Gentherm Inc (THRM) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Amerigon Inc. first-quarter 2011 results conference call. (Operator Instructions). I will now turn the conference over to Jill Bertotti of Allen & Caron. Please go ahead.

Good morning and thanks everyone for joining us today for the Amerigon Inc. first-quarter 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 PRNewswire this morning news release announcing Amerigon's results, an e-mailed 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 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 its expectations on this call are risks that sales may not significantly increase; additional financing if necessary may not be available; new competitors may arise; and adverse conditions in the automotive industry may negatively affect these results. The liquidity and trading price of this 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 Form 10-K for the year ended December 31, 2010.

On the call today from Amerigon, we have Dan Coker, President and CEO; Barry Steele, Chief Financial Officer; and Bud Marx, Chairman. 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, Ms. Bertotti, and thank you for that generous introduction. We would like to thank everyone for joining us today. It is a bit of a dark and stormy day in a lot of the US today, but we're having a mild climate here in Michigan, and we are appreciative of that.

We have had a very exciting first quarter here at Amerigon. Our revenues have been up a bit. Mary is going to give you some detail about that in a minute. We have engaged in an activity and a transaction to acquire a company, W.E.T., and the global markets still continue to be offset upset by economic and physical disasters worldwide, so it has been a very exciting period. We are going to try to stick to our normal format where we will briefly introduce the situation. Barry is going to give some details on some of the numbers and how things have gone, and we will give a brief comment, an update on how things are going with our working acquisition of W.E.T.

Barry, we would like to get you to give us some details on how the numbers look for the quarter.

Sure. Thanks, Dan. We are reporting another record quarter. We had revenue of $35.8 million. That is $11.6 million increase from the prior year of 48% and a $6.9 million increase from the prior quarter, the fourth quarter, of 24%.

This was driven by new programs largely. We did have our first real significant revenues from a couple of the other programs, a little over $1 million. We had again some small amount of revenue coming from a mattress initiative, about $200,000 or 150 mattresses. Additionally North American production volume was up over the prior year almost 15% and increased 13% over the fourth quarter. That helped us as well on this revenue line.

Our gross margin is about 1.7% higher than the prior year at 29.2%, slightly down from the fourth-quarter gross margin of 27.5% -- excuse me, 29.7%. Driving our gross margin increase from the prior year is a better product mix and better coverage of fixed costs. The slide decrease from the fourth quarter was driven by again product mix, although we do show a little higher impact from the Japanese yen. We had some components we buy on the Japanese yen.

Moving on, our net R&D spending was $2.4 million. That is a significant increase from the prior year, about $600,000, $700,000 increase from the prior year's $1.8 million net spending, and about a $200,000 improvement or a decrease from the fourth quarter's $2.7 million in spending.

The increase from the prior year is primarily driven by our ZT Plus advanced materials initiative. You may recall that in the first quarter last year we acquired the full rights for ZT Plus back from a partner that we had, and as a result, we began to incur the full expenses for that effort on our P&L beginning the last part of the first quarter last year.

We have a new line item in the financial statement, and it is related to a proposed W.E.T. transaction or acquisition that we are working on. We spent for transaction costs about $3.8 million for the quarter. Unfortunately we do not expect these to be divestible costs, so this charge actually drove our earnings to be negative for the quarter. We do think that this is a full accrual of all of our expected costs for the acquisition, so we should not see anything additional in future quarters.

Moving on, our SG&A was $3.4 million for the quarter. That is an increase of about $1 million over prior year, but a slight decrease from the fourth quarter. Our new offices in both China and Germany have cost us about $500,000 compared to the prior year, about $200,000 compared to the fourth quarter. We had other items that drove the increase as well. We did have a decrease from the fourth quarter. Some of that had to do with charges we took in the fourth quarter for litigation costs related to W.E.T. litigation we have with them for a patent infringement.

Moving on, the earnings-per-share was, again, a loss of $0.03. However, when we add back to acquisition transaction expenses, we showed a positive earnings-per-share of $0.13 on a fully diluted basis. Our balance sheet has some new line items in it as well, all related to the proposed W.E.T. transaction. All of the financings for the potential purchase of W.E.T. shares have been completed and was completed at the end of the first quarter. That included a new bank financing and a preferred stock offering. We raised $16.1 million in preferred stock, that is net of expenses, and we added $87.2 million in debt related to the acquisition. All of these funds, as well as some of our own funds and our short-term investments which were liquidated, were gathered together and put into an escrow -- actually a number of escrow accounts and now represent restricted cash on our balance sheet totaling $182 million. The actual escrow is actually denominated in euro, and the euro amount is EUR128 million.

