Gentherm Inc (THRM) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Amerigon Incorporated 2010 Second Quarter and Six Month Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions)

This conference is being recorded today, Wednesday August 4, 2010. 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 Incorporated second quarter and six month results conference call. Before we start this morning'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 email and 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 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, 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, 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 to everyone for joining us again for another Amerigon conference call. I think everyone probably saw the release this morning. We had a pretty good quarter in the second quarter. It was a fourth record quarter in a row for Amerigon and we are very pleased with how the results turned out.

We are going to follow the same basic format we have tried in the past few quarters where we will give a very high level summary of [Amerigon's] operations and then we will open the floor for questions. so at this moment I think we will turn it over to Barry, our CFO, and he will review the highlights for the quarter.

Thank you, Dan. The second quarter 2010 turned in results for product revenue of $28.8 million. This was a very significant increase from the prior year quarter which was $10.7 million; that is an $18.7 million increase or 169%. We also show increases from the prior quarter, the sequential prior quarter, from Q1, which was we had product revenues of $24.2 million, an increase of $4.6 million or 19%. The significant increases from the prior year are primarily driven by both the volume in the marketplace, by volume in the automotive marketplace, as well as impact from new models that were launched since the second quarter of the prior year. Just a note, the US production increased during the second quarter of 2010 versus the prior year second quarter by 73%. And also the Japanese and Korea market segment production increased by about 32%. So a lot of our increases are coming from increased volume and improvement in automotive production worldwide.

The increases from the prior quarter, the first quarter of 2010 are primarily due to new model launches that occurred during the first and second quarter.

Gross margins -- we have seen improvements here for the quarter. Our gross margin percentage for the second quarter of 2010 was 30.2%. That compares to 23.6% for the prior year and 27.5% for the first quarter of 2010. Improvements of 6.6% over the prior year and 2.7% over the first quarter of 2010.

This is driven by primarily improved product mix, fixed cost coverage on a higher revenue level, as well as some reduced material costs primarily for Tellurium as compared to the prior year.

Moving on, our research and development expenses also saw a pretty big increase for the quarter. In the second quarter of 2010 research and development net spending was $2.9 million. That represented a $1.3 million or 81% increase over the prior year second quarter and a $1.1 million or 58.6% increase over the first quarter 2010. Much of this increase is due to the purchase of ZT Plus, the interest of ZT Plus where we are bearing the full front of the expenses for that research entity for the full quarter, which was only partial in the first quarter of this year and almost nothing for the prior year. We also had some additional expenses related to some new products that will be launched towards the end of this year including a cup holder program as well as our heat and vent program.

Selling, general and administrative expenses for the second quarter of 2010 were $2.5 million. That was slightly up over the prior year second quarter which was $2.2 million or an increase of $325,000 or 15%. And slightly up over the first quarter of 2010 which was only about $31,000 increase or 1%. Much of this increased spending is coming from our sales and marketing efforts, primarily in redeploying in Europe, China and Korea where we have added people and resources in those different markets.

Moving on, this all meant that earnings per share increased for the quarter. We had $0.10 per share, fully diluted, an increase of $0.14 over the prior year as there was a loss in the prior year second quarter of $0.04, and a $0.03 improvement from the first quarter of this year.

One last thing I would like to point out is our excess and investment reserves have now grown to $30 million. They were $28.4 million at the beginning of the year. We did have to grow our working capital with the significant increases in revenue and that probably will happen a little bit further as you go through the rest of this year; we do see some increases in revenue as we go forward.

That's it for the financial update. I will turn it back over to Mr. Coker.

Thank you, Barry. A very clear and concise report as usual. The only thing I think we should probably add before we open the call, everyone usually asks about guidance. As you know, we only provide top line guidance and as we stated in our press release the early indication for us right now in the third quarter are that we will see continued strength in demand for our basic products in the third quarter. So we do expect the third quarter to be slightly better than the second quarter and we also expect to introduce our heated and cool bed product in the fall. So with that, operator, Douglas, I think we would be delighted to address any questions anyone may have.

