Gentherm Inc (THRM) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Gentherm Incorporated 2012 third quarter and nine month results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, November 1st of 2012. And I would now like to turn the conference to Jill Bertotti of Allen & Caron. Please go ahead.

Good morning, everyone, and thank you for joining us for the Gentherm Incorporated 2012 third quarter and nine month results conference call.

Before we start this morning's call, there are a few items I'd like to cover with you. First, in addition to disseminating through PR Newswire this morning's news release announcing Gentherm's results, an email 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 Gentherm website at www.gentherm.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 Gentherm's website.

Finally, I've also been asked to make the following statements. 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 its common stock may be negatively affected by these and other factors.

Please also refer to Gentherm's Securities and Exchange Commission filings and reports, including, but not limited to, Form 10-Q for the period ended September 30th, 2012, and its Form 10-K for the year ended December 31, 2011.

On the call today from Gentherm we have Dan Coker, President and Chief Executive Officer; 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'd now like to turn the call over to Dan. Good morning, Dan.

Good morning, Jill. And thanks to everyone for joining us. We'd like to start off of course this morning with our thoughts directed toward all the folks on the east coast who have suffered through a catastrophe in weather. And we hope that everything is going well for the recovery.

Amerigon and W.E.T. have both had very good quarterly results, and our Gentherm combined results are very good as well. We broke $140 million for the quarter, which was good for us, and we've also broken $400 million for the year-to-date numbers.

So we're very pleased with our progress as we continue to move forward. Working together with our partners at W.E.T., we've been able to do some pretty significant things for the quarter, and we think that's looking good for the rest of the year.

Sticking with our format, we're going to ask Barry to give us some specific details of the review of the third quarter results, and then we'll open the floor for some questions. Mr. Steele?

Thank you, Dan. Hello everyone. The third quarter of 2012 represented the fifth quarter where the results of W.E.T. are included for a full period, and therefore the first quarter in which a prior year comparison included a full period for W.E.T.

Our product revenues for the third quarter of 2012 are $141.1 million, which Dan mentioned. This represented an increase of $15.4 million, or 12.3%, over the third quarter results for 2011. The increase is due to high revenues at Gentherm of $3.4 million, and high revenues of W.E.T. totaling $12 million.

Higher revenues for Gentherm are primarily attributable to new product launches since the third quarter of 2011, and higher production volumes at our customers, offset by -- excuse me -- higher production volume and higher program launches since the third quarter last year.

W.E.T. benefited from strong orders from its North American customers, and steady to slightly higher revenues in Europe and Asia. It's important to note that Europe has seen some declines, although for our results, we have actually seen some increases at W.E.T.

However, due to the weakening of the European euro, W.E.T.'s euro-denominated revenue was lower when translated into US dollars, by approximately $5 million, when compared to the prior year third quarter.

Our gross margin for the third quarter was 26.1%. This represented an increase of 1.6% over the prior year third quarter. This was a result of the improved revenue and fixed cost coverage, and favorable product mix.

Our operating expenses were $36.8 million during the third quarter 2012, representing an increase of $1.5 million, or 6% over the prior year third quarter. This increase is primarily due to the costs associated with our program to implement the requirements of Sarbanes-Oxley Act at W.E.T.; higher legal expenses associated with our efforts to pursue a DPLTA, our domination agreement at W.E.T.; and approximately $500,000 expenses spent on a potential acquisition that has been cancelled. This was offset partially by lower research and development expenses for the quarter.

Our adjusted EBITDA was $18.6 million, which was $3.1 million higher than that of the third quarter of 2011. This increase was primarily due to the high revenue and gross margin percentage, offset partially by the higher operating expense.

One quick note on our cash. Our cash now totals $72.3 million at the end of the quarter. This represented a decrease of $5 million during the third quarter. We used some of our cash reserves for a few items, including $8.7 million to pay our quarterly installment on our Series [C] Convertible Preferred Stock. The remaining amounts due on the preferred stock total $32.7 million, not including dividend payment. These amounts are due on a quarterly basis over the next four quarters. Including the next one is due December 1st.

We invested about $8.7 million of capital expenditures for the quarter, a portion of which included the ongoing expansion of the W.E.T. manufacturing facility in China.

Our operating cash flow was $11.8 million for the quarter, which was reduced by approximately -- including a reduction of approximately $2.5 million for working capital expansion, which was primarily related to the higher revenue line. And that's all I have, Mr. Coker.

All right. Thank you very much, Barry. Operator, I think we will prepare to go ahead and open the phones for questions from the listeners. Thank you.

