Gentherm Inc (THRM) 2010 Q1 法說會逐字稿

Welcome to the Amerigon 2010 first-quarter results conference call on 27 April, 2010. (Operator Instructions). I will now hand the conference over to Jill Bertotti. Please go ahead.

Good morning and thank you, everyone, 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, in addition to disseminating through PR Newswire this morning's news release announcing Amerigon's results, 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.allen&caron.com. Additionally a replay of this conference call will be available via a link provided on the Events page of the Investors section of Amerigon's website.

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 be 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 impacted by the 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 March 31, 2010 and its Form 10-K for the year ended December 31, 2009. On the 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, Dan.

Good morning, Jill, and thank you very much, and thank you to everyone for spending time in your busy day today to hear our little story. We are going to try to stick with the same format we have used with moderate success in the past about a brief overview from us and then open it for questions and answers.

From our view as management, we felt like we had a successful quarter. We had record revenues and very good earnings on the bottom line. We had a couple of what I call operational highlights that we would like to mention. We announced during the quarter that we were beginning shipments of CCS systems to our new platform, the Ford F-250 Heavy-Duty or Super-Duty pickup truck. That new platform began taking deliveries in the first quarter, and we are very excited about the future and opportunity of that and other new platforms that will be announced during the year, which will give us a foothold for growth in the future.

We also secured and closed a deal to purchase the assets of our partner in our ZT Plus venture. This allows us to move forward with confidence that we can make a success of our new material venture, and it allows us to look into our operational future with a steady hand. We will continue to press forward into the market with new vehicle products. We have got a couple of new ven/heat products that are coming out in our Asian businesses, and that continues to be successful, as well as our other operations are now I think back in tune. The automotive market globally has recovered. I say it has recovered -- it is in the process of recovering. We have seen a good third quarter in 2009, a very good fourth quarter in 2009, and our first quarter of 2010 has rung up as a pretty good quarter. And it looks to us right now like the second quarter is going to be just slightly better than the first.

So with those I would say generally positive comments, I would like to turn the conversation over to Barry who will give you a little bit more detail on the quarter's results. Barry?

Thank you, Dan. The first-quarter 2010 we had revenue of $24.2 million. That was a significant increase over the first quarter of the last year, about 138%. Last year's first quarter had revenues of $10.2 million. It also was an increase of about 12% over our fourth-quarter revenue, which was $21.6 million. The significant increase is primarily related to the improvement in the automotive industry generally. Production levels have returned back to maybe not normal levels but much, much better levels compared to the first quarter last year.

In the meantime we have also added a number of new programs such as the F-250 Dan mentioned, as well as several others that were launched in the latter part of 2009. Those revenues were significantly up.

Our gross margin was improved as well over the first quarter of last year, but slightly down from our fourth quarter. The reason for the increases are primarily due to lower costs of some of our raw material components, tellurium in particular. We also had an improved mix of products with favoring higher-margin programs, and we were able to cover our fixed costs better.

The slight decrease from the fourth quarter is primarily related to our mix, which decreased slightly. Research and development activities cost us a net basis about $1.8 million. That is slightly up from the prior year, up $1.7 million, up $58,000, and up significantly from the fourth quarter up about $0.5 million. That increase is primarily related to the ZT Plus venture, which is now beginning in the month of March the last month of the quarter is being funded by Amerigon and also due to increased activities surrounding some of our new products that are coming out, including the bed and the cupholder.

Our selling, general and administrative expenses were about $2.5 million. That is an increase over the prior year of about $311,000. A decrease slightly from the rate that we had in the fourth quarter. The increases from the prior year first quarter are related to some stock options that were issued in the latter part of the first quarter last year, as well as some additional resources being devoted to our marketing activities, primarily in South Korea and some in Europe.

Our earnings per share for the quarter was $0.07. That compares to a loss of $0.04 for the prior year and slightly better than the fourth quarter's $0.06 per share. I would also like to mention that our cash reserves did increase during the quarter, in spite of the approximate $1.5 million that we spent to purchase back ZT Plus' shares. That amount is net of cash. Our cash increased about $728,000.

Now I turn it back to Dan.

