Gentherm Inc (THRM) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Gentherm 2013 fourth-quarter and year-end results conference call.

(Operator Instructions)

I would now like to turn the presentation over to our host, Ms. Jill Bertotti of Allen & Caron. Please go ahead, ma'am.

Good morning, and thank you for joining us today for the Gentherm, Incorporated 2013 fourth-quarter and year-end results conference call. Before we start today's call, there are a few items I'd like to cover with you. First, in addition to disseminating through PRNewswire this morning's news release announcing Gentherm's results, an e-mail copy of the release was also sent to a number of conference call participants.

If any of you need a copy of the news release, you may download a copy from either the 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 link provided on the events page of the investor section at Gentherm's website.

Finally, I've been asked to make the following statement. During this conference call, representatives of the Company may make forward-looking statements within the meaning of federal securities laws. These statements reflect current views with respect to future events and financial performance, and actual results may materially differ.

Please see the Gentherm, Incorporated SEC filings, including the latest 10-K and subsequent reports, for a discussion of various risks and uncertainties underlying any forward-looking statements.

On the call today from Gentherm, we have President and Chief Executive Officer, Dan Coker, Chief Financial Officer, Barry Steele, and Chairman, Bud Mark. 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, and thank you very much. Thanks to everyone for joining us on our call.

We had an extraordinary 2013, and our fourth quarter was pretty good as well. To start the call, I would like to thank all of our associates that worked so hard to deliver the performance that you see from our Company in 2013.

A lot of people worked very hard to generate these results. I would also like to thank all of our vendors, who work very hard to keep up with our growth, and also our customers, who have helped us with acceptance of our products. It's been an extraordinary year.

This year, we topped $660 million in revenue, up (technical difficulty) 2012. So this has been an extraordinary year in almost every front of our business, and we are very pleased with the result, and we would like to take a few minutes and share some of our thoughts and then open the floor to questions. At this point in time, I will turn the conversation over to our CFO, the learned Barry Steele, who will guide us through the details of the [alt]. Barry?

Thank you, Dan. Earnings for the 2014 fourth quarter were $0.31 a share on a fully-diluted basis. This stemmed from a number of things, including our product revenues, which for the fourth quarter, were $182.3 million.

This represented an increase of $34 million, or 23%, over the fourth quarter 2012 product revenue. It also represented a sequential increase of $11.1 million, or 6.5%, over the product revenue of the 2013 third quarter.

The increase is due to strong performance in all of our regions, including Europe, and especially in North America and Asia. Our European-based revenues benefited from strong shipping buy-ins and new programs in our specialty cable business.

Our gross margin for the fourth quarter was 27.2%, which was 1.4% higher than the prior year, and 40 basis points higher than the 2013 third quarter. Our gross margin varies from quarter to quarter for a number of reasons, including shifting mix in the underlying product, (technical difficulty) pricing as compared with cost-saving initiatives, and special items, both positive and negative, which occur from time to time.

As we have mentioned in the past, our future target for gross margin is 28% currently. The performance this quarter demonstrates progress towards that goal.

Our continuing ramp-up process for our electronics manufacturing facility and electronic design initiative decreased our gross margin, but not as much as it did in the 2013 second and third quarters. We expect that the benefits of this new facility will increase in future quarters, as production at the facility continues to increase and as such, this unfavorable impact on gross margin will reverse and become a favorable impact.

Our operating expenses were $32.8 million during the fourth quarter, representing an increase of $3.5 million, or 11.9%. This included approximately $1 million in expenses related to the new electronics facility, including design initiatives and engineering.

Much of the remaining increase reflects (inaudible) resources that are being directed to development of existing and new products, and the related marketing activities for those new products, which we expect will continue to support our product-revenue growth target. On a combined basis, we reported a net loss, or a loss of $909,000, for the revaluation of derivative and foreign currency during the fourth quarter, as compared to a loss of $1.4 million during the prior-year fourth quarter.