Thank you, sir. We will now begin the question and answer session. (Operator Instructions)

The first question comes from the line of Brett Hoselton with KeyBanc. Please go ahead.

That's as quiet as I have ever heard Brett in my life.

Sorry about that. I was actually on mute. Hello?

Yes, we hear you.

A couple of questions here first. As you think about commodity costs and so forth as we move out over into the next quarter or two, what are your current thoughts and do you have any expectations. I know next year is a long ways off, but is there any reason to believe that there is going to be a significant upswing or downswing next year in terms of capacity or anything along those lines?

Commodity costs, I assume you are referring to Tellurium?

Exactly.

As you are aware, for our type of industry we have seen a slight uptick in the cost of Tellurium from the middle of last year where it had averaged somewhere between $175 and $200 per kilo. This year it has been roughly at about $200 per kilo. Got a little bit above $200 a few times but it is softening back down to the $200 range. So it looks to us like the market has reached an equilibrium at around that $200 range and I think that is going to be a good, solid range, at least for the rest of this year. And as you point out if I knew which way commodities were going in 2011 I wouldn't be sitting here doing this; I would be placing bets in the commodities markets.

Fair enough. And in terms of, can you kind of describe your opportunity in the mattress area. Describe the opportunity in the mattress area in terms of timing, revenue opportunity, and so forth?

Certainly. We have a bedding partner who is working with us now to introduce a heated and cool bed in the marketplace this fall, early fall. We have been evaluating beds. We have been getting tested validation work down. All of that work is near completion. We are just about ready to announce first the partner and the details and specifics of the bed.

I suspect that we will probably sell a few beds this year as we start feeding in the products into the marketplace. Our partner has a definite marketing plan as to how they want to bring the product to market. And it will be introduced primarily in the, I would say, warmer markets in initially, in kind of the south and southwest. The bedding market is, again, something that we don't completely understand but we have a good partner who does understand it very well and they will be guiding us as to how the introduction rollout occurs. But we have modest expectations for this year as we kind of begin the process and introduce it into test markets. And then broaden the distribution and availability of the product during 2011.

Our participation in the bedding market should net us anywhere from $200 to $500 per bed depending upon the content that we provide, the bedding product itself, the margins should be, long-term they should definitely be higher than we are seeing in the automotive market target space.

Do you have any sense, I mean I assume you are targeting in the higher end industry. Do you have any sense of the number -- I would love to know how many mattresses you think are going to sell. But do you have any sense of how big that market is overall?

We do. Again, this is information provided by our partner who are experts in the bedding industry. And this particular partner happens to be an expert in the high end bedding industry. But there are several million beds sold each year or bed sets sold each year. And certainly significantly more than 500,000 to 600,000 of those bed sets sells for the premium market which is described variably from $2,500 to $3,000 and up.

So it is a significant target market here in the US and again our initial efforts here are just to introduce this product in the domestic market. But it also has international opportunity and appeal as well.

Dan, Barry, thank you very much.

Thank you.

And our next question comes from the line of Steve Dyer with Craig-Hallum. Please go ahead.

Thanks and congratulations on a good quarter guys. With respect to gross margin topped up above 30% again this quarter for the first time in awhile, is that a sustainable level or was that due to mix this quarter? I guess maybe if you could parse out the benefits that you saw and maybe prioritize between mix, overhead absorption and commodity costs?

Well as we have said in the past, our mission, our goal, this was back in 2008 when margins first came under pressure, we said that our goal was to operate our business model at a 30% gross margin. And you are very adept at pointing out all of the factors that affect your margins and all of those are matching up as well as our efforts to keep costs in line and reduce the cost of some of our products as we move forward.

There is a component for each of those. I would say that the driving impact right now has been a combination of those three and the balance that we are seeing in the marketplace now is the global markets have stabilized, our mix has stabilized back to an appropriate level. Our cost reduction efforts are maturing and we are beginning to see some positive impact from the efforts to try to get cost out of the system.

