Gentherm Inc (THRM) 2012 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to Gentherm Inc. 2012 fourth quarter and year end conference call. (Operator Instructions). I would now like to turn the conference over to Ms. Jill Bertotti. Please go ahead, Ma'am.

Good morning, everyone and thank you for joining us today for the Gentherm Incorporated fourth quarter and full year results conference call. Before we start today’'s call there are a few items I wouldlike to cover with you.

First, in addition to disseminating through peer newswire this morning'’s news release announcing Gentherm 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 copyfrom either the Gentherm website at www.gentherm.com, or the Allen & Caron website at www.allen caron.com. Additionally, a replay of the conference call will be available via a link provided on the event page of the Investor Section of Gentherm'’s website.

Finally, I have 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 maybe 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 its 10-Q for the period ending September 30, 2012, and its Form 10-K for the year ended December 31, 2012.

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 would now like to turn the call over to Dan. Good morning, Dan.

Good morning, Jill. I know it is a very early morning for you. We appreciate you getting up for our calls. And we would like to welcome to everyone to our fourth quarter 2012 earnings review. For us a key and significant item was that our combined Companies around $555 million revenue milestone number for us. Which allowed us to slightly exceed our projection on revenues from last year of about a 10% revenue growth.

This was driven by new platform programs, new product opportunities and some recovery in the U.S. market in particular. As we go forward today we are going to hear a summary of the operational financial details from Barry and then will open the floor for questions with support by our esteemed chairman where required.

Mr. Steele, would you like to review the operations?

Absolutely. Thank you, Dan. Our earnings for the fourth quarter were $0.09 per share. There were three unusual items that impacted these results that I would like to describe for you. First, we entered into an agreement to terminate and accelerate out royalty payments under the technology license agreement that covered our CPS product at Gentherm. This resulted in a higher than normal royalty expense during the quarter totaling $1.6 million, but also represented the final payment required under the contract which had been running about $400,000 in quarterly costs.

Second, we changed our accounting practice with regard to patent cost. Previously we had a capitalized external cost associated with internally developed patent but expensed our internal cost. We are now expensing all costs consistently, and will do so in the future. This had the impact of decreasing our operating income by $1 million for the year and $300,000 for the fourth quarter.

Finally, our tax provision does not reflect research and development tax credits and certain exemption under the U.S. foreign income tax rules because the U.S. Congress did not extend these provisions in the law until January 2, 2013. If that action had occurred during 2012, our tax expense would have been $1.3 million less. We will be recording this benefit during the first quarter of 2013. Taken in total these items reduced our fourth quarter earnings per share by $0.08 per share.

Product revenues as Dan mentioned for the fourth quarter 2012 were $148.2 million which represented an increase of $17.2 million or 13.1% over the fourth quarter 2011 product revenue. The increase is due to strong automotive productions especially in North American. However our Euro-denominated revenue was lower when translated in to U.S. dollars by approximately $1.6 million as compared with the prior year quarter.

Our gross margin for the fourth quarter was 25.8% representing -- however this was impacted by the accelerated royalty I mentioned earlier. Without that expense our gross margin would have bee 26.9%, representing an increase of 1.1% over the prior year fourth quarter. This was the result of improved fixed cost coverage and favorable product mix.

Our operating expenses were $29.3 million during the fourth quarter. Representing an increase of $3.3 million or 20% over the fourth quarter of 2011. This increase is primarily due to costs associated with our program to implement the requirements of the (Inaudible) at W.E.T. paralegal expenses and year end International management incentives.

This total amount of operating expenses is higher than we would like, but we expect the amount will be somewhat lower during the first quarter of 2013. Our adjusted EBITDA was $18.1 million , which was $3.5 million higher than that of the fourth quarter 2011. This increase was primarily due to higher revenue and gross margin percent offset partially by the higher operating expense.

Turning now to the balance sheet. Our cash which totaled $58.2 million at the end of the quarter decreased by approximately $14.1 million during the fourth quarter. We used some of our cash reserves for several items including we used $8.4 million to pay our quarterly installment on our Series C convertible preferred stock. The remaining amount due on the preferred stock offering total $24.3 million including dividend payments.

These amounts are due in three installments. One was made in cash on March 1st, which was last week, while the other two are due on June 1st and September 1st at that point the preferred stock will be completely extinguished.