Much of these effects come from our portfolio of standard financial instruments, such as currency forward and option contracts, which we use to hedge our exposures to foreign currency. For example, we incurred expenses in the Hungarian forint, which are coupled with our European Euro-denominator European revenue.

These contracts are market-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 adjusted EBITDA, we add back unrealized portions of these items, which we believe better reflects the current operating performance of the business.

Speaking of EBITDA, our fourth-quarter adjusted EBITDA was $25.6 million, which was $7.5 million, or 41%, higher than that of the fourth quarter 2012. Just a couple brief comments on the balance sheet. Our cash reserves have increased now by $18.9 million, and currently stand at the end of the year at $54.9 million.

Our total outstanding debt was $82.3 million, which represented a decrease of $5.1 million during the quarter, and our revolver capacity is $56 million. Of the increase in our cash balances, it's primarily due to working capital decreases, which was driven by seasonally-associated decreases coming from holiday shutdowns in our customers' production facilities at the very end of the quarter.

We expect that our working capital amounts will once again build up here now during the first quarter, as we get back to normal shipping activity.

That's all I have, Dan.

Thank you, Barry. Very comprehensive report, as usual.

One thing I would like to point out -- I think it's important -- we mentioned it in the press release, is that we've had an extremely strong year in all segments of our business and all regions of the business, and we're very pleased that the results showed a very strong revenue increase of 19.2% for the year. That was helped by a very extraordinary fourth quarter, which sometimes, if you have followed us, you know that the fourth quarter is a little bit volatile and it swings one way or the other. This year, it swung very favorably for us.

Included in our results are also about $280 million of our $660 million comes from our heated-and-cooled and heated-and-ventilated seat product lines. These, we believe, are extremely important to us in the long range, in the long term, and that revenue is up a little bit higher than the average revenue. I think it was up about 21% or 22%.

With those general comments, I think we will close our comments session, and we will open the floor to questions. Operator, we're ready for questions.

(Operator Instructions)

Our first question is from Philip Shen from ROTH Capital Partners. Please go ahead.

Hello, guys. Congrats on the great quarter.

Good morning, Philip.

Good morning.

I would like to start off with your guidance. You've guided to plus 10% to 15% in 2014. Do you have a sense for which regions you're most excited about? And perhaps the ones that might grow faster than your guidance? And then which ones might lag or be slower than what you're guiding towards?

I think that, in general, I think that the North American market continues to be our strongest market worldwide. We saw some softness in Europe throughout 2013. I think we're going to see that recover.

In general, it's still a little bit flat, but we think that's going to recover. And I think the Asian markets are going to pick up again in 2014 and 2015. So I think in general, you're going to continue to see a very strong North American business, and you're going to see improvement in Europe and I think a much-improved Asian market.

Okay, great.

In terms of the Chinese facility in Shenzhen, can you give us a general update on the facility? What kind of utilization are you at now? What does the ramp look like? And can you update us on perhaps the latest economic benefits of this facility?

Well, in general, the facility -- it came on a little bit slower than we had hoped. We had some general startup issues in getting things rolling. But in the second half of the year, things picked up very nicely, and the fourth quarter actually was getting very close to our economic target.

We see in 2014 this ramp-up will continue and will be, we believe, will be fully functional by midyear. This will be a strong contributor to our business.

In fact, we believe so much that it's a strong contributor to our business that we have recently acquired all of the interest of a former joint venture partner in our North American business, and we now are investing in a similar facility in our Acuna, Mexico, business that will allow us to extend our electronic capability to our North American customers as well.

Interesting. Great.

Do you have a sense for what that acquisition cost might be? And then, perhaps Barry can comment on what your CapEx expectations are for 2014.

Yes, we have a general understanding of what the investment is. The investment is a couple million bucks.

So it's nothing really that's going to blow the doors off, but we are putting in some new equipment and some new facilities, and we'll be training a few new associates to be able to help us grow the business. So it's a very good opportunity for us, and frankly we're already winning contracts for these facilities.

Barry?

Just generally, our CapEx will probably be (inaudible) 2014 as compared to 2013, so it's going to be in that $30 million to $35 million range in the planned growth that we have planned.