We do have funds included in that escrow to cover all the shares of W.E.T., including some shares that are held in their treasury, which we would expect those treasury shares that are posted to either if they are tendered to end up as cash in W.E.T. or if they are not tendered, there will be about $9 million in cash going back to the Company.

The other thing to point out on the balance sheet is that our -- we do have accrued transaction costs, but we did not spend or pay for all the transaction costs that we accrued, and that's about $6.2 million. That will be spent in the second quarter on things that we have not paid for yet but we have accrued. And that is what I have.

Well, your section is getting a little bit longer as we go through here. A couple of points I wanted to make before we open the floor for comments. Some of you have been following us in the past know that raw materials have been escalating quite dramatically over the past few months. We are seeing a repeat of the surge that we have seen sporadically, particularly in the first quarter of each year, and the tellurium cost is one of the main drivers of that aberration in the pricing.

We have seen a dramatic jump in the cost of raw materials. It has not impacted us in our first quarter, but we very likely will see some impact for that in the second quarter and third quarter as we watch and wait for the tellurium cost to recover to perhaps normal or more normalized levels. The tellurium cost has breached $400 per kilo. In fact, on the spot market, we have seen as high as $480 per kilo. Last year our average cost was somewhere between $220 and $250 per kilo.

Material costs on the other items, as well as copper, have also escalated, but not to this extent. There appears to be some severe speculation in the marketplace. We, again, have had no shortage of materials, and there have been no supply issues of any kind. It is just that the prices have been escalating.

So we are working very hard to try to manage that situation as best as possible. We, again, don't expect to see any impact. We saw no impact on the first quarter, and we don't expect to see any impact on our business until the second and third quarters as we roll through.

The other thing we wanted to comment briefly about is our current transaction where we are attempting to acquire control of a West German electronic components supplier called W.E.T. As Barry has pointed out quite clearly, we have done all the work necessary to get the appropriate and proper financing in place. Barry mentioned all of those funds are now in escrow accounts awaiting for final governmental approvals. We have had approval from all necessary European officials, and we are currently awaiting the final word from the FTC here in the US. But everything is proceeding according to plan. It is still a work in process. There is a lot of work yet to be done, but we are encouraged by the process that has been made to that end.

I think that really covers it. Bud, would you like to make any comments about the advanced teams before we open the floor? Bud Marx?

To say here, we are attracting at roughly the same rate as in the third and fourth quarters, and the differences really reflect the differences in reimbursement from the government for various programs. So I think it is kind of sort of what we have been doing, we are continuing to do, and we expect that it will produce really positive results over the next couple of years.

Okay, that is very good. If there are no other comments, operator, I think we will open the floor for questions. It looks like we are at the appropriate time.

(Operator Instructions). Steve Dyer, Craig-Hallum Capital Group LLC.

Congratulations on your results. I guess I will ask the obligatory question about Japan first. Have you seen any impact to your direct supply chain? Barry mentioned you do purchase some components out of there, or also your customers, the OEMs, I realize most of your exposure is North American, but have you seen any impact at all or do you anticipate to?

The impact is twofold. The first is directly upon us. We do, as Barry pointed out, buy some critical components from Japanese suppliers. The primary of those elements is secure and very conveniently located at the very Southern part of the Japanese island chain. So they were not directly impacted at all. Of course, we are all impacted by the general conditions in Japan.

On a secondary basis, we do have some continuing issues with some small electronic components, the chips and microprocessors and such that are -- were sourced out of the Japanese area, particularly in the [Sendai Valley] area. And those are in short supply, and we are having to struggle to keep up with that sourcing effort there.

A lot of our customers are also in the same situation, but theirs are much more I would say exacerbated because of the volume and scale the components to the auto industry worldwide.

So the second piece of this is, how are our customers impacted, and we don't really know exactly how much they are going to be impacted. But, as these guys try to struggle and get their systems back online, there are going to be some problems worldwide. We don't think they will be terribly long term, but there will be some short-term issues where people try to source and resource some serious (inaudible) problems for components from the Sendai Valley area.

So, in general, we saw no serious impact to our first quarter. We may see some mild disruption in the second quarter, and we believe that will probably fade as time goes forward.

And that is all captured at least as best as you can see it today in your guidance commentary for Q2?

Yes, we believe so.

Okay. The only question I will ask on W.E.T. because I'm sure you don't want to say a lot until that is all closed up, do they have any tellurium exposure in their product, or is your piece primarily sort of what the tellurium impact will be?

Well, I think ours is significant because almost all of our products directly are derivative of tellurium technology. They do have a heated and cooled product that does offer -- does use tellurium. I think that in terms of their total revenue, it is significantly less than ours.