We invested $9.9 million in capital expenditures. A portion of which included the ongoing expansion of a W.E.T. China manufacturing location, our new electronic manufacturing location in China and other capacity improvements. We also paid $3.8 million in debt. Our operating cash flow was $7.7 million favorable, which was reduced by approximately $5.5 million in working capital expansion related to the higher revenue and volume level.

We chose not to use any of our cash reserves for the W.E.T. minority stock purchase during thispast February which Dan mentioned. Rather we drew approximately $40 million from our credit agreement that had been established for this purpose. Our revolver capacity remains virtually untapped and totals approximately $55 million. We have plenty of liquidity to fund the operation going forward. And that is what I have.

All right. Thank you, Barry. We did want to mention on the early part of our call that we were able to negotiate with a couple of the key minority shareholders of W.E.T. at an agreed to price, which included in one case some shares of stock that were issued and cash and then cash for the balance of the shares that has now netted us pretty close to 99% of the public shares of W.E.T.

I think the exact number was 98.8% as I recall, but we are definitely in the range of being able to chase down the remaining shares. This process is not complete yet. Until we have 100% of the total share will not consider the process complete. But we do have a very good solid operating relationship now with our sister divisions at W.E.T. and we plan now to begin the process of blending the two Companies together to be able to provide a much better and faster response to our customers.

With those comments, I think we will open the floor to for questions. Jill, we are ready.

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

Thanks. Good morning, Dan and Barry.

Good morning we thought you would be snowed in today.

Almost. Just related to your last comment, Dan, in the combined Company. Wondering if you are able to elaborate or give any additional color now that it is largely done on maybe some of the synergy's you see going forward and how maybe those will be realized in the time frame?

As we said in the past, Steve, we see approximate $10 million minimum synergy's that can be achieved in several different areas. Reduction of expenses is one of key areas in terms of we have been fighting this battle now for a couple of years. Our legal and administrative costs are pretty high related to that. We also have not been able to take advantage of the combination of our two teams.

There will be some significant savings as we bring those two teams together and refocus them on the future. And then one of the key things for us is the ability to be able to blend the two knowledge bases together and develop new and exciting product solutions for our customer bases. All of that we see taking a period of two to three years to be completed implemented, but we see very good solid synergy's and bottom line impact by the combination of these two fine technology companies.

I think you had said in the past you were spending something in the order of $3 million to $4 million to $5 million somewhere in there in legal expenses, which I would assume drop off almost immediately; is that fair?

Unfortunately not completely, but yes, the bulk of that expense has been basically to pursue to the Domination and Profit and Loss Agreement that we worked so hard to try to get in place for the last 18 months. But we will always continue to have some legal costs. You have scared all of our lawyers to death. But those numbers will be significantly lower going forward.

But we now have to enter a phase where we go into essentially a squeeze out play to try to obtain the final literally 1% of the shares on the outside. So there will be some modest costs for the next year and then that will be normalized going forward.

Okay. With respect to the 1%, is your sense that there is resistance there, or it just so disbursed that perhaps people do not know necessary what is going on?

I suspect the latter. We have not an updated listing of the shareholders and we pretty much pursued all the way down to people who owned 1,000 shares, and that is pretty low in terms of the volume. So we suspect that the remaining 1.2% is probably in small lot quantities all over the place. We are advertising now the placement of DPLTA . We have issued instructions how people can submit their shares for the cash price.

We also have a program going with the banking groups in Germany to try to find people who hold W.E.T. shares in their portfolios and advise them of this development of the issuance of a DPLTA, and request that they submit their shares into the Domination Agreement. I suspect that there is probably a whole lot of folks that have 10 shares, 20 shares, 50 shares of stock that we will have to work pretty hard to find.

Any sense on the timing of the squeeze out?

We are not in a rush. The big key for us and the success for us was getting the Domination Agreement registered. That relieve as lot of operating constraints for us that we have had to literally struggle with over the last 18 months. As you know we spent quite a bit of time in 2012 developing and implementing what we call cooperation agreements where the two companies established a group of agreements where we could work together pretty much at arms length but toward a common goal. The requirement for that now has been lifted and we can literally work together side by side as teams. I think that is going to be a very positive development for us going forward.

Great. Just a couple of more than I will hop back in to queue. As it relates to the business at hand, most of your peers I think in the industry have forecasted a more back half loaded year than normal for a whole host of reasons. As we look at your 8% to 10% revenue growth this year is that a fair assessment as to how you think that will play out for you as well?