Great. Thank you. Congrats on the nice quarter. And I'll jump back in queue.

Thank you, sir.

Our next question is from Steve Dyer with Craig-Hallum. Please go ahead.

Congrats on a really, really good results, guys. Couple of things.

Just tying up the loose ends as relates to Shenzhen: would you still anticipate that, that's going to be a bit of a margin tailwind? Is it there yet? Or is that what you were referring to, midyear?

No, honestly, I was trying to hint to you that in the fourth quarter I think we achieved our financial goals for 2013, where we were essentially break-even to the cost of the operation. I think in 2014, we're going to see positive impact to the gross margin.

Any way to quantify that? Or are you willing to?

Not willing to. (laughter) There are ways. Not willing to quantify.

Is the plan in Shenzhen still to produce for internal needs in 2014, and then potentially look outside after that for revenue-generating opportunities?

That's exactly the strategic plan -- is to first take care of our own growing needs for electronic systems internally. But frankly, we're already looking on the outside. We're already beginning to put together teams of people working with client customers to be able to identify and qualify opportunities outside of our own need. And those are being well-served.

Any chance at any external revenue from that in 2014, or is it just too early?

It's early for us to comment.

Okay. Fair enough.

So the Acuna, Mexico, facility -- is that going to create a similar drag as it did getting Shenzhen up and running, or not?

Not really. Sorry, certainly not to the extent that we saw. In fact, I don't expect any drag at all.

What we did was, we established a joint venture with a partner a couple of years ago, and we essentially now have bought out that partner now that we believe that we are ready in the marketplace to move in, into the [camona] business ourselves.

So the business is already there and it's been running for a while. And what we are doing now is taking over that business completely, and we're expanding on that business for our own needs.

Steve, this is Barry.

Just a little extra comment there. In our current financial statement, there is a line item called Loss from Equity Investments. That is that facility, that joint venture. That loss will go away, or that line item will go away as we fully consolidate that operation.

Is that the GT-plus line item? Or a different one?

No, no. It's called Loss from Equity Investment.

Okay, perfect.

Just jumping back to the seat business, obviously a fantastic growth year, well in advance of the global production increase. If you look at the different categories between heated, heated-ventilated, and heated-and-cooled -- any way to quantify where the growth really came from? If not numbers, at least anecdotally?

Actually, we provided those numbers in the press release that says that we had about $280 million worth of sales for the heated-cooled and heated-and-ventilated business, which was up about 21% over the prior year's numbers. The overall business grew at about 19.2%, from $550 million to $662 million, and that $280 million is included there.

Yes, got it.

So you see that the heated-and-cooled and heated-and-vent business is growing at a little bit faster rate than the rest of the business. And also to further comment there, we also have had very strong growth out of our independent cable business, which is cables and wiring harnesses, have been doing very good for us, particularly in Europe.

Perfect.

And then you had a lot in the press release about new products in the R&D section. Maybe a comment on beds, first of all, and how those are progressing?

And then secondly, any of that list of products or technologies that you plan to commercialize from a revenue-generating standpoint this year? I think if my checks are right, the cold storage box will be one of them. But anything else there we should pay attention to?

Yes, we're seeing very strong interest in the heated-and-cooled cup holders; and you are correct, we do anticipate to begin revenues in the second half of 2014 for the cousin of the heated-and-cooled cup holder, which is the heated-and-cooled storage box.

And those revenues will be modest to begin with, but we believe they will continue to grow. So that is a very solid area for us.

We continue to see strong market interest in our heated steering wheel product, and we're seeing very strong interest in our bed product, and we are working very hard to try to position ourselves in the market and to establish clean lines of distribution to make sure that the opportunities for beds present themselves in 2014.

Perfect. Last question for me and then I will turn over the floor.

Operating expenses -- I know you've talked generally about them leveling off here as the integration works further into it. How should we think of, maybe, the absolute level, either on a quarterly basis or a year-over-year basis, versus how we went out in 2014?