Okay. Thank you very much for that report. And following our usual tradition, we would like to see if we can get Bud Marx on our West Coast office to give us an update on how things are going in our Advanced Technology group. Bud?

Thank you, Dan. Good morning, everyone. Well, obviously the thing we are focused on right now is the reintegration of ZT Plus into our operations as a wholly-owned entity. We believe that this is a key strategic asset for us. We believe that we have the world's best performing power generation material in terms of its efficiency, and we expect to be providing usable samples to customers of this material in the second half of this year. And then we intend to turn our attention toward the development of high-performance heating and cooling material, which would be the next step by redirecting our university partners now that we think we have attained the objectives we had in mind for power generation material. There is work to be done still to metalize this material and put it in condition for customers to sample it and agree to its performance, and that is one of the main tasks for us in the next four or five months.

So I think that is really the big news. We continue to press forward on both automotive and non-automotive applications for our technology. I think we have talked about progress. There is not a lot new to report in that arena this quarter.

Alright. Thank you very much, Bud, for your concise report. Operator, if you would not mind, we would be delighted to open the phones for any questions we may have from the participants.

(Operator Instructions). Rick Hoss, Roth Capital Partners.

Two questions. First, Barry, BSST spend on a net basis event?

BSST was about $946,000 for the quarter.

Okay. The payment for ZT, was that fully reflected in the first quarter? I see you have a $1.5 million cash flow associated with that. Is that price, or is there still going to be some costs that are going to float in the second quarter?

That is the full end transaction. There will be no further requirements for that.

Okay. The marketing initiatives that you just talked about, increasing in the EU, is this related to the seats, or is this related to the waste heat product or both?

It is actually related to both in the long run. We are actually organizing ourselves in Europe. A good portion of the increased expense from the first quarter of this year to the first quarter of last year actually occurred in Korea where we have added a couple of resources in the Korean market to help us satisfy a very busy couple of customers over there in the Korean market.

Okay. But the near-term, the marketing near-term is more the waste heat versus seats?

No, the marketing efforts near-term are working to identify seat potential customers, and at the same time we are clarifying and beginning to introduce the concepts of the power generation and other advanced products in all markets actually. But we are trying to get ourselves established in Europe as a platform first to deliver seats and then to the deliver the Advanced Technologies.

Okay. And then, Dan, how long do you think you can continue to add five to seven platforms a year?

Well, we are scratching the surface of the overall market. We have made, I would say, reasonable penetration in the up-end market of the heated and cool seat product lines. For the near-term, it looks like we are going to be capable of doing that continuously for the next probably three years. I would put at least a cautious bent on that.

There continues to be a strong appetite for our product and variations of our product in the upper, middle, and now we are beginning to see some actual midmarket customers come in and show interest in the heated and cool seats. But I would say that we have at least several years ahead of us where this type of growth is sustainable.

Okay. So we're talking about maybe 75 platforms, and then you start to see it tail-off a little bit. But you may see the same sort of trend that we are seeing with the higher tier where you have the migration of front seat only to front seat and back seat?

Yes, and there is another factor that we are pleasantly surprised with, that more people are recognizing that being able to deliver thermal energy through the seat surfaces changes the way people have thought about how you heat and cool the cabin. So the HVAC strategy is now beginning to incorporate having independent heating and cooling elements built into seat surfaces to deliver early comfort in early parts of rides.

And Dan, last question, what is your outlook for SAR if you have one?

My outlook for SAR is we are going to be in the ranges that everybody has been talking about. We still see somewhere between $12.5 million and $13 million as being a high side. Although Ford did announce this morning with their spectacular first quarter that they are adding even more vehicles to the second quarter. So we are encouraged by not just in the US but also by the global trend that the market is beginning to recover, as Barry said. It is not actually back up to its normalized rates in any way, but there will be a steady recovery I think over the next three years where we will work our way back up to full utilization and full service of the market.

Perfect. Thanks for your insight.

Steve Dyer, Craig-Hallum.

Just a question on the R&D line. Obviously that jumped up with ZT Plus. Is that a good number to use, or does it need to go a little bit higher even just given that it was only one month?

