Gentherm Inc (THRM) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Gentherm Incorporated 2013 first quarter results conference call. (Operator Instructions). I would now like to turn the conference over to Jill Bertotti of Allen & Caron. Please go ahead.

Good morning, everyone and thank you for joining us for the Gentherm, Incorporated 2013 first quarter 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 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 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, its form 10-Q for the period ended March 31, 2013 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 these 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 thank you from all Redwings fans here in Detroit. We're here to discuss our first quarter results.

We had a pretty good quarter. We're pleased with the results. The revenues were slightly stronger than we had originally anticipated, came in about 14% higher than the previous period in 2012 and our results were pretty strong up and down the line from all of our major business units.

We'll follow our normal prescribed procedure here and we will turn the call over to Barry Steele, our CFO, who will provide some of the financial highlights and details before we open the floor for questions. Mr. Steele, good morning.

Thank you, Dan. Good morning to you, everyone.

Our earnings per share for the first quarter were $0.24. There are two unusual items that impacted these results that I'd like to describe for you. First, in February we acquired an additional stake in W.E.T., the largest minority shareholder. In conjunction with this acquisition, we incurred approximately $1.2 million in acquisition transaction expenses.

Second, our tax provision reflects research and development tax credits and certain exemptions under the U.S. Foreign Income Tax rule related to our 2012 tax year, because the U.S. Congress did not extend these provisions in the law until January 2, 2013. So that means in the quarter we recorded a benefit totaling $1.3 million that would be unusual and a onetime event for us.

The net impact of these items reduced the fourth quarter earnings per share by $0.02, so our normalized earnings per share would be $0.20.

Our product revenues for the first quarter 2013 were $148.1 million, which represented an increase of $18.6 million or 14.3% over the first quarter 2012 product revenue. The increase is due strong automotive production, especially in North America and Asia. Our European-based revenues were only slightly higher given -- than the prior year period, due to the soft automotive market in Europe. We continued to see additional penetration in our existing products as we get our new program.

Our gross margins for the first quarter were 26.4%, representing an increase of 1.3% over the prior year first quarter. This was the result of improve fixed costs coverage and stable product mix.

Operating expenses were $29.3 million during the first quarter of 2013, representing an increase of $5.2 million, but that included the acquisition transaction expense, as I mentioned earlier. Taking these expenses out, our operating expenses increased by $4 million, or 16.8% for the first quarter of 2011.

Much of this increase reflects increased resources that are being directed to development of existing and new products and the related marketing activities for those new products, as well as an effort to develop a new CCS system using the best characteristics from each of the historical Gentherm and W.E.T. existing systems offered in the market today.

We also incurred additional administrative startup expenses associated with a new production facility for electronics that will begin production activities during the second half of 2013.

Our adjusted EBITDA was $18.1 million, which was $2.6 million higher than that in the first quarter of 2012. This increase was primarily due to the higher revenue and gross margin percentage offset partially by the higher operating.

Turning to the balance sheet, our cash was a total of $48 million at the end of the quarter, decreased by about $10 million during the first quarter. We used some of our cash reserves for several items, including we used about $8.3 million to pay our quarterly installment on our Series C Convertible Preferred Stock. The remaining amount due on the preferred stock totaled $14.4 million, including dividend payments. These amounts are due on two installments. One will be made on June 1st, while the other is due on September 1st. We had a small amount of conversions for the quarter, which totaled approximately $1.4 million in preferred face value and resulted in the issuance of 104,000 common shares.

We also invested about $6.1 million in capital expenditures, a portion of which included the portion of the new electronics manufacturing location in China and other capacity improvements that are needed.

We repaid $5.2 million in debt during the quarter. Our operating cash flow was $10 million, which is reduced by approximately $6.5 million in working capital expansion related to the higher revenue buys.