Thank you. (Operator Instructions). And our first question comes from the line of Michael Lew from Needham and Company. Please go ahead.

Thanks, and hi guys.

Good morning.

Hi Michael.

Good morning. A couple of questions. You had mentioned higher volumes as one of the primary drivers for the sequential gross margin increases at W.E.T. and Gentherm. Are you expecting to see a similar trend in the fourth quarter at W.E.T., in terms of volume growth?

Year-over-year, I think that's probably a correct statement. On the Gentherm side, we probably have a little bit of a headwind because the fourth quarter last year was a very good quarter for Gentherm. So I think we do expect a little higher volumes. There will be probably some decreases in Europe specifically, offset by benefits in North America.

Oh, okay. Could you also comment on some of the new initiatives that you've highlighted, specifically on the bedding part in the United Arab Emirates? I mean how much development work is entailed and when will the product be commercially available?

This is Dan Coker.

Hi Dan.

The program that we've launched into with a partner in the Arab states is an early stage development project. We have identified a very good partner we believe. We are adapting much of what we've already learned with our North American-based bedding project.

And there is very keen interest, in this extremely warm climate, for products that could provide cooling in the bedding and sleeping area. So we haven't really given any indications to when the product will be available in the market, but we're beginning the process now.

Well, Dan, since you know this technology has probably been developed by your leveraging an existing technology platform, would you say this is one that's more -- well, it's early, but it shouldn't take as long, like you said, to get it to market. It would be more like a third inning type of, is where you'd categorize it right now?

Yes, I'd say we're moving along in the ball game here. We are adapting things that have already been experimented in, although we're still suffering here in Detroit for any analogy that relates to baseball.

Okay. Yes, I thought the series would still be going on.

We were hoping.

Yes, and so was I. Also, with regards to the climate controlled office chairs in Japan, when will that be introduced into the US? And also, do you have a price on that right now, in Japan, what it's being offered for?

Yeah, actually I do not have a price that the chair is being offered for. It is a development with a partner who is a Japanese firm, and there are no current plans to market that here in the US. It will be marketed in the Asian markets, but we have no specific plans about announcing the availability of the heated and cooled office chair for the US at this time.

Okay. And then one final question. What were the mattress sales and cup holder sales for the quarter?

Actually Barry's going to jump on that and tell us exactly.

Yes, mattresses were around $500,000.

They were around $500,000 mattresses, and I don't really have the --

Cup holders were probably around $1.5 to $2 million. I don't have that right yet, Mike.

$1.5 million to $2 million? Okay, great. Thank you.

Yes. All right, thank you, sir.

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

Good morning. Congrats on the quarter in this environment.

Thank you.

Any color, Dan, or flavor I guess, just on Europe? It's obviously far from ideal. What are you guys seeing, or how do you sort of see that playing out kind of as you go into next year?

There's still a lot of uncertainty in the European theater in general. The German market is our primary home market for the W.E.T. operations. They are beginning to see some cooling, even in the German market.

When we look forward, we hope we're getting close to the bottom. There have been some, I'd say generally neutral noise about the economies in Europe these days, but we haven't really got any indications from orders that things are picking up there. Things seem to be still slowing down.

Our operations there have done very well. Our European operations are being quite successful and they've been able to show even improved results in the third quarter. We're hoping to hold our own in the fourth quarter and we're hoping sometime in the early 2013 that things will start getting better. But in the immediate short term, things are not getting any better in Europe.

Okay. And then with respect to gross margins, nice bump in the quarter. Is this a decent level to think about on this kind of a revenue level going forward? Or was there anything, either tailwind or headwind, that caused that number?

I would say that we're probably at the higher end of what we would view as a normal range. It may come down a little bit in the fourth quarter. But certainly there's benefits in the higher revenue level, so maybe the bottom end of our range, our normal range, has increased a little bit.

Yes, I think that we're generally satisfied with the progress we've been making, in both units, as we move forward. And you'll see ups and downs as we go forward, but generally speaking, we're making progress on both sides at our margin level.

Okay. And then I got the $500,000 in the quarter on the potential acquisition. Did you give the number that was spent on getting W.E.T. SarbOx compliant?

I think we're mentioning it in the 10-Q. But it was in the $500,000 order of magnitude.

So is it fair to say then you have about $1 million of one-time expenses in the operating line in the quarter?

I think that's true. You have to look at the different things differently. I would say that the Sarbanes-Oxley expenses will go down a little bit in Q4, and then taper off quite a bit more in the first quarter. So I wouldn't call them one time for the quarter specifically.

