Gentherm Inc (THRM) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Amerigon Inc. Third Quarter and Nine-month Results conference call. (Operator Instructions).

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

Good morning, and thank you, everyone, for joining us today, for the Amerigon Inc. 2011 Third Quarter and Nine-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 e-mail copy of the release, was also sent to a number of conference call participants.

If any of you need a copy of the news release, you may download a copy from either the Amerigon website, at www.amerigon.com or the Allen & Caron website, at www.allencaron.com. Additionally, a replay of this conference call will be available, via a link, provided on the events page of the Investor's 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 its 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 & Exchange Commission filings and reports. Including, but not limited to, its 10-K, form 10-Q for the period ended December 30, 2011, and its form 10-K for the year ended December 31, 2010.

On the call today, from Amerigon, we have Dan Coker, President and Chief Executive Officer, Barry Steele, Chief Financial Officer, and Bud Marks, 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, Jill, andthank everyone, for joining us today, to spend a few minutes to review our last third quarter. As have you seen from the press release, we had a very good third quarter and we are going to try to get into as much detail as we can. But before we get into that, let me give you a brief update, on how things are going with our acquisition of W.E.T.

As you will all recall, in March of this year, we acquired 76% of controlling interest in the W.E.T. Company, and we have worked through the process following all the German laws and guidelines. We are currently awaiting a hearing, in German Superior Court, where we have requested a fast-track hearing for our request to establish a Domination Profit Loss Agreement. We expect to have that hearing in mid December, and with good success there, we expect to see the Domination Agreement filed, in the early part of the first quarter of 2012. At that point, we can begin the official integration of our two companies, to be able to build a much stronger company going forward.

However, at this point, we are consolidating the operating of two independent companies, operating efforts of two independent companies. So we will be merging the two companies together, as soon as we get permission from the German government. Things are going well. Things are on schedule, and we're using our existing time on planning for the consolidation. We have the team of people here today, working on some strategic parts of opportunities for us in the market place, and we continue to work very well with the W.E.T. management team, to try to get a good consolidation plan ready to go.

To the quarter, we were very pleased with the business fundamentals for both companies. Both remain very strong and are growing at a very good rate, in what I would call, a very tough economic environment. The revenue for the third quarter of 2011 was, about $126 million for the quarter, and about $239 million for the nine months, which includes a stub period for the W.E.T. revenues. effective from the 16th of March. Barry will give you a little bit more detail on that.

These revenue results represent a very strong fundamental performance in the marketplace, and again, this is a troubled market. Our combined adjusted EBITDA was around $15.5 million, which is right on our projections, and well above our targets to be able to service our debt obligations, and we're quite pleased with how that is working. Our cash position remained strong. We had $17 million left in our accounts at the end of the quarter, and we did have a seasonal surge in the receivables, and a modest increase in inventories our businesses have grown.

Barry is going to provide you more details on the cash aspects of our business, but again, the cash projections are fundamentally strong and the outlook for cash for us, is very positive. Based upon this liquidity that we see, we have notified our preferred convertible shareholders, that we will be making our payments for this quarter's dividend in cash, in lieu of stock. Our stated GAAP earnings were significantly affected by, the purchase of W.E.T., and how we account for those expenses.

We have developed several charts and exhibits, to outline the principle effects of these write-offs and one time transaction costs for the third quarter, and Barry is going to provide more detail on the key financial notes in his discussions, as we move forward. But, in general, I would have to say that the third quarter was a pretty good solid quarter for us, and we are very pleased with the direction that both businesses are going. I will turn it over to Barry, who will provide some additional detail on the financial results. Barry.

Thank you, Dan. During the quarter, we see very dramatic effects in our statement of operations, due to the acquisition of W.E.T. and now having a full quarter impact. While this resulted in a significant increase in our revenues and operating income, there were several factors that decreased our operating results. Many of which are non cash items, and some of which are temporary.

These include, the purchase accounting affects and acquisition expenses, totaling $5.5 millionand $15.9 million, for the quarter and the year-to-date period, the acquisition related interest expense, of $1.2 millionand $2.5 million for those periods, derivative and foreign currency losses totaling $2.3 million and $2.2 million respectively, and the impact of the dividend for the Series C convertible stock of $2.8 million and $5.7 million respectively.