We have had good luck in terms of the volume, in terms of the overall general absorption of the overall business costs as our volumes have come back. In fact if you look at our numbers, we shipped nearly 410,000 systems during the second quarter of 2010. And I can distinctly remember fairly recently that we didn't ship that many systems in an entire year.

So all of these things combined have gotten us back into the 30% target margin range. And I believe it is sustainable. We may slip to 29.5% but we may also be 31%. So our overall goal is to beat 30% each quarter and this quarter is the first quarter, as you pointed out in awhile that we have achieved that goal. But I believe it is achievable and sustainable in the future as well.

Okay, great. And then with respect to R&D, could you give us an update on sort of your quest to find another partner in that space and just what it may mean to that expense line going forward and maybe the timing if you have that much visibility?

Certainly. The timing for us, as we said, we had the opportunity to establish a material venture. We did that with a partner. The partner contributed greatly to our project and for reasons of their own they decided to pull out. We made the decision that we would buy them out and we would operate the venture independently and burden all of the costs to Amerigon for awhile.

We have obviously taken logical steps to try to focus that cost and make sure that our attention is on the advanced materials. We have taken steps to eliminate some redundant expense that we saw when we were able to merge the units back into the Amerigon operation and those cost reductions will be revealed I think in the second half.

But we have also continued to try to find a strategic partner that would share our vision and help us develop a world class advanced material supply system for our use and other uses in the future as well.

I don't expect to see anything happen in this area until after the first of the year. And we are going to continue talking with people during the second half. So you will see some significant numbers in the R&D line, particularly focuses on our full support of the ZT Plus operating unit as well as our continued support of trying to develop advanced applications for thermoelectric systems, for power generation and heating and cooling as well.

Okay, so the current run rate, $2.8 million, $2.9 million a quarter is going to be the run rate for the foreseeable future?

It will be pretty close to that. It might be a little bit less but it will be about that range.

Okay, and then the last question. What kind of opportunity do you have at least near-term in the cup holder space. I know you have, it sounds like one win that you are going to announce at some point here shortly. What kind of revenue do you see that contributing and is it an option? Any I guess visibility on what that is would be great.

The revenues for us are not scheduled to start until late in the fourth quarter and so you are really going to see the run rate on that startup in 2011. And again it is a fairly modest program. It's not going to be $100 million opportunity for us but it is an adaptation of our existing advances on electric technologies and it is a very good use of our skills in a market that aligns easily with one of our customers.

We have had one clear award that starts off and will actually be available on a couple of vehicles within this customer and we have several other people who are reviewing the components and the product and the feature. But I am not expecting a huge amount of revenue out of this, but again it is a very good application for us as and if it contributes a couple of million dollars, we will be quite happy.

Great. Thanks a lot. Again, well done.

Thanks Steve.

(Operator Instructions)

Our next question is from the line of Rick Hoss with Roth Capital Partners. Please go ahead.

Hi, good morning gentlemen.

Hi Rick. We can just barely hear you.

Okay sorry. Barry, (Technical Difficulty) net, do you have that number?

I'm sorry, I couldn't hear the question?

The BSST expense net?

The BSST net expense.

I do have that. For the quarter the BSST net expense was $2,022,000.

Okay, you guys still there? I took the headset off. And then Dan is it safe to look at a 400-unit sales rate at $200 a kilo for Tellurium, is that kind of your 30% gross margin?

Yes, that is pretty close. Actually I think there is still some more gain yet to come in our cost reduction efforts over the next few quarters. So we are not saying we have achieved 30%, game over. And we really believe that we have a little bit more headroom to go in margins. So achieving a 30% for one blink of a window, it is a mix of the combination of efforts, but we have some more cost reduction efforts coming in and you will see some results of that in the second half.

Okay, fair enough. And then last question. Can you give us an update, maybe progress/timeline for Waste Heat generators?