We chose not to use any of our cash reserves for the W.E.T. minority stock purchase I mentioned earlier for this past February. Rather, we drew approximately $40 million from our credit agreement that had been established for this purpose. Our revolver capacity remains virtually untapped and totaled approximately $55 million. We have a lot of operating liquidity available to us.

That's what I have, Dan.

Alright. Thank you very much, Barry. We have -- again, we would like to open the floor for questions and operator, if you're ready we're ready. Operator?

(Operator instructions) Joe Bess, ROTH Capital Partners

Good morning, gentlemen.

Good morning.

Dan, as we look at -- as we start to approach the middle of the year, are you still expecting the back half recovery in Europe? Or what's the timing on what you guys are thinking that there's going to be a recovery in that market?

Yes, we haven't quite gotten to the part where we feel we're at the mid part of the year yet, but in looking forward, we still think that there's some strength beginning in the European marketplace. It's certainly not -- we haven't seen strength yet, as you heard from Barry's comments, but we are believing at the moment that we're kind of getting near the bottom.

So we do believe that the second half of the year in Europe should be better. We think there's going to be a consistent, strong North American market and we think the Chinese market will also improve in the second half. We had a slight bit of softness in the Asian markets, but we think all of those will follow through with our projections for the year.

Joe, it's also fair to observe that the main European impact has been on the French and Italian and mass market producers. There has been some slowing for Mercedes and BMW and Volkswagen, but they've been sustained by their export sales and by their stronger position. So, in a sense, we haven't had a significant decline in Europe and therefore, it's unlikely there will be a significant rebound for us, but we think it'll be stronger.

Great. Thank you for that. Okay and then transitioning to thinking about W.E.T. a little bit more and as you guys internally evaluate what, can you give us a sense for the operational savings opportunities related to the integration for the two businesses now that you've had a little bit more time to really dive in?

Well, we have indicated in the past that we saw somewhere in excess of $10 million worth of synergistic opportunities for the two Companies being pulled together. I think it should be pointed out that we never really made the acquisition under the assumption that we were going to have massive cost-savings by the merger of the two Companies. But, rather, that we would see significant opportunities created by the combination of our two teams' skills and market strengths.

And so, we do see significant opportunity. We're beginning to lay those out. We have actually quite a few teams of people working around the world right now to draw up better plans, hard, concrete plans to be able to institute these plans over the next two-to-three years, as we've also indicated in the past.

So we're feeling very good about how things are looking in terms of the long-term strength and opportunity for the combination of the two Companies. So everything we've found so far has validated what we thought as our premise for the thesis for the acquisition.

Okay and then, thinking about the press release and as you guys start to broaden your exposure to new markets, i.e., the medical market, can you talk a little bit more about that opportunity and when you guys think that a commercial product might be hitting the market?

Well, we see lots of opportunities in lots of different markets and the thermoelectric applications, there's a couple of really key things that we like that we've been working with some customers on.

As you know, we have a bed product that is in the market now and beginning to show some pretty good strengths. Obviously a bed market for the consumer would lead one to think about a long-term care facility in a medical hospital or some application such as that. So those are the types of medical products. We're not talking about creating a new medical device; we're talking about some adaptation of our skills toward medical applications.

Another prominent example of that would be we're looking into how we would be able to heat and cool office chairs and other furniture items and of course, in the medical industry there are significant needs for regulating body temperature and reducing moisture on the body for people who are confined to wheelchairs. So there's several different opportunities and applications that we see as potentially quite appealing in the medical market.

Okay and then thinking about the medical market a little bit more, what might the cost be to bring a product to market?

That's another area we're investigating. There's many different avenues to get into the medical business in terms of how you distribute your product or what types of levels of products and components that we offer and introduce to the market.

The costs are obviously a little bit higher in the medical industry than they are in the automotive industry and we're examining all of our options in terms of the path to market and the distribution methods that we'll choose. So we're not quite ready to commit to how we're going to approach the market yet.

Okay, great and then just one last one. Where do you expect R&D to go as you pursue these new opportunities that you guys have just discussed?

