begin our activity in the fourth quarter and they will begin shipping their products to their customers in the fourth quarter.

Okay. Great. Thanks, guys.

Thank you. Our next question comes from the line of Gary Hefernan (ph) with Lord Abbett and Company. Go ahead.

Good morning,everybody. And congratulations on some good work here.

And now that I have congratulated you, let's -- I'd like to challenge the margins.

The 32.5% gross margin achieved for the quarter, a little bit of a dip on a prior year comparison. And it looks like we are -- we are leveling off in between two quarters of the last four reported around the 34% level and two in the 32% level. And then taking that with your comments earlier on question about target of keeping gross margins in the low 30s. You -- that is all a backdrop as to your discussions of looking to grow platforms and maybe even move down to a more lower priced vehicle -- not a low priced, just lower price, that as the ASPs come down, how -- what is your thought.? Why is it okay just to keep the gross margin percentage level here as opposed to still trying to -- to move that up each and over period?

Well, of course, it's -- for us it was -- has been a massive effort to get our margins to the low 30s. I don't want to belittle the effort on all of our vendors and our team's part to try to get those margins as high as possible.

Not at all and --

-- operating in a very difficult environment where price pressure is paramount on the minds of our primary customers. But we -- we have built our model based upon achieving a certain level of profitability based upon a growth model and being able to generate as much cost efficiencies and gains as we can based upon the volume curves, as well as design changes and improvements in our product. Because we all know that our product will sell better if we can get the cost down. So, our mission here is to try to grow as hard and fast as we can and occupy all the available space that we can and make the first stab into the marketplace while maintaining a margin level that is within our model. And that target has been in the low 30s. So, I hope that indirectly gets to your question, Gary.

Maybe I can chime in for a minute.

I don't think our target on margins has moved at all over the last two or three years. What has really happened is we've been able to achieve it and sustain it. And the minor changes you are seeing of 2/10 of a point here and so forth, or even a point, as Barry has explained, are much more influenced by product mix of what -- what customer orders what.

And we are not consciously planning to cut prices in a significant way in order to penetrate these segments further on down the -- down the product range. Indeed, I think you will see that the auto companies continue to charge between $600 and $800 per pair of seats regardless of what product this is offered on. So, I don't see a huge trend.

I think Dan has said it very well that our intention is to meet the pressures of the industry on pricing with cost reductions that keep the margins, you know, pretty well constant, keep our profitability constant, but don't expose us to competitors coming in from the low end as has happened frequently in the auto industry Sort of, cutting the legs out from under you and then moving upstream.

So, I think we have a pretty good fix on the kind of pricing and the kind of margins that are appropriate for our product and for the industry. I think there has been quite good execution on that.

Gary, does that address your question.

It does. It does. I just want to be apprised of your mind-set as you are attacking this market. Thank you.

Thank you. Our next question comes from the line of Mark Tobin with Roth Capital Partners. Please go ahead.

Good afternoon, guys. Quick, quick questions for Barry on the housekeeping side. What was the total of BSST R&D spending for the quarter?

Hold on, I have that right here. We did file our 10-Q just a little while ago. The net number for the quarter was $588,000.

Okay. So add the reimbursement to that you get the total number?

That's correct.

Okay. And then for -- for Dan, it seems,at least compared to last year, that the announcements are coming a little bit later in the year. Is there something on the OEM side that is driving that or what kind of insight do you have into that?

I don't have any clear insight into that. I think there is more of a trend of the auto industries are introducing product when they are available to the market as opposed to waiting for some auto show or some model year event. And we are kind of at the mercy of when they get the car ready. They are ready to roll it out and we are ready to announce when they roll. So, we have had some rather sporadic -- as you pointed out -- rather sporadic schedule of announcements this year. And even last year was the beginning of this trend and you will see a lot of that in 2008 as well.

Okay. And on the G&A side, as we look ahead into 2008 and 2009, at what point do you require a meaningful investment in -- you know, just in kind of corporate expenses and that sort of thing?

Hopefully, we are going to keep ourselves well in check on the -- you know, on the required capital to grow our business. And then the period expenses, the support costs to service our business here. Part of our model has been to limit that level of expenses much as humanly possible. So, we -- as we said in the past, next year we are expecting to grow somewhere in the 30% to 40% range and you will see our period expenses growing certainly significantly less than half of that rate. So, we are not looking to add any giant corporate towers or anything to our expense rates. We are trying to stay lean and as cheap as possible to get the job done.

Okay. That's all I have. Thank you.

Thank you. And we have no further questions.

I would like to turn it back over to management. Thank you, Nicole.

And again we thank all the questions from the marketplace and all of the comments from our various team members. Again, as we have said, we felt like the third quarter was a reasonably good quarter for Amerigon. We think that there is a lot of solid expectations for us in 2008. And we believe we have now finished all of the necessary steps to take the next step to go to up the 30% to 40% growth rate and maintaining our profitability. And we are also very excited about the things that we are seeing on the advanced technology side of our business. And we believe that you will start seeing some good indications of that on a smaller basis, but again, indications in a couple of different areas in late 2008 and in 2009.

So, with that said, we would very much again like to thank everyone for their time and attention and we asj everyone to join us again in about 90 days.

Thank you, operator

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