Adjusting for purchase accounting amortization, acquisition expenses, and the preferred stock share dividend, we would have reported diluted earnings per share for the quarter and year-to-date periods, of $0.19 and $0.55 respectively. Although our gross margin percent was lower during the quarter, as compared to the prior year, due to the lower gross margin of W.E.T. The gross margin was particularly impacted by the effects of purchase accounting, including the amortization of customer relationships, which reduced our product revenue, and the amortization of technology and the impact of revaluing inventory, both of which, increased our cost of sales.

The combined effect of these expenses, reduced our gross margin percentage for W.E.T., by 3% and 4% for the quarter and the year-to-date period, and reduced the gross margin percentage for the consolidated Amerigon total, by 2.2% and 2.4% for the quarter and year-to-date period. Regardless of the these impacts, our gross margin percentage was lower during the period, due to some higher material expenses and a shift in product mix to lower margin products.

The derivative of foreign currency losses are primarily related to the derivative portfolio of W.E.T., which manages its future currency exposures, with various forward swap and option contracts, but does not account for these instruments using hedge accounting. Much of these expenses are unrealized and non cash, to the current quarter. The amount also includes, the mark-to-market effect of W.E.T.'s cash related swap or CRS, which resulted in a gain during the quarter, of $1.7 million, but a loss during the year-to-date period, of $2.6 million.

Our SG&A was higher, due to the W.E.T. full quarter impact, and due to approximately $300,000 spent on preliminary integration activities. W.E.T. also had higher expenses for the quarter. due to costs associated with the Frankfurt Auto Show. Due to the significant complexity rising from the W.ET. acquisition and related financing, we are now reporting adjusted EBITDA, as Dan mentioned.

We have defined adjusted EBITDA, to include adjustments for the unrealized portion of our currency and derivative gains and losses, and to add back the transaction expenses, from the W.E.T. acquisition. Adjusted EBITDA for the quarter, was $15.5 million and was $35.5 million, for the year-to-date period. Our effective tax rate for the quarter and year-to-date period was 39% and 71%.

These rates were higher than normal, due to several factors. Including, the impact of a significant portion of the transaction expenses, which are not deductible, and local jurisdictional taxes, such as a gross receipts tax in the Ukraine and certain withholding taxes, which had an unusually large impact on the current earnings, which are approaching break even, due to the significant amortization from purchase accounting, which does not provide an equal offset in the tax provision for these items. Our cash, as Dan mentioned, decreased during the quarter by $10.5 million, as a result of the repayment of $7 million in debt, and the net increase in certain working capital components including, accounts receivable, inventory, and accounts payable totaling, $10 million.

The working capital components increased, due to the timing of revenues and production, during the period which was higher at the end of the quarter, as compared with the end of the second quarter. It is seasonality. We expect these working capital elements, will again decrease during the fourth quarter, due to the year end holiday shutdowns of our customers. This is a normal effect we normally see.

Our debt repayments, included approximately $3 million related to a W.E.T. revolving facility in China, which matured and was repaid during the quarter. Once again, our results have become more complex. In our release, as Dan mentioned, we have attempted to provide supplementary information in order to help show the results more clearly. We hope you will take the time to work through the presentation, and I welcome any questions to help you do so.

Thank you, Barry. Operator, I think we'll go ahead and open up for questions, if there are any. I am sure this has been completely explained, but we will address any questions that may arise.

(Operator Instructions). Our first question comes from the line of Steve Dyer, with Craig-Hallum Capital Group. Please go ahead.

Thank you. Good morning, guys.

Good morning.

Appreciate all the color and reconciliation, to cut through all the numbers. That was very helpful. As it relates to cup holders, I was wondering, what role that played in revenue in the quarter, and sort of how you see that rolling out going forward?

I think in the quarter, we got about $2 million, $2.5 million in revenue for the third quarter, in the cup holder business. We are, as you probably recall, on two platforms currently, both are Chrysler vehicles. We're quite pleased with the response, not only through Chrysler, but also through the consumer market. We haven't announced any additional platforms available, and don't anticipate any before the end of the year, but we do confess that we are working with a couple people, looking at the cup holder or cold storage box, concept.