I think we've got a pretty good base for our R&D team right now, globally. We're going to be focusing this team of engineers and scientists toward specific projects and goals, so I don't really see us having any dramatic uptick in R&D. Hopefully we'll be able to maintain our current levels of spending and our revenues will continue to accelerate, hopefully, in the mode that we've seen lately in a 10%, 12%, 15% growth per year with a flat R&D budget. So that would be ideal for us.

Alright, thank you for your time.

Thanks, Joe.

Steve Dyer, Craig-Hallum Capital Group

Good morning. Thanks for taking my questions. A question for you. You mentioned the new programs in the quarter driving a lot of the growth. What is sort of the cadence of the new programs that's you've won this year? How should we think about are there particular quarters that are strong? Is it spread relatively ratably throughout the year?

Hi, Steve. It's not as it was in the past where we were greatly impacted by the new year model launches that were all dramatically scheduled beginning in July of each year. We're seeing a lot more people roll new model introductions out as soon as they're available, so it's become kind of a broader application. So the typical spikes have been smoothed off a little bit.

Plus we have a lot more global exposure with the addition of the traditional W.E.T. business models. As an example, our cable business has been quite aggressive and it's had very strong successes in the past months and we've seen a very strong increase in revenue from our cable business. Steering wheel businesses are doing well.

So we've got a lot more of a base to draw from, so you don't see, I think, the traditional historical spikes that you saw in the past.

Okay. That's helpful. Could you let us know maybe what bed revenues and cup holder revenues were in the quarter? Just trying to get a sense for how that's scaling.

Bed revenues were about $500,000. Cup holder revenues were about $1.8 million, closer to $2 million.

Okay. How should we think about those numbers overall this year?

The bed revenues were artificially lower. We had a little bit of a problem with one of our bed partners, a bed manufacturing supply partner as a matter of fact, toward the end of the first quarter. And we think those issues have been resolved and that product is flowing back into the market now, here in the second quarter.

I think you'll see the cup holder revenues for the current period will continue, consistent with what you've seen in the past and you won't see any of our new hopeful platforms that we're working with until '14 and '15.

Okay. And then just relating to, I guess, guidance, the 14% growth year-over-year in Q1 and what should be sort of a softest quarter, certainly in Europe, from a production standpoint. The 8% to 10% seems conservative, which I know you are, but any color as to your thoughts on potential upside to that, if Europe does stabilize in the near-term? We've certainly gotten some good data points out of the UK and Germany recently, but just thoughts, I guess overall, on the direction of the year?

Well, we're feeling really good about 10% right now and if everything falls into place, as we hope it will, we're going to be on the high side of our guidance. Again, we've only gotten the first quarter behind us and it is traditionally one of our more volatile quarters. So we're very pleased to have gotten that quarter behind us, but I would also caution us to think that the third and fourth quarter of 2012 were pretty strong performances for the Companies.

And so our comparables are going to be a little bit more difficult in the second half of the year, even with a little bit of a bounce back out of the European and the Chinese markets. So, as we always do, we will reassess this at midyear and we'll provide any adjustments we see necessary to our guidance of 8% to 10%. But right now, for the first quarter, we feel pretty damn good about 10%.

Okay.

This is Barry. I would just add that the currency impact was pretty much nil for the first quarter. We don't know -- we can't predict where currencies will move, but if the Euro strengthens or weakens, it could impact the results, clearly.

Yes, understood. Barry, R&D was up a little bit relative to where it's been running and SG&A was down a bit. Are these good levels to think about going forward? Or was there anything kind of onetime that would have bumped either one up or down?

They're probably pretty good run rates. We mentioned when we had the fourth quarter call that we would expect the first quarter SG&A to go down. We may see a higher fourth quarter again as we get to the end of this year, but these are probably pretty good run rates in the interim quarters, maybe a little higher number for the fourth quarter.