It was only one month. We were -- the month of March. We showed the full costs for us to carry the ZT Plus operating expense. Rolling forward in the near-term, we would obviously be responsible for the full operating expenses during the future quarters.

A couple of things. We are trying to focus ourselves as much as possible and keep our costs in line as much as possible while achieving our technical goals. And we are also looking for additional funding and partners to help us support the -- rather significant material effort that we feel is critical to our long-term success both in power generation and in the low temp applications for heating and cooling applications.

Okay. So it it kind of sounds like in the near-term it might be a little higher?

It will be higher in the short-term, yes.

Okay. SG&A was a little bit elevated to the historical due to $0.1 million run-rate. Was there any one time issues there or is it kind of the new run-rate as well?

There is no specific one-time events that I can recall. Barry, if you have something you would like to tell us now.

I don't think so. I think around 2.5, maybe a little less, is probably the correct reign.

Okay. With respect to the bed, anything more on when that is expected to launch?

Nothing has been announced.

Okay. And then finally, Ford this morning as you alluded to raised their North American production for Q2. Is that already accounted for and embedded in your guidance, or is that additive to you?

We actually had a little bit of a heads up on that notice that they gave to the market today. But yes, it is going to be a good quarter for us. The second quarter is going to be another good quarter.

[Jeff Oshef], Hardy Capital.

Congratulations on the continued lift and financial performance.

Just a quick question on gross margin as we think about Q2 and beyond. So the contribution margin sequentially was about 11.5% to gross profit on incremental sales from Q4 to Q1. Obviously I assume we should expect a much higher contribution margin going forward. Could you guys just talk about -- I know, Dan, you mentioned there was a mix shift that sequentially affected gross margins. Can you maybe just help us think about that as we look into Q2 and maybe also talk about input costs with regard to your personnel?

Actually as we mentioned -- well, actually during all of 2009, during the calamity that was the total financial collapse of the world, we got knocked down on our margins, and we turned around and started working our way back up. And, as we mentioned in the fourth quarter, we had achieved about a 29% gross number, which we were pleased with. But we also warned that we did not feel like that was going to be sustainable quarter over quarter, the type of improvements that we had seen. And we predicted actually that the first quarter would be slightly less than the 29% number we saw in the fourth quarter, and that actually came out a little bit more true than we thought but within a reasonable range.

The improvement of our margins are a long hard draw, and we have to work very diligently to keep our costs down and find ways to find better efficiencies over time. So I think we are very much on track to returning to the 30% gross margin target that we like to maintain in order to make the business highly or efficiently profitable.

But in the short term, there are hiccups that occur. You mentioned raw material. Particularly for us the key raw material is a material call tellurium. It has been bouncing around for the last couple of years. It peaked at something in the 380 per kilo range. Recently those ranges have been anywhere from 175 to 200 per kilo, and that is pretty much what we saw again in the first quarter. So with regard to that, I think there seems to be some stabilization of those input costs from us from the outside world.

Okay. So the decline was just mainly mix related? It was not tellurium?

Roughly speaking yes.

I was going to say that the fourth quarter was a little heavy on rich mix in this quarter, and we (multiple speakers) of our customers about that was a little lean.

Okay. And just looking out maybe throughout the remainder of the year, should we extrapolate this quarter's ASP or Q4's ASP?

Well, the average selling price is driven a lot by content from program to program. So we don't really predict where it is going to go up or down. We look at just the overall volumes. So probably this quarter is pretty representative of where we are going for the rest of the year.

Thanks a lot, guys. Keep up the great work.

Tyson Bauer, Wealth Monitors Incorporated.

Good job, gentlemen. A quick question. In regards to the heated and ventilated seats relative to your heated and cooled seats, are you seeing any short-term impacts or any acceleration of growth in one segment versus the other?

Well, as we have just recently introduced the heated and ventilated seats, we are seeing a dramatic expansion in the number of platforms proportionately that are offering that. And again, they are mostly focused for us where we thought they would be. They are in the midmarket and entry-level vehicles, primarily from our Asian customers. So I would say that you are going to see more and more of those types of vehicles coming on board, particularly in that midmarket. This is a new product for us, and I believe it is going to grow. But we are seeing very good response and still pretty positive results out of our heated and cooled seats for the upper middle and upper end markets.

