Gentherm Inc (THRM) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Gentherm Incorporated 2013 second quarter and six months results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator instructions). This conference is being recorded today, August 1, 2013. I would now like to turn the conference over to Mr. Jill Bertotti of Allen & Caron. Please go ahead, ma'am.

Good morning and thank you for joining us for the Gentherm 2013 second quarter and six months results conference call. Before we start today'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 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 relations section of Gentherm's website.

Finally, I have been asked to make the following statement. Except for historical information contained herein, statements on this call are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include statements regarding the future sales, products, opportunities, markets, expenses and profits. Forward-looking statements involve known and unknown risks and uncertainties which may cause the actual -- the Company's actual results in future periods to differ materially from forecasted results. Those risks include but are not limited to risks that sales may not significantly increase; additional financing requirements may not be available; new competitors may arise; and adverse conditions in the industry in which the Company operates may negatively affect its results. Those and other risks are described in the Company's annual report on Form 10-K for the year ended December 31, 2012 and subsequent reports filed with the Securities and Exchange Commission, copies of which are available from the SEC or may be obtained from the Company. Except as required by law, the Company assumes no obligation to update the forward-looking statements, which are made as of the date hereof, even if new information becomes available in the future.

On the call today from Gentherm, we have President and Chief Executive Officer Dan Coker; Chief Financial Officer, Barry Steele; and Chairman, Bud Marx. 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. Thank you for the fine introduction and good morning to everyone. Thank you for joining us on our second-quarter 2013 results call. We were quite pleased with the results of the revenues. We broke $160 million for the second quarter, which is an all-time record for the Company on revenue. It involved a lot of good successes in all of our major business units. All units are continuing to show good strength over and above the traditional automotive markets, so we are quite pleased with that.

We were challenged by a few things, and in the gross margin line we had some impact. We are going to talk about those a little more in detail. And, we also had a few special one-time items that affected our quarter and we will talk about those as well.

For us, we saw some disappointing things. I was not pleased with the results of our bed revenue for our new product, the heated and cooled bed. We continued to suffer from lingering effects of the problem that we saw at the end of the first quarter in terms of a bed design change. So we had very little revenue and I think actually, Barry will tell you that we had roughly $100,000 worth of revenue in the second quarter compared to roughly $650,000 in the first quarter.

So we will talk about all of these things. Barry is going to review with you the details of the financial results, including some commentary, and then we will open the floor for questions. Mr. Barry Steele, CFO.

Thanks, Dan. Hello, everybody. Thanks for joining us today. Earnings for the second quarter were $0.15 per share. This result included $422,000 in continued acquisition transaction expenses related to our increased ownership stake in W.E.T. You may recall that in February, we acquired an additional stake from W.E.T. from the largest minority shareholder. We have since initiated a process to acquire the remaining 0.5% of these shares through a squeeze-out procedure. This result also included approximately $1.8 million in severance and other costs associated with a management reorganization. Together, these items reduced our earnings by $0.07 per share.

Our product revenues for the second quarter 2013 were $160.5 million, as Dan mentioned, which represented an increase of $24.4 million, or 18% over the second quarter of 2012's product revenue. The increase was due to strong automotive production, especially in North America and Asia.

Our European-based revenues were also higher than the prior-year period, despite the soft automotive market in Europe. This is in part due to strong performance in our specialty cable business.

Our gross margin for the second quarter, as Dan mentioned, was a little bit down. It was 25%, which actually was nearly the same as the prior-year second quarter but also represented a decrease from the gross margin from this year's first quarter of 26.4%. Our gross margin varies from quarter to quarter for a number of reasons, including shipping, shifting mix in our underlying product, timing of customer pricing as compared with cost savings initiatives and special items both positive and negative that occur from time to time. We believe that the current quarter's performance would represent the lower end of our gross margin range and includes some one-time events and effects that total approximately $1.5 million to $2 million.

For example, we are continuing to ramp up a new production facility in Shenzhen, China that will be dedicated to production of electronic components. During the second quarter, we spent approximately $1 million for this venture, approximately $400,000 of which was reported in cost of sales. The benefits of this new facility will begin in future quarters as production in that facility begins and then ramps up. As such, this unfavorable impact on our gross margin will have reversed and become a favorable impact in the future.