Okay. Helpful. And then, just real quickly, could you give us maybe an update on the progress of the remaining I guess less than 1%? Where is that? Are there any costs that you're carrying in trying to chase that down that may go away once you get it resolved? Or where are we with that?

Well, the process that we're offered by the German regulations are that we can make a decision to go for a squeeze-out play, which involves a legal court process and is a rather weekly thing that we are conducting our evaluations on right now.

For us, that's not a terribly significant item, to be honest with you. We're not keenly interested in chasing down that 0.6% or 0.7% that are remaining out there. Something like 22,000 shares, I think, are outstanding in the group. So we're pretty happy about where we stand. We've gotten the domination profit/loss agreement in place. We have been able to acquire a large block of the remaining open shares, so our minority interest numbers are extremely small. The teams both feel like we are now a merged Company.

There are some costs that we'll have to continue to carry on the books in terms of remaining to be an open Company in Germany. We'll have some filings and some legal expenses that we'll have to continue to incur, but it's nothing really significant that bothers us. We are planning to pursue and examine the opportunities of the squeeze-out and we'll make our decision as to how far we want to push that or how much value there is there. But, frankly, it's not a lot of expense and there's very little gain for us, so we're happy where we are at.

Got you. Alright, thanks. Nice quarter.

Alright. Thanks, Steve.

Anthony Dean, KeyBanc Capital Markets

Hi. Good morning, gentlemen.

Good morning.

A few questions here. Your organic growth opportunities continue to impress. My question is how sustainable do you believe this high single-digit, low double-digit is over the long-term and I'm talking the next two to three years? I mean, CCS penetration clearly is a big driver, so I'm just wondering if you can share some details on your addressable market, where we're at today, where do you see it going and how much does Gentherm's backlog benefit.

Well, actually, Anthony, if you look at where we've been the last five or six years, our growth rate targets have not been by accident. We actually focus very hard on trying to find new opportunities for our technologies and now that we have a slightly larger Company, it's a little bit more difficult than we had when we were a smaller, more a technology startup type of Company.

But our goals are very clear. We're trying to grow the business at a steady, healthy rate that allows us to take advantage of the market experience that we have and the technologies that we offer to these markets. We assessed that a 10% growth is kind of a minimum acceptable number for and we have, now, a lot more products in our quiver than just the heated and cooled seats. And we're trying to drive more products and technologies to market to continue this path.

But, when we look forward, for the next three-to-five years, we see this as being a key driver in the financial health of our Company. It's being able to expand our base and we need new products and new market opportunities to be able to do that. So we're pretty happy with where we're heading and we're pretty happy with our last, actually, 10 years of success of being able to deliver predictable growth.

And then, with those accelerating organic growth opportunities with your new products and applications you just referenced, now is there any chance Gentherm might provide bookings in the future, whether it be gross or net new business growth, to help us out? And is there any color you can provide with respect to your backlogs over the next few years as a stance to that?

There's very little chance of that, actually. We're quite happy with how we are guiding the market. We provide as much information as we have that's definitely reliable and predictable for us. We provide an annual topline guidance number on where we think revenues are going to go.

You have a lot of historical data to look back and see how our financial performance has been. And given where we go, we give guidance on a quarterly basis as to how we think the impacts of the business are and how we're doing on a year-to-date basis, especially with regards to our projections.

We're not intending to get into the line-by-line projections and forecasts that some companies get into. We're not that kind of Company, so we're not going to give you a whole lot more details than what you get out of the documents.

Okay and then, just lastly, you had some margin expansion this quarter despite R&D and SG&A representing a larger percentage of revenue. And it appears as though you're expanding capacity in China, investing more in product developments and the integration might be a slight near-term headwind.

So I'm just wondering. Can you give us an indication on the margin outlook for your Company over the next -- in 2013, maybe 2014? Do you see yourself in this 12% to 13% EBITDA range? Is that sustainable, or potentially a step function increase of some sort to the 14% and 15% range? Obviously some good revenue growth you can leverage, some potential integration opportunities. So can you give us a flavor on the margin outlook?