Is that part of a mixed situation that we will see in the quarters upcoming, and what impact does that have as that segment continues to grow?

The impact to us on the -- well, obviously it is positive on the revenue line, whereas we are adding new sources of revenue for us in areas where we would not be able to get our high-powered, expensive heated and cooled devices installed in moderately priced vehicles. The margin targets, though, for the heated and cooled and heated and ventilated seats are virtually the same. So you will see better revenue, and you will see margins contributing.

Okay. Is it important to get a significant foothold in that heated/ventilated side because of the ease to switch that over because of the systems to eventually heated and cooled, or do you think the heated and ventilation market pretty much stands alone, and we don't have an upgrade option in the out years?

That is actually a very good point. Most of the current heated and cooled business is new landscape for us where there is either a power availability problem on a very small engine or there is a cost problem on a moderately priced vehicle. We have had successes, though, as you are describing like the Nissan Teana, which is sold in certain markets as an upper midmarket car where it has heated and cooled seats. And then it is sold in some of the developing markets as a midprice entry-level vehicle, a full-sized vehicle but still midpriced. And it has -- it offers heated and ventilated seats with a smaller engine.

So I think you are going to see most of the heated and ventilated business will be new space for us in the midmarket and entry-level market business. But I think you'll also see a few opportunities where someone may step up and design in our heated and ventilated system with the option to upgrade if the vehicle sees an opportunity to go for an upscale market.

Okay. And in regards to your targeted 30% margin, what is going to play the critical role in getting there? Is it going to be that reduction in raw materials costs, or is it going to be more associated with growing those volumes?

Obviously volume contribution is significant for us as we claw our way back up to a fully operating industry. And we have got pretty good initiatives ongoing now, and we have had -- they started really in the second half of last year, and they are continuing throughout 2010. So both are going to be contributing to our returning to a target of 30%.

The only reason I ask is you have been able to perform at 30% plus margin at lower unit volumes than previous years. So that is why I was wondering how important is the volume to actually achieving that as opposed to just maintaining pricing and getting better efficiencies with the raw materials you have?

Well, when we were a much smaller volume business, we did have a smaller base, and now we have expanded to target ourselves a little bit fuller-sized company, and we do have a higher inflection point for our margins. So yes, we would like to see the margin come back. That is a big contributor for us.

Okay. And the last question for me, the second half of the year, any indications at this point, or is it a wait and see game?

All indications right now are that there are steady solid gains to recovery in the automotive marketplaces. The general market to us I think is still cautiously optimistic. There are some big things that have to be swallowed yet by the world financial markets. There has not been a lot done about the housing crisis worldwide. But I think that generally speaking it looks like we are kind of at a steady, slow pace of expansion. For the auto industry in particular, I think there is going to be a good, steady return to normal volume periods again over a couple of year period. But I think you will see a good strong rebound for the next couple of years.

But Q1 was the base for this year?

I'm sorry. I did not hear you.

Q1 is the base level of units we should expect this year and continued growth of that?

We do have -- assuming the economies continue to filter along as they are, we have good confidence that the future looks pretty good for us. We have new programs coming in this year, as well as carryovers from last year's second-half.

Matthew Mishan, KeyBanc.

As I look through some of your results from years prior, there seems to be a little bit of seasonality with the gross margins, especially from the fourth quarter to the first quarter on a sequential basis. Is there seasonality there, or is it mix?

A lot of it I think is mix, but there could be some random opportunity there. But we don't really see a seasonality on that, not a predictable one anyway.

Okay. Because as I looked, it seems as if there was 100 to 300 basis point move down from the fourth quarter into the first quarter and then a continuous ramp-up throughout the year. Is that not something we can expect in 2010 as well?

Well, it is certainly our expectation that margins will continue to firm up as we go through the year.

I think you mentioned over the short term we are going to see some higher R&D costs. I'm just trying to get a grasp for the amount. If they went up by about $0.5 million or so or $400,000 from the fourth quarter and only maybe about a month or so of that was factored into ZT Plus, is it looking like it's an extra $0.5 million or $1 million there? Should we be able to run that -- do the run rate there for one month to three?