Obviously the acquisition potential is something that you won't see in the fourth quarter. And then the legal expense associated with the DPLTA will probably pick up a little bit in the fourth quarter, because we have some activities in court during the fourth quarter. And then we'll be -- you know, go up and down in different quarters going forward, until that is resolved.

Okay. Anything new to report there? Or not really?

As Barry reported, there's some court activities happened in Munich in the fourth quarter. And we hope to express our case again in front of the Appeals Court, to try to get some progress in our pursuit of the DPLTA. But there's no activity other than the fact that we're having increased frequency of activity in the court instead of preparing briefs and filing. Now we're actually going to be doing some oral arguments. We expect to probably have some word, results of those court hearings, early in the first quarter of 2013.

Got you. Okay. And then last question. Just operating expenses in general, how should we view those next year? Is this a pretty stable level or is there still some gains you can make there from productivity or head count standpoint?

I believe there are gains to be made. Again, we point out specific things that have different characteristics as we go through time. If we take those out, we probably are at more of a normal, you can see a normal rate here.

Keep in mind also that not all of our P&L is in one currency. It's in different currencies and so those can have somewhat of an effect on our P&L going forward. But again, if you peel back the Sarbanes-Oxley costs, the legal costs, and this other charge that we had talked about, I think you'd see somewhat of a normal rate.

Okay. I guess I do have one more. With respect to the acquisition that didn't work out in the quarter, maybe, and I don't imagine you'll be able to comment specifically on that, but more generally, what is your thought on acquisitions, and sort of how do you view that going forward, given that you're still sort of entangled in this W.E.T. acquisition?

Well, we consider being entangled in the W.E.T. acquisition, I think it's a normal process for us. So we're not really encumbered by it. It is a mild distraction, but it doesn't really keep us from looking around how we want to build our business in the long term.

So we do keep our eyes open for opportunities. We saw an opportunity that we thought would be a strategic fit. We did a little work on it, and we decided that, at this point in time, that that was not a good fit, and so we decided to move on. But we are keeping our eyes open and there are still some things we'd like to add to the structure as we go forward. And we did take a good hard look at what we thought was a very good opportunity. We still think it's a good opportunity, but the strategic fit just doesn't match with the timing right now.

Okay. Very good. Thank you.

Thank you. And our next question comes from the line of Mark Tobin from ROTH Capital Partners. Please go ahead.

Hi, Dan and Barry. Thanks for taking my questions.

Yes, hi Mark.

I wanted to follow up on the Asian market in particular where we're seeing from some of the Japanese OEMs, they're saying that they're being impacted by the dispute over the islands with China. What are you seeing in the Asian markets now, and how do you see that playing out over the next year or so?

Well, we don't like to dwell in politics, but there are some disputes between the Japanese and the Chinese mainland. And it's not just about a few islands, there's a bunch of things that they're arguing about.

That has impacted some of these companies, the Japanese auto companies' sales in China. But the sales in Japan are recovering nicely, and their exports to the rest of the world are still doing very well.

I don't think it's going to put a dramatic impact on our revenues as Gentherm in the (inaudible) location, but I do think it's something that the politicians are going to have to resolve, not business people. So I don't think it's going to really have any direct impact on our revenues.

Okay, that's helpful. And following up on the court process, what are the potential outcomes when you go into the court next month? What are the different scenarios that you see playing out from that process?

Well the opportunities and the results we expect to see, of course, are Gentherm wins on appeal, and we move forward in the process to implement the DPLTA. But we are, of course, at the whim of the courts. And the German courts have good solid laws. We have abided by all of the laws and rules and regulations of the German court system, and we fully expect that we will prevail, over time.

This is an appeals process, and we still have further options available to us if we do get a result that we are not looking for. We'll continue to pursue the DPLTA until it is approved and installed.

And how is the cooperation agreement process, how is that going? And are some of those agreements being implemented now?

Yes, that's correct. The German legal system does allow for companies in situations like ours to work together. We do have a group of cooperation agreements already negotiated and in place, to allow us to cooperate, particularly on some very key programs that we feel that the strengths of W.E.T. and the old Amerigon fit very nicely and will progress the business forward in the future. So that is very helpful for us. It's not the ultimate answer, but it is very helpful.

Mark Tobin% Okay. That's helpful. Thank you. I'll jump back in the queue.

Thank you, sir.

Thank you. (Operator Instructions). And our next question comes from the line of Adam Brooks from Sidoti & Company. Please go ahead.