Sure. First, we have been working very hard in the last 18 months to try to expand our production capabilities and capacities. We have doubled the size or our Chinese facility. In addition to that we've also opened and are in the process of validating a new Chinese-based electronics facility, which will come online in the second half. We're also engaged in expanding our capacities in our North American manufacturing site in Acuna, Mexico.

At this moment in time, we don't see a current need to expand our facilities in the European market, because of the conditions in the short-term we see in the marketplace, but we do see an opportunity to be able to continue to constantly put some upward pressure on our gross margins. We would like to see that, over a two or three-year period, reach somewhere between a 28%, 30% range.

We're currently making some progress. It's a very steady, measured progress. There is no significant nuclear event that's going to cause us to kick up to 28%, but we feel we're on the right path. We feel we have programs and projects in place to allow us to continue to improve our gross margins over time.

Thank you.

(Operator instructions) Adam Brooks, Sidoti & Company

Yes, good morning and maybe good afternoon, guys, at this point. Just a few quick questions here. You talked a little bit about the cost synergies with W.E.T., but I was a little more curious and maybe you're updated thoughts on revenue synergies. Maybe you could talk about some of the content upsell opportunities and maybe what the outlook is for the next three-to-five years as far as the combined growth rate?

Sue, Adam. That's actually one of the things that got us most excited about merging the two teams together, is to be able to help each other in markets. Again, W.E.T. had a very strong position, particularly in Germany and the European market. We had always struggled trying to get into that marketplace.

Now we see, with the combined teams and the full product line opportunities, we're seeing real, tangible program results that we feel are going to contribute to the bottom line over the next three years in a significant way. We're very excited about that, our partners at W.E.T. are very excited about that and frankly, I think our customers in Europe are excited to see some of these new technologies.

In North America, we're pretty much square on. We were both, I think, in very good positions and we're introducing new products to the markets there and the combinations of the two teams, again, I think are working quite well.

In Asia, we have lots of future opportunity. Asia is a growing market in the auto world. It also is growing as a consumer market and they are very keen and interested in new technologies and new technical approaches to solutions to consumer-related problems.

So we see this as one of the big key factors. The combination of things like being able to sell heated and cooled cup holders, heated and cooled storage bins, steering wheel heaters, heated and cooled beds, heated and cooled storage spaces - these are all opportunities that were generating and are now being enhanced by our combined capabilities.

So, for us, this is really the exciting part of the side of the business that we really wanted to get our teams together on. As the old Amerigon, the existing Gentherm was really a little limited in being able to push these new technologies globally without some serious additional resources. And as the old, historical W.E.T., we offer some new technologies and some new technical-based products that will allow them to expand their product offerings as well. So, combined, we think this is going to be a very, very successful, technology-driven Company.

If we look out, once again, that same timeframe, let's call it three-to-five years, do you have a target as far as revenue derived from adjacent markets to seeding, or just maybe something that you think you'd like to hit maybe as a pure number or as a percentage of revenue?

Yes. I think we've indicated we'd like to something between 10% and 15% revenue growth per year over the next three-to-five years and that's really the only targets that we've set for ourselves, publically.

Okay and also have you seen any delays in platform launches? There have been a few surprises talked about, just maybe a quarter or two delays, I guess, particularly over in Europe. Have you seen anything of the sort?

We have seen a few, I would say minor program delays and launch delays, but nothing out of the normal and nothing that is specific to us or our participation in the market.

Alright. Thank you.

Thank you, sir.

Steve Dyer, Craig-Hallum Capital Group

Me again, two quick ones. I'm wondering where you're seeing, in the growth of the business, the new platforms you're winning. You used to put out, obviously, press releases on every win when you were a standalone Company. Are you seeing -- is the bulk of the growth coming from heated/cooled, heat/vent, or some other area of the Company? How should we just think about, I guess, the distribution of growth?