The update is that we are continuing to work. We have ongoing programs with the Department of Energy and with BMW, one of our key partners in the European marketplace. We are scheduled to deliver some units by the end of this year that will be further identified and tested, evaluated for performance and then we will take that to the next step. We will learn from that process and move forward in the next step.

We also have commercial opportunities for waste heat recovery and power generation devices that we are exploring as well. So, it is not going to be anything, anytime soon. But we are seeing good progress and we are very pleased with the response to the marketplace -- the customers are keenly interested in devices such as this and we are trying very hard to push the combination of the basic technology of the heat exchanger and the raw material to see if we can get them to confide with the market interest.

So maybe a three to five year timeline at this point maybe for contribution?

Yes, we may see some early efforts in the commercial or industrial market prior to that but right now we are thinking three to five years is the early horizon for power gen.

Perfect. Thanks gentlemen.

Thank you, sir.

Our next question comes from the line of [Daniel Kornblatt] with Witter Asset Management. Please go ahead.

Daniel?

It looks like Mr. Kornblatt has just dropped out of the queue. Our next question comes from the line of Tyson Bauer with Wealth Monitors. Please go ahead sir.

Thanks a lot. That's Wealth Monitors. Great quarter guys. Couple of quick questions. Dan, are we going to be able to look back in 2010 with the vehicles you announced and the new platforms that you will announce and really be able to say that you have successfully bridged that gap on the luxury line down to the mid-range and now we should see an acceleration from going from these premium option packages to more of a standardized use of your products?

Yes, I think, I'm not sure exactly what time window that that occurred. As you know we have had a couple of, I would say, mainstream market vehicles pick us up in the past 24 months. We have seen vehicles like the Taurus, the F-150, the F-250, all these vehicles are very high volume vehicles and they are targeted towards the mid-market or upper mid-market range. I think you are going to see that somewhere either in 2009/2010 with that inflection point where we have very broad market appeal. I think you are going to continue to see more mainstream vehicles pick us up.

Your sales and marketing you mention in the press release, you decided to make sure that it was put out there that your increase in expenses in Korea, Europe and China, is that because you are reacting to renewed interest from those manufacturers in which you must service. Or are you trying to push your influence more in those areas and see the greater opportunity there?

Actually it is a good question. It's a combination of effects. Actually in Asia we have been very successful in the marketplace as well as North America that in Asia, in particular, it is a little bit more difficult to service the entire market from a single base. We have, as you know, we have a base in Tokyo and we have a team of people there who helped with our Asian business. The Korean market has grown exponentially for us and continues to grow and requires more serviceability in a local market. So we have had to actually open a Korean office and we have a staff -- I believe, Barry, of four people in the Korean office today and that is doing very well.

So in that respect we are having to service markets where we already have a presence and we are being successful. And success breeds requirement for more service. So that is a very good sign.

On the European side it is a little bit of the opposite of that. We haven't had the success that we want to have in Europe as of yet so we are actually opening an office in Germany, we have already opened an office in Germany in between Munich and (inaudible) that will be our base of operations in Europe as we continue to try to build on that market and penetrate that market.

So it is a little bit of a combination of both ongoing service requirements to maintain our excellent customer satisfaction with our OEM relationships and their tier one, and also a desire on our part to push harder in the markets where we are not currently satisfied with our position.

Okay, and the last topic for me. It wasn't too many years ago that we would be looking at Amerigon and evaluating the CCS divisions and then you can say you are getting BSST for free or sometimes you get a premium evaluation because of those developments. Now, at least in my opinion, you are kind of in a penalty box valuation because of BSST and we are not getting the true evaluation of what their earnings power is on CCS. Your thoughts on the evaluation prospects of those two divisions and would you consider business segment reporting in the future to try to give the investment community a clearer picture of what the CCS division really is and then they can make adjustment between the two segments.

I don't think we are in a situation where we have to break out segments at this point. All of our revenue today is coming from our existing technology or adaptations of that technology or refinements of that technology. BSST is always intended to be our advanced development product group. I'm not sure that we would be well served if we took out the individual products that are going to be coming out of that stream and indentify them separately from others.