When you balance out the three major markets that we service, Europe, North America and Asia. The North America market has continued to be fairly strong. We expect that to be fairly balance. The Asian market has been relatively flat in the first quarter of this year. And the European is, as I think everybody knows is off and will continue to stay at very low production and run rates at least through midyear. And we are expecting a small and slow recovery beginning in the second half. So that is a broad answer, but I can basically say we will see a stronger second half than we will first half.

Okay. One more bedsales, any update there in terms of how that is going, maybe revenue in the quarter and new developments there with Mat Firm?

The developments at Mat Firm are that they are continuing to expand the retail stores that offer our heated and cool bed line, and that has been very positive. Our revenues for the fourth quarter were pretty much in line with what we saw in the third quarter, but we have seen a very strong response in the early first quarter of the 2013, and that is the first results we see of the hard work that the Mat Firm teams has put in place to be able to get this additional retail coverage for us in some new states. So we expect that number will continue to grow during the year, and we look forward to seeing that additional revenue role in Q3 or Q4 here.

Are you able to quantify how many doors you are in right now, and what the plan is as the year goes along?

I am not actually. I cannot tell you exactly how many doors we are at. I do know that they have a 1,000 stores, and we are in a relative minority of those shops right now.

Okay. I will hop back in line. Thanks.

Thank you, stir.

Our next question comes from the line of [Anthony Dean] with KeyBanc Capital Markets. Please go ahead.

Good morning, gentlemen.

Good morning.

I have a few questions here. On your 8% to 10% revenue growth guidance for 2013, this is obviously solid out performance versus the vehicle production and the regions where you have a lot of exposure. North America forecast is up 3%, Europe down 3%, for example. Definitely one of the most robust sales guidance of any supplier if I recall. I was just wondering if you could spend a little bit of time you whether you see take rates improving for your products this year, or is this out performance simply a function of new program launches and favorable customer mix, any thoughts there?

Yes, all of that is true what you have said. We do see additional platforms offering our products both our Gentherm traditional heated and cool and heated ventilated seats and the W.E.T. heated seat and heated and vent seat. Plus we also have a fairly nice portfolio of new product applications that are rolling in. Key among those are, of course we just mentioned, our beds will be expanding.

We also have seen pretty good response to cup holders and cold storage boxes and the W.E.T. lines with the new steering wheel heaters, which on a day like today in Michigan are quite delightfully to have. All of those things combined will help us. Plus there is new penetration and new market growth for us through penetration in all of the major markets. So it is actually a accumulative affect, and we feel like that should be our target . We should try to grow the business by about 10% a year and we are working on plans to deliver that.

Okay. As it relates to the portfolio of your new product applications with respect to the 8% to 10% guidance you provided any thoughts on the breakout of what the beds, cup holders, steering wheel heaters and such what the contribution to the growth rate will be between those new products?

We have lots of thoughts, but we do not really expose those to the market. We just give you a top line growth number, and that is really about all the information we feel comfortable to provide.

Okay. Can you talk to margins a little bit in 2013? It just seems like there is a lot of moving pieces. obviously legal costs have potential to come down $2 million to $3 million maybe, pick your number. SG&A expense higher in 2012 as percentage of revenue, and you are expanding your presence in Asia. I am wondering how we should be thinking about SG&A? You are making some changes to your accounting with respect to your patent development, and maybe there could be some benefit from the W.E.T. integration. So just wondering if you can sum this up for us, and paint a picture of how we should be thinking about margins this year relative to 2012 ?

Well, there are a lot of driving factors for that. That is a very broad reach. Obviously margins is kind of the base pulse of the business. There are some things that we are doing. As you heard one of the key things we are going to be doing is we will be reducing legal costs. That is going to definitely affect our SG&A line. We have definitely taken steps to negotiate what we think is a favorable settlement of a royalty agreement that we had that quite a bit of time left on it that will reduce our expenses by about $400,000 per quarter going forward.

We continue to work to try to reduce our operating costs at all level, not just at the SG&A line but also at the engineering, R&D and operational levels. Material cost impact is there. We have seen reasonable costs on (inaudible) our old nemesis sometimes, friend sometimes. Right now it has been a relatively stable commodity that we require. We have some exposure now greater exposure to currency fluctuations worldwide. We have seen some negative impact from the euro and dollar relationship, and we have seen some positive relationship to yen to dollar.