Yes, good morning guys. Just a few quick questions here. You've been stripping out the impact from that historical Amerigon platform and the currency impact. W.E.T.'s growth was pretty strong in the quarter, above what it seems like market growth was. Can you speak a little bit about what drove that?

Yes, we have a very good North American, very robust North American business. And the W.E.T. business in China is doing exceptionally well.

Okay. And then did you have any impact from the strikes in Korea?

Not any direct impacts on our business, no.

All right. I think that's it for now. I'll hop back in the queue.

Okay, thank you.

Thank you. And we have a follow-up question from the line of Steve Dyer from Craig-Hallum. Please go ahead.

Yes, just one follow up. Does the transition from the T900 to the K2XX impact you in any meaningful way, from a quarterly basis, or is it going to be pretty minimal?

I don't think you'll see any direct impact on our operations and the transition. We have the business and we plan to retain the business.

Okay. And then with respect to, I know W.E.T. won the [Lambda] business. Is that still their's, or I guess kind of yours as well, going forward?

That's our understanding, yes.

Okay. Thank you.

Thank you. (Operator Instructions). And we have a question from the line of Ailon Grushkin of Nano-Cap Growth Fund. Please go ahead.

Hi guys. You guys are doing a great job building this company. So I applaud you for that.

Thank you.

Have you guys taken advantage of the extraordinarily low tellurium prices and built up some inventory by any chance? Because I saw you have a fair amount of raw material on the balance sheet.

We have enjoyed the recent run down of prices in tellurium in the global markets. And we do try to cover ourselves as broadly as possible. We don't actually take any direct contracts of tellurium on our books, but we try to push our commitments out as far as we can when prices reach these levels.

Okay, great. In terms of the heating and cooling cup holder market, where do you see that going? Like I saw there was one competitor that we found was like in the Audi vehicle.

Yes sir.

I'm trying to figure out, are you making any progress, I guess, expanding beyond Chrysler at this point?

I think we're making some progress. We have several programs in what I would call a pre-development stage right now. There are a couple of competitors out in the world, specifically the guy who does the Audi program is a very good company. We think we have advantages over their designs. And we're now, after having won our first few programs at Chrysler, we're working very hard to try to push the concept of a heated and cooled cup holder, in addition to heated and cooled storage areas for cars, worldwide.

Okay. Great. How about the heating and cooling, I mean the heated steering wheels. Is that market still growing?

That market's actually doing very well. It's something that, unless you've lived in the cold climates, you don't truly appreciate, but it's something that we think has got a lot of upside potential.

Okay. And lastly, in terms of the heating and cooling office chairs, how does that work? Are you going to be collecting a royalty from that or are you going actually be manufacturing the units and selling it to them?

It's our goal to be a manufacturer, so we don't really want to get into a licensing program in that particular arena, and we will be supplying the basic core and guts to the system, and they adapt it for their chair.

Okay, great. Thank you so much.

Thank you.

Thank you. And we have a follow-up question from the line of Adam Brooks from Sidoti & Company. Please go ahead.

Yes, I just wanted to get an update maybe on CapEX expectations for this year. And maybe if you could speak a little bit as far as the next year as well.

Sure. In this quarter we are at about $8 million. I think we will be a little bit less in the fourth quarter as we tail off the expansion in China. Next year we'll have other expansion opportunities that we'll be pursuing, so the next couple of years we're probably in the $20 to $25 million range for CapEx.

Okay. Thank you.

Thank you. And at this time, there are no further questions in my queue. I would like to turn the conference back over the management for closing comments.

Well I thank you and we very much thank everyone for joining us in our review of our third quarter results. We feel like the results were fairly positive, and we think that we're going to have a good fourth quarter, finishing up 2012 on a positive note.

These are, unfortunately for us and many areas of the globe, tough times. Our businesses have and lucky to be able to get into favorable positions, and our business continues to grow and expand. And our team at Gentherm are very much aware that this is a result of hard work and a little bit of luck.

We are also in a state where, in the US right now, there's some pretty serious disasters that have occurred on the upper east coast. And again, our thoughts and prayers are with the folks who have been impacted by that. And we encourage everybody to get out and vote next week. There's big decisions to be made, and we look forward to some stability after those decisions are made.

Again, join us again in about 90 days, and we'll hopefully be talking about a good fourth quarter for Gentherm. Thank you everyone. Bye, bye.

Ladies and gentlemen, this does conclude our conference for today. We thank you all for your participation. And at this time, you may now disconnect.