What we're looking at in terms of operating expenses, we're making a conscious effort to try to hold down our base level of engineering, and R&D in particular; but we are investing in areas that we see big opportunities, and we just talked about the electronics area.

We will be building up internal capability to support full-service electronics systems for our customers. And that will include some additional resources for software development, and some additional resources for hardware development. We'll need some additional testing personnel and equipment. We'll also need some very competent engineers to help us communicate with the customers' electronics engineering teams.

We will continue to invest in the areas, but I think that in general what you'll see is a flatter growth rate for our engineering and R&D and SG&A costs as we move forward. And you're going to continue to see our top-line revenues numbers outpace our growth in operating expenses.

Very good. Congrats again. Thanks, guys.

Thank you.

(Operator Instructions)

Our next question is from Mufazzal Habib with DA Capital. Please go ahead.

Good morning. Congratulations on a wonderful year.

Good morning. Thank you very much.

Just a quick question on the automotive waste-heat recovery project or initiative. What's the update there? And how should we think about that? Is that still sort of a 3-to-5-year project, or is it making faster progress than that?

No, actually we're continuing to make very steady progress in the waste-heat recovery systems. As we've focused in the past calls, we're focusing very hard on trying to design systems, particularly for what we would call the industrial market applications as the preliminary area for us to study and learn in a smaller arena.

We then plan to turn our attention to some of what I would call mobile systems, and that would be things like heavy truck and bus. And then, after we get a good set of working experience and facilities and capacities to be able to do those projects, we plan to look at the final market opportunity for the passenger cars.

So we're making good progress. We are not making fast enough progress, but we're making good progress on the technology. We've come up with some very good (technical difficulty).

Got it. Okay. Thank you.

Operator, there's quite a bit of distortion on the line. Can you (technical difficulty).

Yes, give me one moment, please.

Sorry.

Actually, sir, it sounds like that noise is coming from your line. Everything is fine on my end.

Okay. Well, we are hearing a little bit of distortion on our end. So we'll ignore it. Next question.

Our next question is from Josh Goldberg with G2 Investment Partners Management. Please go ahead.

Hello, guys. Good morning. Couple quick things.

One is obviously your gross margins improved all through the year and in the year above 27%. Based on what you are communicating, in terms of some of these facilities and ability to scale some of these operating efficiencies, are you comfortable?

I realize you're trying to get to this 28%, longer term. Do you feel comfortable with your top-line growth outlook, that your gross margins should stay flat to up in 2014? And I have a follow-up.

Yes. I do feel comfortable that the work that's necessary to see margin improvement is ongoing for us. It's a constant effort at continuous improvement, and we are working very hard to try to achieve our target.

That 28% gross profit for us is essential to achieving our financial goals for our bottom-line results. So I do feel confident that we're strong and on a path to that goal. I don't know that we're going to make 28% in 2014, but that's our objective.

In terms of the fourth quarter, though, there wasn't any one-time items that helped you on the gross margin side?

No, there wasn't. There was a lot of good coverage of fixed costs.

One thing I would point out in the future, and that is as we grow very rapidly, there's always the potential for extra cost associated with that growth that could sneak up on us. So (multiple speakers) costs.

Second question is, obviously exiting the year,19% top-line growth, and especially the fourth quarter at 23%, seems like you're seeing a lot of really good activity. And yet the guidance of 10% to 15% -- I know it's above what the analysts are expecting, but obviously half of the growth of what you're doing this year.

Is there something you're seeing out there, the market, that's making you more concerned this year, a little bit more worried about the macro? Or first few months of the year you feel pretty confident that 10% to 15% is where you're going to start out, and see where the cards drop by the end of the year?

Well, by nature, we're conservative people. What we see when we look out on the market is a series of opportunities and some risk. For us right now, looking at where we are, we just finished a year where we hit a 19% growth rate for a full year. And that was a lot of hard work by a lot of people.