So when you boil all this out, what you will see is, I think, a steady improvement of our gross profit overtime. But we cannot really pinpoint a quarter you are going to see that. I think over the next 4 quarters to 8 quarters you will see a good solid steady improvement of our gross profit margins.

Okay. And a few more if I may. Do you have an estimated accretion from the W.E.T. transaction?

The accretion we think from the acquisition of most of the 24% non minority holdings is somewhere in the range of $0.12 to $0.13.

Okay. Let's see here. And then just lastly tax rate, how should we be thinking about that longer term as your Asian presence grows?

Our tax rate, this is Barry speaking, will certainly come down as we are able to potentially become more tax efficient in respect looking at the Company and its operation and structure. We were unable to do any tax planing or method without a DPLTA. The tax rate you see here is probably a little bit lower. There is some good news things that went through for the year. We got to recognize some different (Inaudible) that we did not have before. So we would probably predict about a 28% rate roughly going forward with the hopes that when we are able to structurally change ourselves we will be able to lower that.

Thank you very much.

(Operator Instructions). Our next question comes from the line of Joe Bess with ROTH Capital Partners. Please go ahead.

Good morning. W.E.T. revenue growth for the full year was pretty strong, and I believe it was about 14.6% if you had acquired the business on January 1st. Can you help me get a better understanding of where that growth occurred? Is that really just a function of you moving production of a key customer to the W.E.T. facility, and being recognize at W.E.T. and than can you quantify that for us?

That is one of the key contributions, plus there has been a very strong market in what I would call the Asian markets particularly China for W.E.T. traditional products. There is probably $12 million to $15 million worth of product revenue in referring to the heated and cooled seat products that had been supplied traditionally by Gentherm that is now being supplied by our North American operation for the W.E.T. operations down in Mexico.

Okay. Great. Thank you. And then thinking about the minority interest in Q1 higher is that going to be bit higher because of the date of the ownership where you gained about the extra 16%?

The minority interest should be lower. There will be a period of time where we do still have the 24% going through the minority interest line. That will go down quite a bit. It will be 1%.

And starting Q2 it will be at about 1%, but in Q1 it is lower sequentially but higher compared to Q2 quite a bit, right?

It should not be higher compared to Q2, it should lower. Keep in mind we closed the transaction in February, February 13th actually. So that is the point where we go from a 24% dilution I guess to 1%.

Okay. Perfect. Thank you.

Thanks Joe.

Our next question comes from the line of Adam Brooks with Sidoti & Company . Please go ahead.

Good morning maybe even good afternoon at this point. Now that you have registered the Domination Agreement can you talk about the decision making process for which platforms to pull in-house?

That is a very good question actually. One of the things we have been working on developing a plan to begin the integration. Obviously for us the larger platforms that are remote to manufacture sites today are the key targets. For us today at the old Gentherm business all of our manufacturing support was provided out of the Asia. We have lots of very nice happy customers here in North America that would prefer to see their product made locally.

So those are the top priorities for us to try to make sure we relocate as much of that business closer to the demand market as possible. That will continue to be our pressure. If you will recall the biggest customers that we have for the heated and cooled seat products are here in North America, so we will begin that process right away. And the rest of the products will be faded in over a two to three year period.

Okay. So is that a big chunk of that $10 million in synergies that you included.

It is a contributing factor. I would say it is significant.

Okay. And then just looking at SG&A, R&D pretty steady throughout the year. It seems like there is a little more seasonality in SG&A since you have acquired W.E.T. maybe you can touch on if this is going to be the normal seasonal trend kind of an up tick in 3Q, 4Q ? It doesn't seem just volume driven by from a percent of revenue as well.

Yes. Actually you have seen that seasonality for the last year and half, and to some extent it will continue. The SG&A does shift and move around depending upon the position of year. I think as Barry mentioned a little bit earlier there is a year end management incentive that is played out on an International basis in December, that only occurs in December. So you will see that blip every year as the incentives are earned and paid. For the rest of the transactions I think it is reasonably steady, and we are aware that is a large number and we are going to be working on trying to figure out a way to become more efficient as a combined Company.

Okay. Just one more. 2013, 2014 pretty large platform years for North America as far as changeovers and launches in general for the industry. For you is it possible it is a little bit of a pickup from historical norm?

I like to think so. There is a lot of activity, and where there is activity there is opportunity for us. So we think there is a good shot of us getting on some new platforms.