But we are very pleased with the progress that we have made in expanding beyond just a C company as you said before. We were simply a C company or a C-component company and in the very near future we will also have a consumer product in the bedding market. We will also have a heated and cool cup holder business which will also be in the automotive business. And in the future you are going to see other applications of the advanced products in terms of power generation and HVAC. But those won't happen for awhile. But you will continue to see new applications and adaptations of our products in new markets as we move forward.

So my understanding is that the bed and the cup holders are off-shoots of the CCS technology. You don't think that there was a $0.50/$0.60 number out in the street due to CCS alone that you would get a better valuation today?

Frankly to be honest with you Tyson I don't really understand how you financial wizards value companies. And I don't spend a lot of time thinking about how we should position that message. We simply report the facts. We are doing okay with our heated and cool seat business; we stated an objective to try to get into other markets; we are trying to pursue that with all of the effort that we can at the company. We are doing really well, I think, in the bedding area. That is going to come out and I think it is going to be successful. We are also doing well in the heated and cool cup holder application. And we are working very hard with some very serious partners to try to adapt power generation and HVAC products in the future. So I am pretty happy the way things are going. I have the usually, I guess, a bad case of CEO impatience. I would like to see things moving quicker and better but I think we are on the right track.

I don't know how that gets valued to you guys. I have some people tell us that we are spending way too much money on development, but then when we have substantial growth that is an off-shoot of these developments that we come up with, that gets valued somehow as a BSST product or as a heated and cool seat product or as an Amerigon product. These are all going to be Amerigon products and we are going to develop them and work on them and move them into the market as the market matures.

Alright, thanks a lot, gentlemen.

Our next question comes from the line of Daniel Kornblatt.

Sorry about that guys.

Welcome back.

Congratulations on another great quarter. Thank you for all of the wonderful information you have provided on the bedding product so far. I was just wondering when you guys expect to see substantial revenue intake for the heated and cool bedding. Time frame on that?

I think we will see substantial revenue or I would say significant revenue from the bedding product in 2011. I think 2010 is going to be a kind of early market roll out. But 2011 I think you will see some good success from the bedding product.

Okay, and do you have any information available, provide any, do you know the split in profit between you and the partner in the bedding?

We do know that but we are certainly not at liberty to provide any of that.

Alright, that's great. Thank you so much.

Thanks, Daniel.

(Operator Instructions)

And seeing no more questions, I think we are about ready to wrap up then.

Thank you, sir. I would like to turn the call back over to management for closing remarks.

Okay, thank you very much everybody for attending and taking time out of your day to listen to our little company's story. It is proceeding, there was a bit of a disruption in 2008 and early 2009 but I think we are all back on track. The industry at large, worldwide, the automotive industry is still not in a healthy mode. In North America, as an example, we are hoping to get somewhere between 11.5 million units and 12 million units sold. And that is really considered to be a deep recession in the automotive industry and that is a similar story worldwide.

So things are not good overall in the industry but we have been very lucky in being able to continue our penetration and continue growing our business by getting new platforms and new operations. Currently we have about 49 platforms that offer heated and cool or heated and ventilated seats. Very soon you will be seeing opportunities outside of the automotive industry in the form of bed products. You will see an adaptation of our product in new applications in the automotive industry in the form of a cup holder.

I think you are going to see continued growth and extension of our profit as we go forward. And I think we have got a very good team, system of supply chain partners and customers that are allowing us to grow in a profitable fashion, even in very tough times.

So we thank you very much. We would also like to thank our partners and all of our employees and our customers for allowing us to serve the needs of the market for thermoelectrics and we invite you to come back in about 90 days and hear how the third quarter really turned out; we think it is going to be good again.

Thank you very much and thank you operator.

Thank you. Ladies and gentlemen, this concludes our conference for today. We thank you for your participation and you may now disconnect.