It's coming very nicely from heat/cool and heat/vent, as you pointed out. We're quite happy on both sides of the charter there. We're also seeing pretty steady, good growth and contributing cable business. I think that the steering wheel business is going to be very solid for us, so I think you're going to see a lot of penetration gains and I'd say technology gains across the board. So everybody's pulling their weight and everybody's contributing to the growth.

Got you and then is a high 20%s tax rate, on a normalized basis, Barry, still the right way to think about it?

I believe it is, yes.

Okay. Thank you.

Thank you.

Ailon Grushkin, Nano-Cap New Millennium Growth Fund LP

Hi guys, another magnificent quarter. At this point, there's absolutely no reason why the stocks shouldn't garner a billion-dollar market cap. You're doing a phenomenal job.

Thank you.

My question relates to the Chinese market. Since it's up 21 million cars a year, how does that break down? What's the penetration in that market, at this point?

Well, there's two pieces of the Chinese market. There's the transplant business where the international car companies have set up shop and partnerships and are established very, I'd say, solidly on the upper middle and high end markets and then there's the domestic Chinese manufacturing companies that have gone off on their own.

The bulk of the volume of the Chinese market are those local domestics. They tend to be more of the entry level and midrange vehicles. Our products tend to, on the whole, go towards the people who're focusing on comfort and convenience items, so that's typically the upper middle and upper and luxury models.

So our business there is growing quite nicely. I think, if you look at the number, you'll see that even in what China considers to be a depressed state, the auto industry is expanding at about a 10% rate per year right now. So we see that as a very big opportunity, not only with the transplants but also with the domestics, as they become more focused on increasing their product offering in the upper range product lines.

So are these, I guess, I think those smaller Chinese local brands represent about 32% of their market. Are they producing cars that are similar to like a Kia that eventually should offer a low-end heating and cooling device in the seats?

Yes, that's our kind of model that we see going forward, is that all of these car companies -- or actually, it's all the developing world. It's not just China. But they introduce an entry level model, then they move to mid-range and then they move to upper mid-range. And some of the features that these types of market drivers find appealing are things like heated and heated and ventilated seats on maybe the entry level. And then the heated and ventilated on the mid-range and then we get up to the heated and cooled when they get to the luxury end of the market.

So we, again, have said that we think that the heated and ventilated business for us will be expanding quite rapidly over the next five years, as these developing automotive market suppliers start pushing their product lines upscale.

Great. Well, thank you so much and keep up the great work.

Thank you, sir.

At this time there are no further questions in queue. I'd like to turn the call back to management for closing remarks.

Alright. Thank you, operator. As we said, we've had a pretty good year last year in 2012. We were all pleased with the successes. Our first quarter has shown to be a pretty good quarter. We got some nice revenue growth and we got some pretty good performance and results by all business units and our bottom line reflects that.

We were also able to gather up more of the independent shares. We now have a significant dominant controlling position of the W.E.T. division. We're now in a position to begin the actual integration process. We're in the midst of our planning. We'll begin our execution process in the second half of this as we get into our integration actions and we think that the business shows a pretty good 2013 on the horizon here.

We believe very strongly that our 8% to 10% growth rate looks good. The first quarter is always one that we want to keep an eye on to see how the year is going to roll out. Our first quarter has been very good, so we're expecting this year to continue.

There are always the uncertainties of what's going to happen in a very complex world. It looks to us to right now that the European and Chinese markets will recover with a little bit more strength in the second half, But again, we think that our comparables in the second half are quite a bit more significant achievement to be able to keep up our 8% to 10% growth. But, based on what we see today, we think we're going to make it.

So, again, we thank you for your time. We thank all of our partners at W.E.T. and the old Amerigon and all of our outside vendors and all of our stakeholders for joining us and we look forward to talking to you again next quarter.

Thank you very much, operator.

Thank you. Ladies and gentlemen, that does conclude our conference for today. We'd like to thank you for your participation and you may now disconnect.