And I was just wondering if you are willing or able to quantify how much of an impact? I mean we can look back at 2008, but I knew that the new seat design has done some things to address that as well. How should we think about gross margin just in light of where you are seeing prices today?

The impact is not really directly known for us. The prices are moving around fairly dramatically, and we have not been buying aggressively in the market place. But if you look at the total cost of goods sold, our tellurium cost is somewhere between 3% and 4% of our bill of materials.

Okay. And then final question, just the cup holders, I thought that was more of a significant expected contribution than I would have thought. How should we think about take rates with cupholders and dollar content on those vis-a-vis your seats?

Well, vis-a-vis the seats they are going to be dramatically less. This is a brand-new item for us. It has just been introduced in its first platform. There will be a second platform coming in the second half of the year. Those two combined early platforms we think have the potential to generate somewhere between $8 million and $10 million of revenue during 2011. We are obviously working very hard to try to get this product introduced to other customers both domestically and globally. So we think that this is very early stages, but the people seem to like it, and we are quite pleased with the reaction in the market so far.

Rick Hoss, ROTH Capital Partners.

It looks like you are making progress on capturing additional R&D reimbursements. Do you expect that to continue to approach the more historical rate of, call it, $2 million a year?

We are -- go ahead, Bud.

This is something we are working hard on, and we have several programs in the hopper that could contribute significant support. I expect those will not come into play until late in the second half. So that is roughly my forecast for government reimbursement support.

Okay.

So an improving trend.

Okay. On the German and China offices, were there one-time charges associated with those, and how should we look at your R&D run -- I'm sorry, your SG&A run-rate at this point?

There were no one-time or startup costs involved in the costs you saw in the first quarter. And you will probably seeing some -- that is a basic run-rate, and we will escalate slowly as we see a need for additional resources in both of those major markets.

And then on the mattress line, you through out $200,000 on 150 mattresses. So that is 1330 or so per mattress. Is this about as much content you can get, or are you looking to increase your content per mattress?

I would say that that is probably not directly reflective of what we expect to see. We will probably see an irregular run-rate somewhere around a $800 per mattress content for us. But the oddity of the net at that gave us an odd positive mix in the ASP for the mattress business. But, again, I would forecast somewhere around $800 per units sold of contributions for us.

(Operator Instructions). Matthew Mishan, KeyBanc Capital Markets.

The first question I have is, I guess the delta between when you gave guidance back in February to up slightly and the results you announced today, what came in better than expected?

Life was rosy. We have seen the recovery in the North American market that's a little bit stronger than we thought. We also saw a very powerful response in the market into the Korean marketplace. So we were very pleasantly surprised at how well things turned out.

Just to quantify slightly, if we can, your guidance was up slightly, but it was a significant ramp in revenue. But your guidance were down slightly in 2Q. It is slightly less than the ramp up, or is it about even?

Well, I'm not really going to get into English language skills here, but we believe that there is a very good potential for the market to soften because of all of the elements we discussed earlier in terms of the continuing rash of recovery issues out of the Japanese industrial sector, and how that directly impacts the auto market, we don't really know. The orders we have on books indicate to us that we could be either close to the first quarter or slightly below. As you know, we are not far enough into the quarter yet to be able to precisely pinpoint that. So we are simply giving a heads up that the first-quarter results may not be repeated.

Okay. Thank you. And this question is, which we provide as well -- is anything I mean we have the cupholders now and there are the mattresses, is there anything else that is starting to percolate out of [BSD]?

This is Bud. Nothing we want to talk about at this point in time. So I would say not likely to see new product intro this year.

Okay. And my last question is -- and this involves the acquisition, and Dan, I know you have a significant operational experience in the past. And assuming completion of the acquisition and given it's a small company buying a much larger company, I mean what should give the investor community confidence that Amerigon has the ability to integrate a company the size of W.E.T. into its operations?

Well, fortunately for us I don't have to do that by myself. We have a very strong team of managers who are all quite experienced in operational activity. The other half of this good news is that the target company, our new partners, W.E.T., are quite adept at operations, and that is one of the key and, in fact, that's the driving reason that we decided it would be a good time for us to try to join forces and provide better service to our customers worldwide.

One of the key requirements for us is try to find a way to be more broadly reached in the marketplace. W.E.T. has facilities in place in Europe, North America and Asia, and Amerigon has no manufacturing support ourselves directly. So one of the things we are highly interested in is finding a way to integrate our joint product requirements and market requirements together.