Other one-time items include overtime costs related to the significant increase in our production volume, maintenance cost related to our new facilities in China and Mexico and an unfavorable impact from some of our revenue that is denominated in Japanese yen.

Our operating expenses were $31.7 million during the second quarter of 2013, representing an increase of $6.1 million, but included the acquisition transaction and management reorganization expenses I mentioned earlier. Taking these expenses out, our operating expenses increased by $3.8 million or 15% during the second quarter of this year. This also included approximately $600,000 related to the new electronics facility. Much of the remaining 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 system offering. This is a continuing process.

I want to mention a couple of the lines that we haven't talked about in prior quarters. On a combined basis, we are reporting a loss of $251,000 for reevaluation of derivatives and foreign currency. This compares to net gains during the prior-year second quarter of $1.9 million and during the first quarter of this year totaling $1.2 million. Much of these come from our portfolio of standard financial instruments, such as currency forward and option contracts, which we used to hedge our exposures to foreign currency.

For example, we incur expenses in the Canadian dollar, which are coupled with our US dollar-denominated North American revenues. We have to hedge these relationships. These contracts are marked to market in each quarter. As such, we report gains and losses for instruments that are intended to hedge transactions of future periods. In measuring our adjusted EBITDA you will notice that we add back the unrealized -- portion or these unrealized portions, which we believe better reflects the current operating performance.

Speaking of adjusted EBITDA, our adjusted EBITDA was $16.6 million (sic -- see press release -- $16.5 million), which was $1 million lower than the second quarter of 2012. This decrease was primarily to the management reorganization expense of $1.8 million which I mentioned earlier.

Just a couple of quick notes on the balance sheet -- our cash increased slightly from the end of the first quarter and was $49 million. It was up $1 million. Our total outstanding debt was $92.8 million and our revolver capacity remains virtually untapped and totals approximately $56 million.

Dan, that's what I wanted to tell.

All right, thanks, Barry. Operator, we would like to open the floor for questions from our dialers.

(Operator instructions) Steve Dyer, Craig-Hallum.

You talked a little bit about the new electronics facility. Barry, can you quantify the cost that went into that again? I was writing but I didn't catch it all.

For the quarter it was about $1 million that's spread around in the P&L. The portion that was in gross margin was around $400,000. So this is an effect that you see just the cost right now, or we might characterize as an investment.

I would say investment.

Yes, but will benefit us in the future as we vertically integrate and as we expand to offer products directly to our customers. (Multiple speakers) and then as we ramp up production later in the year, we will see some benefit coming back from that.

And when would you anticipate that will actually start generating revenue? Or will there be transfer revenues, I guess?

Yes, in the second quarter, it was a very small amount. I think it was like $50,000 but it should start ramping up a little bit more in the second quarter or in the third quarter and the fourth quarter. I don't have a figure to tell you where else it will be, but it will be ramping up fairly significantly over these next couple of quarters.

Steve, you are also correct that the initial production will be consumed internally and it will be driven -- for us, it will be a cost reduction on the early stages. And as Barry has pointed out, that will begin happening in the second half of this year, and then we will continue to ramp up to full production in 2014.

And it will affect the gross margin line particularly.

Do you have the magnitude off the top of your head?

We have not talked about it, but obviously we have invested a lot of money and we are expecting a pretty significant contributing factor for our ongoing business, plus it also lays the groundwork for us to get into the independent electronics business as well. So our initial thrust is to try to incorporate more of our own in-house manufacturing for our electronic modules, controllers and electronics components that we need for our own internal consumption. And then, as we get a little bit more ground under our feet, we'll turn our attention to trying to pick up some additional outside business that will add margin to the bottom line as well.

Steve, I would add that this should be margin-neutral, I believe, by the end of the year with actually benefits to the margin as we go from there.

Okay, that's helpful. Aside from that and the severance and a couple of the other one-time things, operating expenses continue to creep up. Is there anything specifically you can pin that on? And maybe going forward, how should we think about that number?