Thank you.

Thank you, sir.

Our next question comes from the line of Bill Selesky with Argus Research . Please go ahead.

Hi, thanks guys. Congratulations on the fourth quarter and 2012 results. I have two questions first, Dan, can you talk briefly about the European market and more specifically the German market? I know last quarter you had spoken about it in the process of cooling some, and I am wondering if things have bottomed or if things are actually turning up.

I'm sorry. Do you want to ask both questions, or do you want me to respond one at a time?

No, if you could do that one first, I would appreciate it.

Okay, great. We are seeing the European market has continued to cool and I would say maybe even is getting close to frigid right now. I suspect that sometime in the first half you are going to see things settle down to a bottom and the second half it will start going back. Specifically in the German market they have a very high export business based out of German Mercedes, BMW, and Audi in particular all generate very large amount of there revenues each year from International markets particularly China and the U.S. We think those markets have held strong for these products.

In fact, if you look at the recent publications you will see that Audi, BMW have all had record quarters here in the U.S. and they have been a little flatter in China. So the slow down you see that is finally beginning to affect the German companies has been primarily pressure from the European markets, the local markets. We expect those markets to begin to improve in the second half.

Great. And my finally question I think you also addressed this last quarter, but on CapEx going forward 2013 and 2014 I think you had previously mentioned in the range of $20 million to $25 million. I just wanted to see if that was still the same, or if there is any change in that?

This is Barry speaking. We would expect that to be fairly consistent with 2013 with the possibility of things tapering off and going down a little bit in 2014 unless we need more capacity and we see growth as somewhat likely.

That is helpful. Thanks very much.

(Operator Instructions). Our next question comes from the line of [Shirley Louie] with Garrison, Bradford & Associates. Please go ahead.

Good morning. And congratulation to your tying up of W.E.T. Could you please tell me more about the size of the markets and your share and how fragmented it is and the competition involved?

Well, the markets get broken up in many different pieces. The traditional market that the old Amerigon the existing Gentherm service which was dominated by the heated and cooled seat business we had essentially 90% plus of that relatively small but somewhat fast growing segment of that market. W.E.T. has maintained they have actually fought and earned their way to roughly a 50% market share of the worldwide traditional resistance seat heater business. So those are the two big driving factors. So I think you would say we have somewhere roughly better than 50% of the available market for us worldwide. So that would put the total market somewhere in excess of about a $1 billion.

Okay. So you are the major player so to speak in these heating and cooling system?

Yes, Ma'am, we believe we are.

Right. And your future growth depends on your other products such as your heat and cool beds?

Actually we still see very good growth opportunities in the heated and cooled and heated and ventilated business particularly in the developing markets the heated and ventilated business we believe will be a very strong contributor for our future growth for the next five years, and that will be complemented by our new product development efforts that we are bringing out that you see now in an early infant stage as they mature and are joined by other projects that we are currently working on.

Okay. If you could tell me is there a certain target for your operating margins?

We would very much like to see at least a 10% return on our efforts.

Okay. Thank you very much.

Thank you.

And we have a follow-up question from the line of Anthony Dean with KeyBank Capital Markets. Please go ahead.

Hi, thanks for taking this question. One quick more. You mentioned legal costs in your synergy remarks, so I just wanted to double check something. Does that longer term $3 million or $4 million of lower legal expenses over the next couple of years is that part of the $10 million synergies or is that just above and beyond? Thank you.

It is a portion of the short term synergies that we see immediately, and as we have indicated the $3 million to $5 million we have both been spending on legal attempts to place the DPLTA will drop fairly significantly, but there will be a residual impact for the pursuit of the squeeze out and the reorganization of the Company.

Great. Thanks.

And there are no further questions at this time.

All right. Thank you, operator. We believe we have covered most of the questions and as much information as we can at this time. We would again very much like to thank all of the listeners for dialing in. We would like to invite you back at the end of the first quarter where we will be reviewing hopefully some pretty good results for the first period of 2013.

Gentherm is at the threshold I think of a very exciting three to five years. We see a very good opportunity to grow our business, become more efficient and expand our product offerings to our customers. We are looking forward to it. We are very excited about it. And we thank you all for joining us, and come back next quarter. Thank you.

Ladies and gentlemen, this concludes the Gentherm Inc. 2012 fourth quarter and year end results conference call. You may now disconnect.