Okay. And then, I was wondering if we can get a quick update on the heated and cooled bed. I see Mattress Firm is going public, wondering if that has any impact to you guys positively, presumably, in terms of the selling the heated and cooled mattress?

I think it probably will help. Mattress Firm has continued, our retail partner has continued to expand its retail base. They made a few additional acquisitions and I think they're expanding fairly rapidly. The fact they're going out for an IPO, I don't think specifically will help us, but it is good news, that they're getting equity capital access to the markets.

The one thing that we have done, is we have taken this period, as we described last summer, we have taken this period to understand the bed market a little bit better. We have reconfigured the bed product offering, and have now three bed platforms that we have in the product line, and the response, the initial response, which these all just came out within, literally, within the last couple of weeks, which has been very positively received in Texas.

We also do have plans to expand outside of the Texas market for the first time, probably by early next year. To be able to get into some of the new warmer climate markets that Mattress Firm also has extremely good presence in, so I think that in the near term, things are moving fairly smoothly. We're completing the development and market test phase, and we're now getting ready to move in 2012 into a broader market push, for the heated and cooled bed product.

Okay. That's helpful. Just moving to some of the housekeeping, operating costs, I think, we're a bit higher at least than I had modeled this quarter. Is this a good level to use, understanding that you are just basically putting two companies together and haven't had a chance to do much, in the way of synergies yet? Is this a good number to use for the next, sort of little bit here, quarter or two, until you can get in and find some synergies? Then secondly, I am wondering if you are willing to hazard a guess, as to what you see in synergies going forward and what that model might look like going forward?

With regard to the expenses, again, we remind you we're independent companies, but I would also point out as I think we did in the last call, that the stub period began in the middle of a quarter, and I think we warned the use of that period times two, as a simple base arithmetic formula, to project all of our costs going forward. I would say, that the costs are a little bit higher than we would like, and that we do plan, as we merge the two companies together, to pursue some efficiencies in operating a single company, instead of two. In answer to your question, we do see a substantial amount of good opportunity to be able to save money, by going through this exercise, and hazarding an amount, I don't think we specifically said, but I can tell you it is in millions of dollars, and the expense areas are some of the areas we're going to be focusing on.

Okay. Very good. And then, Barry, the revaluation of the derivative, is that -- do you expect that line item to be material going forward? I know you kind of explained it, but is that sort of a one-time thing or is that going to be something that we see going forward as well?

It will have some -- it will be sporadic. There will be quarters where we have good news coming out of the combination of those two line items, and quarters we have negative news. The way I would like at it is, to look at the way we're putting in EBITDA, is adding back the non cash impacts or unrealized impacts, so there will be some cash or realized impacts in the quarter that is left in the EBITDA number. So there will be good quarters and there will be bad quarters. It is a matter of all the various hedging instruments, maturing over these different periods.

Okay. Last question for me and I will hop back in the queue. What should we think about for a tax rate going forward this quarter? Looked like a little higher than, sort of, where I thought the combined Company may come out. How do you guys model for that going forward?

The W.E.T. growth rate, sort of, without all the purchase accounting impacts, is like right now looks like about a 30% rate. Amerigon's is a little bit more. These probably are the rates that really will come through at some point, because of the amortization, the significant amortization for purchase accounting, which only gets a benefit of 22%. There is a little bit of a skewed effect, at the moment. In essence, we're bringing their earnings significantly down, so closer to break even, so the permanent differences or the local jurisdictional taxes that aren't necessarily income based, don't necessarily get a full benefit. They're not large numbers individually, but they do have an impact on the percent.

They're magnified in terms of a percentage relationship, to the actual number.

So we think, as a going forward cash rate, it is probably around 30% to 35%.

Okay. Very good. Thanks, guys.

Thank you.

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

Good morning, gentlemen. This is Joe, filling in for Mark.

Hi, Joe.

Looking at R&D costs going forward, is this kind of a run rate that we can expect?

Well, no, I think that going forward depends on how forward you go. If we're talking about the fourth quarter, again, we're probably -- you're looking at a pretty representative number, in terms of the R&D expense. Going forward in the long-term, I would expect to see a more conservative R&D number, when the Companies are truly combined, and we are beginning to achieve some of our planned synergies.