So, in terms of giving the investor community a high level of confidence that we can do this, we have got two willing and exciting teams. We have a common mission, and we have a very nice overlap of needs and strengths and weaknesses to be able to cover. The net of these two companies will be a very formidable operation. It will provide world-class service to all three major auto markets and will provide a manufacturing base for all of W.E.T.'s existing products and Amerigon's future products. Many of the things that we have been working on in the past -- sorry, working on in the past that are actually going to be our more advanced programs will probably require us to do more of the manufacturing effort ourselves, and we did not have any capability to do that with our current contract manufacturing structure. So we needed to get this process underway, and we believe these are the right people and this is the right team to do that.

Thank you very much, Dan.

This is Bud. I think also it is very important to say that the W.E.T. team have agreed to stay on and they are enthusiastic. So we are not going to be doing this from scratch or replacing capabilities that we hold in very high regard. And although we are a small company obviously relatively, the level of international experience and the level of experience at this kind of integration of two different cultures, which is obviously a challenge, is something that we have had experience at.

Greg Weaver, Invicta Capital Management.

Nice job. Just to confirm, Barry, I think you answered this already, the money in escrow is already all denominated in euro?

Correct. There is EUR128 million in our three escrow accounts.

Greg, okay. Obviously the dollar has been weakening, so that was a nice move on your part. And just in terms of the additional 20% tender you need of W.E.T. to do the 95% squeeze out, can you give us any color on how that is going?

We cannot.

All right. Actually on the Ford Explorer, any sense on how that's going in terms of a tax rate?

It appears to be going quite well. The Ford Explorer is selling very well, and the benefit for us is that the early sales of this brand-new platform are going out very well equipped. So we can tell you that it is very positive for our team.

Great. And it just sounds like you kind of alluded to this, but the second platform that's coming on for the cupholders, it is also a Chrysler vehicle?

It is a North American vehicle.

Rick Hoss, ROTH Capital Partners.

One more. As far as requesting tellurium costs into your selling price, is there a chance to go to the OEM and ask for a price increase, or would you get laughed at?

There is always a chance to go in and try to plead our case, but what we have seen in, let's say, the near-term historical past is these zero cost surge, and then they add back as it appears to me -- this is a personal opinion -- that as China vacates their need, their inventory need that they do apparently get largely in the first quarter of each year. Once we get past that, the costs do seem to update a bit, and then we would go into the OEMs and try to tell them that we had what is basically a temporary problem, they are as not as sympathetic to us as if something became a long-term consistent (inaudible) problem.

If we saw that tellurium were going to, let's say, average out at $500 per kilo, we would have to go in and try to beg for their forgiveness for the material costs that we have had to pursue.

(Operator Instructions). Steve Dyer, Craig-Hallum Capital Group.

Just a follow-up. What would you expect the timeline on the acquisition assuming if it were to get approved as put out there, what would you look at for a time to close, and would you plan on holding a call at that point in time to give us a little bit more clarity with how the model looks going forward?

Certainly, I would expect us to be able to -- it is going to be a close in several steps. I would expect us to be able to close on the tender offer some time, let's say, mid-summer, and then there will be a process that we will go through in terms of some steps we have to take to be able to assert our position with the German government authorities. So it will probably be closing midyear, and it probably will not be until the end of the year that we actually start seeing some operational activity where we are combining companies.

What would be the first quarter that you consolidate the financials?

We will probably have some portion of the second quarter would be consolidated.

Okay, and rather than go into the potential merits of the deal or not at the time -- I know you have not had a call yet -- would you plan on doing one at the time to address all the questions on the deal?

We will probably -- I'm not booking this -- but we will probably have a call when we affect the first step of the close and to try to address the general questions that people may have at that time.

I'm showing no further questions at this time. I would like to turn the call back to management for closing remarks.

Well, thank you very much for all the questions and for everyone's time and attention. These are very exciting times at Amerigon. There is a lot of transformative events occurring. The world is an exciting place these days. There is a lot of outside influences on our Company and other companies and many of our customers' operating results and goals.

We have been very lucky here at Amerigon, and things are working out well for us. We think we have found a very good, strong partner to build a stronger, better future with W.E.T., and we are in the process of trying to make that happen. While we do that, we try to keep an eye on our operations and on our business results, and I hope the first quarter is indicative of how we will be able to manage the businesses in the future, and we hope that everything stays stable and everything continues to be good news.

We ask you to be patient with us. We realize you have many more questions than you are able to get in at this time, and we cannot respond openly and honestly with everything we have going on until these transactions are closed and solid. But we ask your patience, and we tell you to stick with us, and we will see you again at the end of the second quarter.

Thank you very much for your time and attention.

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