I don't think there's anything specific to pin it on. We try to characterize it as a number of different initiatives that are going on, a lot of integration initiatives and other things.

It's fair to say that we set up like six months ago a separate organization to attack markets beyond the automotive seats. And we did that consciously, but it added to our selling in general and will add a little bit to our development cost. But we see that as having a payoff over the next 2 to 3 years, without a doubt.

Let me add one thing to that, Steve. One thing I didn't mention is there is some currency impact here. The euro was a little stronger in this period, and there is a significant amount of euro-denominated expenses.

But if you stepped way back, Steve, we recognize now that we have full control and the ability to implement the strategic opportunities that we had already identified that we need to pay particular attention to our cost structure, because the last thing we want to do is deliver empty sales at the top line.

Got it; that's helpful, thanks, Bud. So with all that said, as you think about gross margin, you have always talked about a range of 25% in a quarter like this one where mix is unfavorable, etc., and 28%, call it, at the top line. Do any of the things in the back half of the year change your mind on that, whether it be the internal purchasing of electronics? Or I guess maybe just how does the mix look? How should we think about positioning the number within that range?

I think you will see that the second quarter was abnormally soft on margin for us, and I think that you'll see a return to a more normal average. We target -- as you know, we are targeting something to the higher side of our range, and you saw 25% was lower than expected and lower than we would like to see.

So going forward, I think you'll see better results, but not spectacular results. We are not going to go above 28% next quarter. We are going to see variations in our gross margins quarter by quarter.

Another thing, if you don't mind, I would like to point out to the group -- I didn't quite get a chance to jump in there before you drifted off on a new subject. But we did spend quite a bit of time working on the acquisition of W.E.T. We finally did get control of the W.E.T. organization in March of this year. We have gone through a full organizational structural review and we have now implemented a new management structure team and we are beginning to develop our budgeting process for 2014, 2015 and 2016. So I know that some of the cost that we see on the paper here in terms of R&D and SG&A are higher than we would all like and we are beginning to develop plans to try to adjust ourselves to these numbers.

So in the first quarter that we had the ability to impact the expenses for the Company, we felt like we were in fairly reasonable control, but we do promise that we will keep working on getting that number more in line as we go forward. So this is something that it's just beginning. We've got some time to work on this. And it's going to take us a little time, but we do believe we will be able to impact the spending as we continue to evolve as one Gentherm company.

Sure. Okay, two more quick ones, and that was all very helpful. One, just as you think about the squeeze-out process, is there any sort of time frame we should think about as that being resolved? And then the second part of that would be what costs do you feel like will go away with that? In other words, W.E T. won't be listed publicly anymore and, etc. The costs associated with that -- how should we think about that process?

Well, as you all know, I'm not very good at estimating the German court process. But our current indications are that following the normal guidelines of the German courts we should be able to get an understanding of how the squeeze-out process is going to turn out early next year and sometime in the early first quarter of next year.

If we are successful with that squeeze-out procedure, then -- and W.E.T. will no longer be a publicly-listed company and will not have the reporting requirements and the separate independent accounting rules and regulations that we have to follow as a public company in Germany, we estimate that would save us somewhere between EUR300,000 to EUR400,000 per year in cost. That number is going down as W.E.T. is going to be, obviously, a less significant entity in itself, and we are attempting to change the status of W.E.T. from an AG Corporation to a GmbH. So, over time, that should ease out somewhere between EUR300,000 and EUR400,000 per year.

Okay. And then lastly, on the more fun stuff, as you think about the new programs, when you were sort of standalone Amerigon, you would report them all as you got them, or at least as they went into production. How should we think about the cadence of that this year in terms of, if you don't want to share a number, more new programs, fewer new programs than you have sort of seen over the last several years?