I think if you look at it and just guess that it would be normal operating costs would be somewhere between $250,000 to $300,000 a month for that operation. So you saw somewhere between 750 and maybe 800 or 900 or 1000 a quarter. If we were fully supporting this program with no additional outside sources of support, that would be a good run rate.

And I guess the first priority is to get up to -- is to form a new partnership. But is there also some thought to maybe rationalizing a little bit R&D? Because you said over the short term. I'm assuming that you mean you are looking for a partnership there. But if a partnership does not develop, is there some rationalization that may occur?

Yes, you might imagine that assuming that we had just now stepped up to take over the full operating costs ourselves, that some rationalization efforts have been made.

This is Bud. Just to amplify that a little bit, I think you have correctly heard the run-rate if it were only a standalone run-rate. As Dan says, we are looking to rationalize our costs in the R&D area. Secondly, we are looking to get additional support, particularly from very strong support in the government arena who would like to see thermoelectrics and power generation for its benefit to the country sustained. And then thirdly, we are going to be looking -- we are presently looking for partners to help us carry this forward.

Okay. Just moving on, the F-250 congratulations. That is a really nice program. Are we still thinking six to eight relatively new programs or new vehicle launches in the 2010/2011 area?

Yes, sir.

The last question I had was on tellurium, and I know it is not the easiest to track. But given that you have seen other commodity costs start to move, is your expectation that tellurium moves in -- is correlated with other commodities and it moves in conjunction with them, or is it possible that other commodities -- steel, iron, copper -- all move in tellurium can stick around with where that is?

I don't believe that the tellurium market, it's a very small niche material. I don't believe it is directly connected to all other materials or raw materials. But obviously it is affected with general economic activity. If we are coming back strong and everybody else in the world is coming back strong, there is an obvious economic uplift in the pricing, the demand curves for this material. But some of the I would say pricing movement that we have seen in the past two years in particular have been a little bit of irrational exuberance to quote a famous economist in the US. Some people thought that this thing was going to take off bigger than it did in the solar industry, and I think that was a little bit overplayed. So I think that generally we have no idea which way the market is going to go, but I would say that generally speaking I would say it is going to be -- we are hoping for relative stability as opposed to the rather erratic swings you saw in the past 18 months.

(Operator Instructions).

Okay. Operator, seeing no great clamor for questions, we will hold for one second and maybe take one more question, and then we will move on.

It appears we have answered all the questions. So, operator, I think with your permission we will go ahead and sum up and close out the call.

The first quarter for us was a continuation of something that started basically in the third quarter of '09, showed us a pretty good swell up in the fourth quarter. The first quarter is continuing, and it looks to us like the second quarter is going to continue to support the economic activity that we have seen really now for the last nine months in the automotive industry as we struggle back up from oblivion where the production numbers worldwide completely collapsed. The numbers that we are talking about now, the reference to the SAR that you heard a couple of our analysts mention of 12.5 million, and those numbers are reflected worldwide in each of the major markets proportionately. These are catastrophic numbers in normal times worldwide for the auto industry. And so we believe pretty firmly that over the next three years you will see a return to the normal global production output for vehicles that we service, and that is going to be somewhere back up in the 60 million plus range worldwide.

So the market that we are associated with today is in a slow, steady recovery mode globally, and we have new products coming that will enter into this and other markets outside of the automotive industry. Barry mentioned earlier the bed program that we have been talking about for a while is looking very positive, and the early indications are that we will have some announcements coming during 2010 on that program, as well as our cupholder.

We are continuing to work and push for the advanced development teams to help us step into the next major market arenas, which are power generation and more advanced solid-state heating and cooling systems. So again, we think we have had a pretty good quarter, but we also believe our better days are ahead of us. So we would like to thank all of our suppliers and our partners and our associates worldwide for delivering an excellent quarter for Amerigon, and we ask you to all please drop by here in about 90 days and hear how the second quarter turned out.

Thank you very much for calling in, and greater, I think that will do it.

Thank you. This concludes the conference call. Thank you for participating. You may now disconnect.