When we look out at this year, we see the opportunity to grow on top of that 19%, another 10% to 15%. We don't know exactly whether it's going to be 10% or 15% right now. Obviously, we're pushing our team to grow as rapidly as physically possible and still achieve all of our quality and customer service requirements.

So I wouldn't say that we're underestimating the marketplace, nor overestimating. We try to be real.

We had a really good fourth quarter last year. Our comps, as we go forward, our first- and second-quarter comps will be easier to achieve, the numbers that we've given. The third and fourth quarters are going to be very difficult for us.

So you're going to see some strong growth, I think, in the first half; and I think you're going to see some good growth in the second half. I just don't know how it's going to add up. That's why we gave a range. And frankly, I think a range of 10% to 15% is substantially higher than most of our technology compatriots.

Correct me if I'm wrong, but going into 2013, you projected a 10% top line growth, correct?

We did. We indicated that we felt there was a 10% growth opportunity, and at that time, we strongly believed that. We had some good luck and some hard work and we were able to beat that number.

Okay. Last one for me is in terms of the tax rate.

Looks like it came up a little bit. Is there any kind of guidance you can give us for tax rate in 2014 in terms of, is it going to be 24%, 26%, or something even higher than that?

We would continue to guide at the high end of the 20%-ish, 20.5%, 20.6%, in that range. It's important to point out that, as we look at the profitability that we have in each region, we have a very different tax rate.

A significant portion of the business is in the US, which is the highest tax rate in our whole business. Whereas when we have earnings in China, they are a much lower rate. There's a lot of volatility in the rate that we see as we grow, but we would still say we are probably in the upper 20% range.

Okay. And then the cups opportunity -- heated cups -- on a unit basis, are those gross margins higher than what you're seeing in your corporate average right now?

They are what I would call an early development start. They are not higher than our corporate average, but we have plans to push them to that level.

Okay, guys. Congratulations. Thanks again.

Thanks.

Our next question is from Kevin Sonnett with RK Capital. Please go ahead.

Thanks.

Really I just wanted to let the conference operator know that, at least on my line, I was getting quite a bit of interference as well a few minutes ago. It seems to have gotten better.

But that's all great. Great job, guys.

All right. You're coming in clear as a bell as well. Thanks.

Operator, I think next question.

Ladies and gentlemen, this concludes the Gentherm --

I'm sorry, we have a question from Josh Goldberg. Please go ahead.

Sorry, guys. Just in case I get all my questions answered.

When you talk about the first half of the year having a much easier compare, can you just give us a little bit of a review of what was it that was difficult in the first half of last year, and why you don't think those circumstances should play out again?

I mean, definitely you said you were flat in the March quarter versus December quarter last year. And I'm just wondering, what would give you the level of confidence that you have an easy compare at the beginning of this year? Thank you.

Well, it's actually just a mathematical formulation. It's very simple. Our first quarter of this year is going to be compared to a first quarter of 2013 of around $150 million.

The second quarter for 2013 was $160 million. The third quarter was $170 million. And the fourth quarter was $180 million.

Those numbers obviously escalate as all of our new programs fade in, that we are very much a seasonally biased business. So comparing a quarter 4 against a $180 million base as opposed to a quarter one of $150 million, it's just simply a mathematical equation. Our business is seasonal.

We do see a pickup in the second half of new programs and new projects that we win. And as we win those, obviously we have to stack those up against the wins from the previous year. So I'm not foreshowing any doom or anything. I'm just saying that it gets tougher as the year goes on for us to meet our number.

The number we gave of 10% to 15% is a full year, January through December. So there's some growth that we have to keep in mind that already occurred in 2013 that we have to overcome to achieve our target.

Okay. So at the beginning of the year, you might be even closer to the higher end of that 10% to 15%, and then be dragged down as you get tougher comps in the back half?

That's very possible. We're working to try to avoid that, but that's possible.

Okay, great. Thanks so much.

Okay. Thanks a lot.

Ladies and gentlemen, that does conclude the Gentherm 2013 fourth-quarter and year-end results conference call. Thank you for your participation, and you may now disconnect.

Thank you.