Well, I think what has happened to us now with the addition of the W.E.T. program product lines and the other new products that we are introducing, it would be a burdensome task for us to sit here and list all the new programs we get each quarter. So what we are really trying to get you guys to focus on is to listen to our top-line guidance. So we are going to give you indications as to how we think the overall success of our efforts to get new products and new markets is going. We believe it's going quite well right now, and we are -- as you saw in our note, we are increasing our guidance to be certainly over the high side of our range based upon the first half's very strong result. But we are not going to come out and say we are getting seven new heater programs and three new heat-and-cool programs on a quarterly basis, because it's really just not practical anymore.

Got it, okay.

In the bargain, our base is now large enough that each of those programs individually has much less significant impact. So it's a dual thing. There are too many of them to talk about, and in the bargain, the base is larger.

Yes, and I understand. I was just thinking back. There was really robust years, and then there was years where just there was not a lot of new programs up for bid, etc. So just trying to get a sense for how that is ebbing and flowing. But I will hop back into the queue. Thanks, guys.

Philip Shen, ROTH Capital Partners.

I would like to start with your expected, perhaps, change in revenue mix. Can you talk about how the revenue mix by OEMs might be changing? In 2012, we saw an OEM mix of GM and VW with 50% mix each, and then Ford with 14% and on down the line. How do you expect that to change in 2013 and maybe beyond, given the integration of W.E.T. now and your ability to cross-sell products into new opportunities that historically were not available?

I don't really see any major shifts in the revenue mix in terms of the companies that we deal with and serve. We are seeing continued improvement in each of the major companies. We are seeing very good growth right now in Hyundai, so I expect Hyundai to continue to grow. Hyundai/Kia is a very strong customer of ours globally and it continues to expand. I expect us to continue penetrating at GM, Ford, Chrysler and all the other existing customer base. I don't see one person becoming dominant or changing their position dramatically one way or the other.

Okay, thanks. And then going forward, can you expand on your relationship with Bosch? I think it's focused primarily on cables. Is there an opportunity here where you can kind of grow into more OEMs or models via Bosch? And can you comment on that relationship overall?

Our relationship with Bosch is very good. We have a very strong position as a preferred supplier of specialty cables and wiring harnesses to one of their key divisions. That relationship has been ongoing for quite a few years now and is generating a significant increase in revenues for us in a year when most of the European market has been relatively flat.

How we leverage that into additional OEMs using Bosch as an intro -- that's not really the purpose of our relationship with them. We are growing and they are growing in their market penetration in these fuel delivery system businesses that they have worldwide. We are seeing a need to establish more capacities in North America and Asia as the Bosch companies are successful in their venture to fill their fuel delivery systems worldwide.

Great. And then in regards to your thermoelectric generator, can you give us an update on this and when you expect to productize? Can you comment on when this could be available?

We certainly expect to productize it as soon as possible. We are still 3 to 5 years away, as the old joke goes, but we are making very good progress in terms of the design. And we are now involving some of our new manufacturing partners at the former W.E.T. to help us look at some of the design manufacturing requirements as we go forward.

So we are definitely accelerating the program. We are continuing to invest and we are continuing to see, frankly, quite encouraging results.

As to when we will see something come off of that line, again, I'm going to predict that it will not be an automotive product. It will be an industrial application of some form of thermal generators

Initially (multiple speakers) yes.

Yes. And then we will continue to grow that business as we work our way up. We will probably go something like industrial, consumer. Probably something in the trucking market would be a good target for us. Truck and bus is a very good opportunity, and then maybe the early stages of the automotive applications would be in something in either an electric or hybrid vehicle.

Great, thanks very much, I'll jump back in queue.

(Operator instructions). [Anthony Dean], KeyBanc Capital Markets.

First, on the revenue guidance, are you able to quantify the magnitude to which you expect to exceed the high end of your prior 8% to 10% guidance?

No, we are not actually going to quantify how far above it we are going to be. We believe that right now, the way we're sitting, we are going to exceed the 10% that we put out as the high side of our range. There are still quite a bit of open orders yet to resolve and look at before we get to a number where we are going to be comfortable to say we think the number is going to end at the end of this year. But I think it's safe to say it's going to be above 10%.

And to your earlier comment, it sounds like above 8% to 10% mainly driven by the strong results seen in the first half here. So maybe just for modeling purposes, should we keep the back half in line with that 8% to 10% range? Is that fair?