And then in regards to the TEG system, I was wondering if you can give us an update on some of the key milestones going forward?

Well, we've had quite a bit of success actually, recently. At the last call, I think we indicated, that we had received a follow-on program from the Department of Energy, and that program has been kicked-off and is now in full swing. We have taken the information we learned from the first DOE program, and our first set of actual road tests and vehicle equipped testing of our kind of Phase I devices, and we have used that in the past, really in the past six months, to as a basis for a redesign of a second generation. That generation, is now being prototyped and tested and evaluated, during the DOE Phase II, and we're beginning to pull together some working information with our customers, the OEMs. The BMW and Ford Motor Company, specifically, have a keen interest in this technology, and I think we're making very good progress.

The other devices that we tested in the past, generated a little over 700 watts of energy passively, by converting the heat from the exhaust system and the test cars, into electricity. We were all very encouraged by this, and now we are focusing on how we can actually build this device into serial production, and provide it as a competitive cost into the marketplace, and making it available to the customers who are seeing true value out of this innovation. So I would say, that generally speaking, we're making good progress. But, there is no imminent announcements about to be had, other than, we're continuing to work with two very strong innovative customers, and we're enjoying the support of the Department of Energy.

Great. Thank you, guys.

Thank you.

Thank you, and our next question comes from the line of Adam Brooks, with Sidoti and Company LLC. Please go ahead.

Yes, good morning, guys. If we talked a little bit about, just stand alone Amerigon, the quarter revenue is essentially flat, production North America, Europe, up say 5% or so, is this just a function of being tied to some of the Japanese OEMs or something else going on?

Well, essentially, we did see a little bit of recovery from the Japanese OEMs, but if you look at the numbers, I think you will see that Amerigon's general numbers have actually increased. We have actually transferred one of our historical programs from the Amerigon production supply chain, over to W.E.T., and that would have added somewhere in the range of --$4 million, $4.5 million, which we are now enjoying on the W.E.T. side of the books, but in general, Amerigon is consistently growing , expanding fairly nicely.

Would have been closer to $35 million, because I guess you posted $30.5 million, so it would have been closer to $35 million, if you included that.

That's correct.

Okay, so that's the difference. And real quickly, if we could talk about R&D. Do you have any sense, thus far, as far as W.E.T. on a quarterly basis? I know we have annual numbers back to '06, and they ranged I guess anywhere from 6.5% to 9%, to 9.5% R&D. Is there any seasonality to their R&D spend, any customer give backs that they particularly get in 3Q or 4Q, anything that can skew the numbers on the quarterly basis?

I don't think that you would see any seasonality to their expenses. I think what you see are project driven costs that come in uneven lumps, as we attack different programs and projects throughout the year, and with regard to what customer support they get for these programs, I don't know that I can intelligently answer that question for you.

Okay. And lastly, just that 5 to 7 program launch, that you have typically thrown out for Amerigon, does that still hold for the next few years?

We do see additional programs coming on board for our existing heated and cooled, heated and vent systems, and in fact, we hope that we see more. Because we are -- our teams are currently working on taking the good skills at W.E.T. and Amerigon have together, and we are working very hard on coming up with a common system that has the strengths of both Company's technologies combined. We jokingly, of course, refer to that as the Uber System, and we expect to be introducing that to customers, sometime early next year.

Alright, thank you very much.

Thank you, sir.

Thank you. (Operator Instructions). Our next question is from the line of Anthony Dean, with KeyBanc Capital Markets. Please go ahead.

Hi. Good morning.

Good morning.

You mentioned here in the press release, fourth quarter is running ahead of your business plan projections for both companies. Just related to that, can you share if that means your sales might be running flattish, sequentially? Is it just a conservative budget on your end, and also what exactly is driving that out-performance interview?

Barry?

Well, we do continue to maintain very conservative budgets. In terms of the sequential revenue, we probably would have predicted it to be slightly down, because of the seasonality that you would see in the fourth quarter, but still improvement over where we would see the businesses being, compared to where our earn analysis.