I think it's definitely fair. We will probably be achieving the high side of the range in the second half as well. But in terms of modeling, yes, I would definitely say within the 8% to 10% range.

Okay. Your cable business -- a touch over 10% of your mix and growing here. Are you able to share whether that business is in line with corporate average margins, above or below? I'm just wondering if maybe that business is potentially part of the mix issue that you cited in the press release.

Yes; actually, it is. It is a contract build-to-print type of business. So the opportunities for gross margins are very limited, but it is a strong contributor to our manufacturing efficiencies in our plants worldwide. As you know, we make cables and wiring harnesses for our own internal consumption. And having a very key customer like Bosch be a strong partner for us in developing new processes and new systems and additional opportunities for revenue are quite handy. But the gross margins on the cable lines are not what we would like to see in the rest of our business. But it does contribute very strongly to the bottom line.

And the acquisition integration expenses you called out as one-time in nature this quarter -- those are complete, right? We shouldn't assume anything additional in the third quarter?

It depends on how it goes. If nobody (multiple speakers) agrees to sue against us to stop the squeeze-out, we are probably done spending. If they do, which they are likely to, there's probably some more spending.

But I think the magnitude of the spending is going to greatly diminish in future coming quarters.

Yes, absolutely.

And then just two more -- can you talk to the higher material costs you cited in the press release? What raw materials are driving that? Is that expected to be a headwind in the back half as well, potentially?

I think it's just general material cost increases across the board. As you know, one of our key items, tellurium, has been relatively stable. Another key item, copper, has been relatively stable. But there have been some increases that we are having to deal with in a normal core of the business.

Okay. Lastly here, any update on the potential for revenue synergy that you finally merged with W.E.T. and Gentherm teams together? Your European revenue growth was very solid in a flat market, so W.E.T. having a big presence in markets like Germany. Could you attribute your outperformance this quarter there to that integration, potentially? Or just any update you can provide on that, revenue synergies here in the near-term.

I don't think our quarterly performance has been greatly enhanced by the fact that we are together based upon the European teams working together. What you are going to see -- the teams are working together and, frankly, I think they're working very well together.

What you are going to see in the, I'd say, fairly near future are the combination of the W.E.T. technical people, sales and application engineering teams introducing the old and Amerigon technologies into some new market and introducing it to new customers. I think we have indicated that we are getting a very strong response to several of those products, particularly in the European and Asian market.

So I think you're going to see some future dramatic increases in both of the traditional product lines, but it don't think that we could say that just because we were working together for a year or so now that the results of the second quarter were directly attributable to the impact of us working together for a time.

Great, well thank you very much.

You have to assume the normal automotive cycle for adoption of these kinds of products, but we are very encouraged by the first steps.

Okay, thank you very much.

Steve Dyer.

Barry, just two quick housekeeping items -- tax rate, still thinking that 27% range, something like that?

Yes. It will vary from time to time, but yes, it would be in the high 20s.

Okay. Lastly, just what was the diluted share count at the end of the quarter -- not the blended rate, but I just want to make sure I have all of the outstanding stock issued accounted for in the model going forward.

That's kind of a trick question. I can tell you what the share count was at the end of the quarter, but I can't tell you what the diluted share count was at the end of the quarter because we don't calculate it that way. There are 34 million in actual shares outstanding.

34 million? Okay.

Yes. And the diluted is 500,000 or 600,000 additional shares.

Okay, thank you.

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

Thank you, operator, and thank everyone for your questions. We again feel we had a good quarter. It wasn't a fantastic quarter, but it was a very good quarter on the top line. It's obvious to us we still have a lot of work yet to do on getting our costs under control and continuing to expand our business in all the major market areas that we play in. We are quite pleased with the result of our efforts to integrate the two teams together. We now have a solid management structure in place. We are beginning our planning processes for the future of our Company, and we see great opportunities not only for growth, but also cost efficiencies as well.

So, again, we thank you for your attention and we look forward to talking to you again in 90 days at the end of our third quarter. Thanks very much, operator.

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