That's helpful. Then, you've had a full quarter with the W.E.T. assets, and appreciate the color on the hint at the R&D synergies there. Have you identified any incremental synergies associated with W.E.T., that you can update us with and also anything related to potential revenue synergies, you can share?

We have indicated, that in working with the W.E.T. team and working with our investment groups, prior to the acquisition, that we did see substantial opportunities for synergies with the combination of the two companies together. The first of those, come in terms of just operating efficiency, in terms of having two Companies operate with a single cost structure and cost basis. We have indicated that those numbers, over time and this is not a short-term thing, but over time those numbers could be anywhere between $5 million and $10 million worth of advantage. That includes cost duplication, reductions, cost advantages, being able to rationalize some of the existing expenses in both businesses, plus the opportunities that we see in terms of being able to help each other sell in markets where one or the other is stronger or more prevalent in. As an example in China, W.E.T. has a very strong business base, and Amerigon is essentially servicing the Chinese market, as an outsider, using our Japanese and Korean based team, with a single person based in China doing work.

Now we have something like 1,600 people in China, 100 of which are engineers. Technical sales people will help us be able to expand the use of heated and cooled, and heated and ventilated systems in China, as the market matures. Plus there is also the additional opportunity, of the combination of the two technologies, being able to expand our ability to service new markets with, thermal management systems and the technologies that we both bring together. I think that the overall concept of the combination of the two Companies, results in a much more powerful, much more global, much more focused Company that is going to be quite successful.

Okay. One last one. Appreciate the color there. Just related to the integration, you mentioned the SG&A being higher. Can you highlight some of the investments are you making there, whether it be more sales reps, whether it be related to the China expansion, that you just referenced there?

I don't think I am prepared, at this moment, to provide insight as to what our plans are in the future. We are working very hard, on trying to come up with how we can better spend all of our monies, to make sure that we're getting the significant impact for the investment. We do know that we would like to grow our Businesses. We have announced, that we with like to see a 15% growth rate, year-over-year, with our combined Companies. Again, we would like to see that come in new products and new market opportunities, so that is our goal. We're working on planning that right now, and again until the German courts allow us to integrate the two Companies, we really don't want to get too far off onto that story.

Thank you very much.

Thank you. We have a follow-up question from the line of Adam Brooks, with Sidoti and Company LLC. Please go ahead.

A conference call, without a question on tellurium, so I figured I would ask you what you saw this quarter and what pricing has been so far, in the fourth quarter?

We have seen softening in the market price of tellurium. It is a gradual process for, I think, the globe, now that materials have been bouncing all over the place. We did see some, as Barry mentioned, a little bit of impact on our margins due to the higher costs of tellurium, and thank you for bringing it up. It is a painful memory for each of us, but we are struggling with the market indicators here. We do try to buy intelligently in the marketplace. We're waiting for a good opportunity. Those opportunities usually occur in the fourth quarter, and we'll be keeping our eyes open for a purchasing change.

I think I would complement Dan's comments, by pointing out that now, tellurium, has even less impact on our overall cost of sales. Given the vast amount of products that we have for W.E.T., that do not include tellurium. You will probably hear many more conference calls in the future, where we really don't talk about it, because it is reduced as a significant issue for us, because of that.

Thank you.

Thank you. I am showing no further audio questions at this time. I will now turn the call back over to management, for any closing remarks you may have.

Thank you, operator. Again, we had what we consider to be a very fundamentally strong quarter, in the third quarter. With that said, we do see areas of improvement, and we plan to pursue all of those. We have opportunities in the marketplace, but we're most excited about the joining of two excellent teams of people, with good technologies and a good global footprint to be able to help grow our business in the future, and make ourselves a very good strong supplier of thermal management systems in the future.

Again, we would very much like to thank everybody, for coming and attending our call. We look forward to talking to you again, at the end of the year, where we'll be reviewing the full year results. Hopefully we'll be able to announce, that the German government has given us permission to begin the integration process, and we'll have a little bit more exciting news to tell you. Again, thank you very much for your attention, and I will talk to you in the next quarter.

Thank you. Ladies and gentlemen, your conference is now concluding. We thank all of you for your participation, and you may now disconnect.